Dysfunctional Markets
by Doug Noland May 14, 2010
For the week, the S&P500 rallied 2.2% (up 1.8% y-t-d), and the Dow gained 2.3% (up 1.8%). The S&P 400 Mid-Caps jumped 4.3% (up 8.6%), and the small cap Russell 2000 recovered 6.3% (up 11.0%). The Morgan Stanley Cyclicals jumped 4.4% (up 7.0%), and the Transports gained 4.4% (up 9.5%). The Morgan Stanley Consumer index rose 1.8% (up 3.4%), and the Utilities gained 2.4% (down 3.9%). The Banks jumped 3.1% (up 24.7%), and the Broker/Dealers increased 1.5% (down 1.8%). The Nasdaq100 increased 3.1% (up 2.5%), and the Morgan Stanley High Tech index gained 2.1% (down 2.1%). The Semiconductors rose 2.1% (down 1.7%). The InteractiveWeek Internet index jumped 4.5% (up 4.1%). The Biotechs rallied 3.7%, increasing 2010 gains to 15.3%. With bullion jumping $22, the HUI gold index surged 7.9% (up 13.4%).
One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 14 bps. Two-year government yields declined 3 bps to 0.72%. Five-year T-note yields fell 3 bps to 2.10%. Ten-year yields increased 3 bps to 3.46%. Long bond yields rose 6 bps to 4.34%. Benchmark Fannie MBS yields declined 7 bps to 4.20%. The spread between 10-year Treasury and benchmark MBS yields narrowed 10 bps to 74 bps. Agency 10-yr debt spreads declined 3 bps to 44 bps. The implied yield on December 2010 eurodollar futures declined 4 bps to 0.855%. The 10-year dollar swap spread declined 1.25 to 3.5. The 30-year swap spread increased 2.25 to negative 18.5. Corporate bond spreads were mixed. An index of investment grade bond spreads narrowed 15 to 103 bps. An index of junk bond spreads widened 27 to 516 bps.
Debt issuance remained slow. Investment grade issuers included Enterprise Products $2.0bn, Morgan Stanley $1.75bn, Citigroup $1.5bn, CVS Caremark $1.0bn, Kinder Morgan $1.0bn, Burlington Northern $750 million, XCEL Energy $550 million, PNC Funding $500 million, Pearson Funding $350 million, Cigna $300 million, FPL Group $250 million, and San Diego G&E $250 million.
May 14 – Bloomberg (Shiyin Chen): “High-yield bond funds posted the largest outflows in five years and emerging-market equity funds had a second straight week of redemptions as Europe’s sovereign- debt crisis dented demand for riskier assets, EPFR Global said.”
Junk issuers included Mylan $1.25bn, MCE Finance $600 million, Omnicare $400 million, Wireco Worldgroup $275 million and Kratos $225 million.
I saw no converts issued.
International dollar debt sales included Inter-American Development Bank $1.0bn, Metinvest $500 million, Kazatomprom $500 million, and Renhe Commercial $300 million.
U.K. 10-year gilt yields declined 6 bps to 3.75%, while German bund yields rose 6 bps to 2.86%. Greek bond yields collapsed 470 bps to 7.70%, and 10-year Portuguese yields dropped 163 bps to 4.63%. The German DAX equities index rallied 6.0% (up 1.7% y-t-d). Japanese 10-year "JGB" yields rose 3 bps to 1.30%. The Nikkei 225 recovered 0.9% (down 0.8%). Emerging markets recovered some of last week's decline. For the week, Brazil's Bovespa equities index gained 0.9% (down 7.5%), and Mexico's Bolsa rose 1.0% (down 1.0%). Russia’s RTS equities index gained 4.8% (down 0.6%). India’s Sensex equities index gained 1.3% (down 2.7%). China’s Shanghai Exchange added 0.3% (down 17.7%). Brazil’s benchmark dollar bond yields dropped 17 bps to 4.83%, and Mexico's benchmark bond yields sank 43 bps to 4.78%.
Freddie Mac 30-year fixed mortgage rates dropped 7 bps last week to 4.93% (up 7bps y-o-y). Fifteen-year fixed rates fell 6 bps to 4.30% (down 22bps y-o-y). One-year ARMs declined 5 bps to 4.02% (down 69bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 15 bps to 5.63% (down 64bps y-o-y).
Federal Reserve Credit dipped $1.2bn last week to $2.310 TN. Fed Credit was up $90.3bn y-t-d (11.1% annualized) and $193.7bn, or 9.2%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/12) declined $11.8bn to $3.064 TN. "Custody holdings" have increased $108bn y-t-d (10.0% annualized), with a one-year rise of $380bn, or 14.2%.
M2 (narrow) "money" supply was up $34.3bn to $8.504 TN (week of 5/3). Narrow "money" has declined $8.1bn y-t-d. Over the past year, M2 grew 1.4%. For the week, Currency added $0.8bn, and Demand & Checkable Deposits surged $40.7bn. Savings Deposits declined $4.0bn, and Small Denominated Deposits fell $5.0bn. Retail Money Fund assets added $1.9bn.
Total Money Market Fund assets (from Invest Co Inst) jumped $24.2bn to $2.878 TN, the first rise since February. In the first 19 weeks of the year, money fund assets have dropped $416bn, with a one-year decline of $912bn, or 24.1%.
Total Commercial Paper outstanding added $0.9bn last week to $1.103 TN. CP has declined 67$bn, or 15.7% annualized, year-to-date, and was down $195bn from a year ago (15%).
International reserve assets (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.297 TN y-o-y, or 19.4%, to a record $7.986 TN.
Global Credit Market Watch:
May 12 – Bloomberg (Tim Catts and Pierre Paulden): “Europe’s sovereign debt crisis is punishing corporate borrowers, with bond issuance tumbling as investors doubt a $1 trillion bailout plan will be enough to bolster confidence in government finances for the region. Borrowers worldwide have sold $15 billion of corporate debt this month, a 62% decline from the same period in April and 83% less than the average for the past year… The extra yield investors demand to own corporate debt instead of government bonds soared last week to the highest in more than four months… ‘This is a fix and not a resolution,’ said Jason Brady, a managing director at Thornburg Investment Management… ‘Investors have seen volatility and that makes it harder to get excited about longer-dated assets paying a fixed return.’”
May 11 – International Herald Tribune (Andrew E. Kramer): “As the financial markets try to absorb news of a rescue package for Greece and other teetering euro-zone countries, some bankers and economists see parallels to Russia’s meltdown in 1998. A decade ago Russia was walking in the same shoes as Greece is today, striving to restore confidence in government bonds by seeking a huge loan from the International Monetary Fund and other lenders. Then, as now, the debt crisis was roiling global financial markets. And big hopes were pinned on a bailout — one that in Russia’s case did not work. ‘Greece creates a remarkable sense of déjà vu,’ Roland Nash, the head of research for Renaissance Capital, an investment bank in Moscow, wrote…”
May 11 – Finanacial Times (David Oakley and Ralph Atkins): “Investors on Tuesday warned that the European Central Bank would have to introduce quantitative easing to stave off the worst crisis in the eurozone since it was launched 11 years ago. The ECB has resisted following the Bank of England and the US Federal Reserve in expanding the money supply by buying government bonds because it fears that it could stoke inflation. Although eurozone central banks bought eurozone government bonds this week for the first time as part of the international rescue plan, this is not QE as the ECB is funding this by selling German bunds or using commercial bank deposits.”
May 11- New York Times (Landon Thomas Jr. and Jack Ewing): “Like the giant financial bailout announced by the United States in 2008, the sweeping rescue package announced by Europe eased fears of a market collapse but left a big question: will it work long term? Stung by criticism that it was slow and weak, the European Union surpassed expectations in arranging a nearly $1 trillion financial commitment for its ailing members over the weekend and paved the way for the European Central Bank to begin purchases of European debt on Monday... The premium that investors had been demanding to buy Greek bonds plunged… And as details crystallized of the package’s main component — a promise by the European Union’s member states to back 440 billion euros, or $560 billion, in new loans to bail out European economies — the wisdom of solving a debt crisis by taking on more debt was challenged by some analysts. ‘Lending more money to already overborrowed governments does not solve their problems,’ Carl Weinberg, chief economist of High Frequency Economics…said…"
May 12 – Bloomberg (Tim Catts and Pierre Paulden): “Europe’s sovereign debt crisis is punishing corporate borrowers, with bond issuance tumbling as investors doubt a $1 trillion bailout plan will be enough to bolster confidence in government finances for the region. Borrowers worldwide have sold $15 billion of corporate debt this month, a 62% decline from the same period in April and 83% less than the average for the past year…”
May 14 – Wall Street Journal (Ianthe Jeanne Dugan): “Federal regulators and state officials are examining Wall Street's role in trading derivatives that essentially bet the municipal bonds they sold would go bust. The Securities and Exchange Commission has launched a preliminary inquiry into banks' trades of municipal credit-default swaps that allow investors to short-sell, or bet against, municipal bonds… The probe is exploring potential conflicts of interest by banks that sell municipal bonds and then poise themselves to profit if those bonds fail, these people said. A main thrust of their investigation is whether firms use their own money to bet against the bonds they sell and, if so, whether that activity is properly disclosed to bond buyers.”
May 14 – Bloomberg (Christine Harper): “Goldman Sachs… is ceasing proprietary trading in one type of structured debt… A group of traders who were focused on making bets on collateralized loan obligations with the New York-based firm’s own money are now handling trades for clients…”
May 12 – Bloomberg (Takahiko Hyuga and Finbarr Flynn): “Morgan Stanley Chief Executive Officer James Gorman denied allegations the U.S. bank misled investors about mortgage derivatives it sold them. The firm is being probed by U.S. prosecutors over whether the bank misled clients when it sold them collateralized debt obligations as its own traders bet that the value of the securities would drop… Wall Street firms are facing unprecedented scrutiny from lawmakers and prosecutors over whether they missold CDOs linked to the subprime mortgages that caused the credit crisis.”
Global Government Finance Bubble Watch:
May 12 – Bloomberg (Abigail Moses and John Glover): “The cost of saving the world from financial meltdown has been bloated by ‘hyperinflation’ since Long Term Capital Management LP’s rescue in 1998… rising price of bailouts since the $3.5 billion pledged to hedge fund LTCM after it was crushed by Russia’s default, and the almost $1 trillion committed to halt the European Union’s sovereign debt crisis this week. It cost just $29 billion to sooth markets in March 2008 when Bear Stearns Cos. was taken over, and $700 billion for the Federal Reserve to save the banking system with the Troubled Asset Relief Program in October that year. ‘We haven’t had any kind of normal inflation in the last decade, but we’ve had hyperinflation in writedowns and the magnitude of bailouts,’ said Jim Reid, head of fundamental strategy at Deutsche Bank… ‘You have to do more to get a similar effect every time.’”
May 12 – Bloomberg (David Mildenberg and Dawn Kopecki): “Four of the largest U.S. banks, including Citigroup Inc., racked up perfect quarters in their trading businesses between January and March, underscoring how government support and less competition is fueling Wall Street’s revival. Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the first, second and fifth-biggest U.S. banks by assets, all said in regulatory filings that they had zero days of trading losses in the first quarter… ‘The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,’ said Christopher Whalen, managing director… Institutional Risk Analytics. ‘It’s a transfer from savers to banks.’
Currency Watch:
The dollar index jumped 2.1% this week to 86.249 (up 10.8% y-t-d). For the week on the upside, the South Korean won increased 2.2%, the Mexican peso 2.1%, the Brazilian real 2.0%, the South African rand 1.3%, the Canadian dollar 1.1%, and the Singapore dollar 0.6%. For the week on the downside, the euro declined 3.1%, the Danish krone 3.0%, the Swiss franc 2.2%, the British pound 1.8%, the Swedish krona 1.35, the New Zealand dollar 1.1%, the Japanese yen 0.9%, the Norwegian krone 0.3%, and the Australian dollar 0.2%.
Commodities Watch:
May 12 – Bloomberg (Stuart Wallace): “There has been a ‘significant’ surge in sales of gold coins and bars, particularly in Germany, Ross Norman, one of the founders of TheBullionDesk.com, said… ‘The last time we saw this level of grass-roots activity was in October 2008 when the economy was on the brink and the retail gold buying community effectively drained gold from the market,” the former bullion dealer said in the report.”
May 10 – Financial Times (Jack Farchy): “Silk ties and handkerchiefs are forecast to rise in price after the cost of silk jumped to its highest level in at least 15 years as rapid industrialisation in China, the world’s largest supplier, robs the sector of valuable farmland. The price of silk cocoons… has doubled since the start of 2009…”
The CRB index declined another 1.1% (down 8.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) slipped 0.4% (down 4.4% y-t-d). Spot Gold jumped 1.8% to $1,230 (up 12.1% y-t-d). Silver surged 4.6% to $19.30 (up 14.6% y-t-d). June Crude sank $3.18 to $71.93 (down 9.4% y-t-d). June Gasoline 0.6% (up 4% y-t-d), and June Natural Gas jumped 7.7% (down 22% y-t-d). July Copper declined 0.8% (down 7% y-t-d). May Wheat sank 7.3% (down 14% y-t-d), and May Corn declined 2.2% (down 14% y-t-d).
China Bubble Watch:
May 11 – Wall Street Journal Asia: “The direction of China’s economy is set. The question troubling investors is whether policy makers have set their course, too. With consumer-price inflation rising to 2.8% in April, real interest rates have moved farther into negative territory… More inflation is in the pipeline. The producer-price index rose 6.8% year-to-year in April, up from 5.9% in March. Higher manufacturing costs should eventually feed through to consumers. The latest housing-market data adds to fears of overheating, with prices up 12.8% year-to-year across 70 of China's larger cities. New bank lending was up, too, with $113.3 billion more loans pumped into the economy in April -- back to around the average monthly level during 2009's credit bonanza. Against this backdrop, Beijing's tightening measures to date are inadequate.”
May 13 – Bloomberg (Peter Woodifield): “China is set to overtake Japan as the largest Asia-Pacific commercial real estate market next year following a surge in values, according to property adviser DTZ Holdings Plc.”
India Watch:
May 13 – Bloomberg (Unni Krishnan): “India’s food inflation rate climbed… An index measuring wholesale prices of agriculture products… rose 16.44% in the week ended May 1 from a year earlier…”
May 12 – Bloomberg (Kartik Goyal): “India’s industrial production grew more than 10% for a sixth straight month, adding to inflation pressures even as Europe’s debt crisis threatens to undermine the global economic recovery.
Asia Bubble Watch:
May 12 – Bloomberg (David Yong): “Asian interest-rate swaps show traders are betting central banks will be less aggressive in raising borrowing costs because of the European Union’s sovereign-debt crisis. ‘The euro crisis has hurt market confidence and liquidity,’ Matthew Huang, an interest-rate strategist… at Barclays Capital Plc, said… ‘If liquidity freezes up, Asian policy makers will likely choose to leave monetary conditions looser for longer.’”
May 10 – Wall Street Journal Asia (Alex Frangos): “The European bailout plan could be too much medicine for an overheating Asia. Before the Greece crisis intensified last week, policy makers in China and elsewhere in Asia said too much growth and an abundance of capital inflows were pushing real-estate and other asset prices dangerously high. While Asian markets welcomed the 750 billion euro ($955 billion) bailout plan, economists and analysts warned that the rescue package could end up bringing even more capital to Asian markets… Loose monetary policy in Europe and the U.S. has already helped to inflate assets prices in Asia, especially for emerging-market bonds and real estate.”
May 12 – Bloomberg (Eunkyung Seo): “South Korea’s unemployment rate declined in April for a third straight month… The jobless rate fell to 3.7% from 3.8% in March… ‘Jobs market conditions are improving on the economic recovery,’ Lee Sang Jae, an economist at Hyundai Securities... said… ‘But there remains some weakness, supporting policy makers’ views that the economy isn’t strong enough to endure higher borrowing costs.’”
May 13 – Bloomberg (Shamim Adam and Manirajan Ramasamy): “Malaysia’s economy grew at the fastest pace in at least 10 years last quarter… Gross domestic product increased 10.1% in the three months ended March 31 from a year earlier…”
Latin America Bubble Watch:
May 12 – Bloomberg (Jens Erik Gould): “Mexico’s industrial production rose the most in almost four years in March on surging demand for exports to the U.S. Output climbed 7.6% from a year earlier…”
May 12 – Bloomberg (Fabiola Moura and Drew Benson): “Argentine Economy Minister Amado Boudou said last week’s jump in bond yields may prompt the government to shelve plans to sell as much as $1 billion of bonds, its first international offer since defaulting in 2001.”
Unbalanced Global Economy Watch:
May 10 – Bloomberg (Bob Willis and Thomas R. Keene): “The fallout from the European debt crisis raises the risk of a ‘double dip’ recession for the global economy, said Stephen Roach, chairman of Morgan Stanley Asia Ltd. ‘When you have a vulnerable post-crisis economic recovery and crises reverberating in the aftermath of that, you have some very serious risks to the global business cycle,’ Roach said… ‘This concept of the global double dip which no one wants to talk about… is alive and well.’”
May 12 – Bloomberg (Svenja O’Donnell): “U.K. unemployment climbed to a 16- year high in the first quarter, underlining the fragility of the recovery as Conservative David Cameron begins his premiership.”
May 12 – Bloomberg (Simone Meier): “Europe’s economy expanded at a faster pace than economists forecast in the first quarter as a global recovery boosted exports… Gross domestic product in the 16 euro nations rose 0.2% from the fourth quarter…”
May 12 – Bloomberg (Christian Vits): “Germany’s economy unexpectedly grew in the first three months of the year as rising exports and company investment outweighed the effects of the cold winter. Gross domestic product… rose 0.2%..."
May 12 – Bloomberg (Maria Levitov): “Russia faces a ‘massive’ capital influx as investors look for alternatives to Europe’s crisis- ridden debt markets, said Mikhail Dmitriev, president of the Center for Strategic Development. That’s putting pressure on Russian policy makers to implement capital controls soon to stem the flows and avoid ruble volatility, Dmitriev, whose think tank conducts research for the government, said in an interview… ‘The government is unarmed against the distortions that may result from massive capital inflows,’ said Dmitriev, who is also a former First Deputy Economy Minister. ‘Russia’s balance of payments and internal macroeconomic stability would undoubtedly be at risk.’”
May 14 – Bloomberg (Paul Abelsky): “Russia’s economy expanded for the first time since 2008… Gross domestic product rose an annual 2.9% in the first quarter after contracting 3.8% in the last three months of 2009…”
May 13 – Bloomberg (Jacob Greber): “Australia’s job growth accelerated in April, propelled by full-time employment… The unemployment rate held at 5.4%.”
May 13 – Bloomberg (Tracy Withers): “New Zealand’s manufacturing industry expanded at the fastest pace in more than five years in April amid rising production and orders.”
U.S. Bubble Economy Watch:
May 12 – Bloomberg (Shobhana Chandra): “The trade deficit in the U.S. widened in March to the highest level in more than a year as imports climbed faster than exports, adding to evidence of the global recovery from the worst recession in the post-World War II era. The gap grew 2.5% to $40.4 billion…”
May 13 – Bloomberg (Ryan J. Donmoyer): “White House budget director Peter Orszag predicted Congress would approve higher taxes on managers of private equity firms, real estate funds and other investment partnerships in the coming weeks. Orszag, speaking yesterday…”
May 10 – Bloomberg (Terrence Dopp): “New Jersey’s Democratic lawmakers plan to introduce legislation to resurrect an income-tax surcharge on residents who earn $1 million a year or more…”
Derivatives Watch:
May 11 – Bloomberg (Phil Mattingly): “The Federal Deposit Insurance Corp. advanced a proposal aimed at overhauling part of the $4 trillion asset-backed securities market and introduced a rule that would require the biggest U.S. banks to submit ‘funeral plans’ to handle their possible collapse… ‘Now is the time to put some prudent controls in place to make sure we don’t get into some of the problems we saw in the past,’ Bair said…
Real Estate Watch:
May 13 – Bloomberg Dan Levy): “U.S. home repossessions rose to a record level in April while foreclosure filings dropped in a sign mortgage lenders are working off a backlog of seized properties, according to RealtyTrac… ‘Right now it appears that the banks are focusing on processing the loans already in foreclosure, and slowing down the initiation of new foreclosure proceedings as a way of managing inventory levels,’ Rick Sharga, RealtyTrac’s executive vice president, said… A record 92,432 bank repossessions were reported in April, up 45% from a year earlier…”
Central Bank Watch:
May 13 – DPA: “The European Central Bank (ECB) on Thursday defended its decision to intervene in European bond markets, rejecting claims that this threatened the bank’s independence. ‘These measures are designed not to affect the monetary policy stance,’ the ECB wrote in its monthly report of its decision to buy debt from troubled eurozone members. ECB chief economist Juergen Stark said this was a ‘temporary emergency measure,’ to which there was no alternative after the euro currency had come under attack. Stark said the bank was not responding to political pressures… ‘The credibility of the ECB does not just hinge on the question whether or not we buy government securities, but whether we fulfill our central task, which is ensuring price stability,’ Stark said. The economist said there was no doubt that ‘an attack’ on individual eurozone countries was being carried out by "anonymous market sources.’”
May 10 – Bloomberg (Mayumi Otsuma): “Central banks from the U.S., Japan and Europe will participate in temporary U.S. dollar swap agreements amid heightened tension in global financial markets, the Bank of Japan said. ‘In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe’ the central banks of Canada, England and Switzerland will also participate in the re- establishment of currency swaps that were implemented during the financial crisis, the BOJ said… ‘These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers.’ Central banks ‘will continue to work together closely as needed to address pressures in funding markets’ the BOJ said.”
May 10 – Bloomberg (Saburo Funabiki): “The Bank of Japan said it would pump 2 trillion yen ($21.7bn) into the financial system for a second day to help reassure markets after the Greek fiscal crisis set off a slump in stocks worldwide.”
GSE Watch:
May 10 – Bloomberg (Nick Timiraos): “Fannie Mae asked the U.S. government for an additional $8.4 billion in aid after posting an $11.5 billion net loss for the first quarter, the latest sign that the bailout of the mortgage investor and its main rival, Freddie Mac, is likely to be the most expensive legacy of the U.S. housing-market bust… The company has now racked up losses of nearly $145 billion, or nearly double its profits for the previous 35 years.”
Fiscal Watch:
May 13 – Bloomberg (Vincent Del Giudice): “The U.S. posted its largest April budget deficit on record as receipts declined in a month that typically sees an increase in individual income tax payments. The excess of spending over revenue rose to $82.7 billion last month compared with a $20.9 billion gap in April 2009… April marked a record 19th straight monthly shortfall… Deterioration in the government’s balance sheet in coming years raises the risk of higher interest rates even as an improving economy helps lift tax receipts. ‘With the recovery in place, we should be seeing higher revenue and lower outlays, not the other way around,’ said Win Thin, senior currency strategist at Brown Brothers Harriman… The government’s April budget deficit compares with a median forecast of $57.9 billion… The last time the U.S. had back-to-back April deficits was 1963-1964… For the fiscal year that began in October, the budget deficit totaled $799.7 billion compared with $802.3 billion during the same period last year.”
May 12 – Associated Press: “President Obama’s new health-care law could potentially add at least $115 billion more to government health care spending over the next 10 years, if Congress approves all the additional spending called for in the legislation, congressional budget referees said… That would push the 10-year cost of the overhaul above $1 trillion…”
California Watch:
May 11 – Bloomberg (Michael B. Marois and William Selway): “California Governor Arnold Schwarzenegger will seek ‘terrible cuts’ to eliminate an $18.6 billion budget deficit facing the most-populous U.S. state through June 2011… California’s revenue in April, when income-tax payments are due, trailed the governor’s estimates by $3.6 billion, or 26%.”
May 14 – Bloomberg (Michael B. Marois and William Selway): “California Governor Arnold Schwarzenegger proposed a new round of budget cuts, including eliminating the state’s main welfare program for families, to close a $19.1 billion budget deficit for the year starting July 1. The $83.4 billion plan calls for $12.4 billion in spending reductions, $3.4 billion in additional federal aid and $3.4 billion in fund shifts, fees and assessments…”
Speculator Watch:
May 14 – Bloomberg (Jody Shenn and Michael J. Moore): “In June 2006, a year before the subprime mortgage market collapsed, Morgan Stanley created a cluster of investments doomed to fail even if default rates stayed low -- then bet against its concoction. Known as the Baldwin deals, the $167 million of synthetic collateralized debt obligations had an unusual feature… Rather than curtailing their bets on mortgage bonds as the underlying home loans paid down, the CDOs kept wagering as if the risk hadn’t changed. That left Baldwin investors facing losses on a modest rise in U.S. housing foreclosures, while Morgan Stanley was positioned to gain. ‘I can’t imagine anybody would take that bet knowingly,’ said Thomas Adams, a former executive at bond insurers Ambac Financial Group Inc. and FGIC Corp… ‘You’re overriding the natural process of risk-mitigation.’”
May 12 – Bloomberg (Tomoko Yamazaki and Komaki Ito): “Japanese hedge funds, the world’s worst performers last year, returned 6.7% in the first four months of 2010, the best year-to-April return in six years, according to Eurekahedge Pte.”
Dysfunctional Markets:
It scrolled by quickly Wednesday afternoon on my Bloomberg screen: a one-line headline quoting ECB Executive Board member Jose Manuel Gonzalez-Paramo: “Central Banks Can’t Work if Markets Dysfunctional.” My efforts to located Mr. Gonzalez-Paramo’s full comments on the issue were unsuccessful; we’ll have to assume the context. I do believe strongly that many things these days can’t work because global markets are hopelessly dysfunctional.
I was never a big fan of the simplistic analytical fixation on the so-called “shadow banking system.” Key components of this “system” – i.e. the Wall Street securities firms, ABS, CDOs, SIVs, private-label MBS, etc. – have been reined in. This would imply a more stable financial backdrop, which is nowhere to been seen. I am similarly not a subscriber to a “new normal” thesis. Again, the focus seems to detract from today’s key issues. I have posited a “Newest Abnormal” thesis – that the long process of market distortions and economic imbalances has actually accelerated. Things go from bad to only worse. Things may look somewhat different, but there’s nothing new.
From my analytical perspective, the heart of the problem lies with this dysfunctional dynamic between global marketable debt and derivatives, policy-induced distortions, and unfettered speculative finance. Unique in history, we continue to operate with a global financial “system” functioning without limits to either the quantity or quality of new Credit created. There’s way too much Credit backed by little more than government assurances or perceptions of government insurance. And never before has an enormous global “leveraged speculating community” so dominated the markets for debt instruments and, in the process, so relied on faith in the efficacy of government market interventions. It’s global wildcat banking in its purest ever form.
These days, entities all over the world issue enormous quantities of tradable debt instruments. This debt, in large part, is purchased by sophisticated market operators earning unimaginable compensation for achieving “above market” returns. When market psychology is bullish, there is essentially unlimited demand for marketable debt – a significant portion acquired through the use of leverage. And as long as demand for new marketable securities remains robust, underlying positive fundamentals appear to support a high market valuation for this debt (irrespective of the quantity issued) - and the party lives on. But Katy bar the door whenever the crowd moves to cut exposure – either through liquidating positions or acquiring market “insurance.”
Eurozone policymakers look foolish these days for not having reined in profligate Greek borrowing and spending. To many, the ECB looks foolish for Sunday’s decision to purchase in the open market debt issued by Greece, Portugal, Spain and other troubled European countries. Others believe the ECB was foolish for not having had initiated a Federal Reserve-style monetization plan long before the debt crisis spiraled out of control. I sympathize with the ECB. Dysfunctional global markets placed them in a winless situation. Greek 10-year bond yields were below 5% for much of 2009. The market was happy to accommodate profligacy - until it wasn’t. If only well-functioning global markets disciplined borrowers rather than emboldening them.
The sea change in global finance gained unstoppable momentum in the early nineties. The Greenspan Federal Reserve nurtured marketable debt as a mechanism to help overcome severe banking system impairment. There was no stopping the historic boom in market-based Credit once unleashed. The problem was clear by the time of the 1994 bond and mortgage securities dislocation. But it was politically and monetarily expedient to allow GSE Credit (with its implicit government guarantee) to evolve into a mechanism for stabilizing the Credit system and spurring economic expansion.
The rapidly escalating scope of the problem was illuminated with the collapse of LTCM. Yet, the Greenspan Fed supported this new financial infrastructure with only more powerful words and deeds. Pegging short term interest rates and aggressively intervening to rectify market tumult incited unprecedented leveraged speculation throughout the Credit system. Dr. Bernanke’s 2002 “helicopter money” and “government printing press” speeches sealed the fate of runaway Bubbles in both marketable debt and leveraged speculation.
Especially during the Bubble years 2004 through 2007, massive U.S. current account deficits worked to unleash U.S. Credit Bubble dynamics upon the entire world. The more Bubbles became ingrained in the financial architecture the deeper market perceptions became that policymakers wouldn’t tolerate a bust. Worse yet, policymakers resorted to using the debt markets and the market’s propensity for leveraged speculation as mechanisms for increasingly aggressive monetary reflation.
Global policymakers and Credit markets have been fueling Bubbles and accommodating profligacy for years now. It would have taken a concerted effort by global central bankers to rein things in. The Greenspan/Bernanke Federal Reserve would have had no part of it. Quite the contrary. It was fundamental to Greenspan/Bernanke doctrine to deal with market and economic fragility through the aggressive reflation of system Credit. This doctrine of inflationism was instrumental in nurturing Credit and speculation excesses that worked over time to increasingly distort the pricing of finance, the quantity of Credit created, and the allocation of real and financial resources. The ECB’s big mistake was not to have forcefully fought the Fed.
We’re now two years into the greatest expansion of global government debt in the history of mankind. Manic-depressive debt markets have now pulled the rug out from under Greece and periphery Europe, but in the process have further accommodated profligate government borrowings here at home. It is frightening to think of how distorted the Treasury market has become - and how things might play out down the road.
My bearish thesis on our markets and economy is based upon the view that the financial fuel for our recovery has been unsound, unstable and unsustainable. This “Monetary Process” is now in jeopardy. The Global Government Finance Bubble, which lunged into its terminal phase of excess with the collapse of the Wall Street/mortgage finance Bubble, has been pierced. Greece’s debt crisis marks a momentous inflection point. And, yes, some government markets – certainly including Treasuries – are benefiting from Greek and periphery European debt woes. Yet key Bubble dynamics percolate under the surface.
I have argued that the Global Government Finance Bubble has been the biggest and most precarious Bubble yet. The incredible scope of global sovereign debt expansion over the past couple years has been rather obvious. Less apparent are related distortions - to the pricing and allocation of finance throughout international markets - based specifically upon the market's perception that politicians and central bankers would act aggressively and successfully to forestall future crises. This policy-induced market distortion fostered an incredible bout of risk-taking – especially considering the fundamental backdrop – and a resulting massive flood of finance out to the risk markets. This perception has been blown to smithereens in Europe and has quickly become vulnerable everywhere.
Global markets in sovereign Credit default swap (CDS) protection have flourished on the assumption that policymakers would thwart any debt crisis. In the post-Greek debacle era, writing insurance against a government default is no longer free money. New realities have profoundly changed the risk and reward profiles of operating in this key market - and I’ll assume some profoundly less attractive marketplace liquidity dynamics going forward. And a faltering market for sovereign debt insurance significantly changes the risk profile of owning the underlying sovereign debt. To be sure, changing perceptions in the market for government debt work to corrode market confidence in the capacity of policymakers to stem financial and economic crises generally. This implies a major adjustment in the markets’ perception of risk in various markets, including corporate, municipal and mortgage instruments.
But I’m getting somewhat ahead of myself. Thus far, dislocation in Greek debt has fed powerful contagion effects throughout European debt and CDS. This has forced a major market reassessment of the relative stability of the euro currency, which has unleashed bloody havoc throughout the currency and “carry trade” arena. Currency and “carry trade” tumult has forced market reassessment as to near-term prospects for both the dollar (upward) and global growth (downward). This has caused trading liquidation and de-leveraging havoc in the enormous global “reflation trade” and in risk markets more generally. And there’s nothing like liquidation and forced de-leveraging to really bring out the animal spirits for those seeking to make nice speculative profits from others’ misfortune.
The dollar and Treasuries have benefited. This has supported the bullish view that the unfolding crisis is largely a European issue. It has also helped dampen the impact to our markets from changing global perceptions with respect to the capacity of policymakers to stem crises. Here in the U.S., Credit spreads and risk premiums (corporates, MBS, municipals, etc.) have widened some. Yet faith still runs deep that Washington won’t allow a crisis. This confidence must hold for sufficiently loose U.S. finance to continue to support our fragile recovery.
The confluence of global financial crisis and intense financial sector scrutiny here at home will at some point prove confidence in Washington overly optimistic. For now, when it comes to pricing risk and disciplining profligate borrowers, our debt markets remain dysfunctional.
This has caused liquidation and de-leveraging havoc in the enormous global “reflation trade” and in risk markets more generally. And there’s nothing like liquidation and forced de-leveraging to really bring out the animal spirits for those seeking to make nice speculative profits from others’ misfortune.
The dollar and Treasuries have benefited. This has supported the bullish view that the unfolding crisis is largely a European issue. It has also helped dampen the impact to our markets from changing global perceptions with respect to the capacity of policymakers to stem crises. Here in the U.S., Credit spreads and risk premiums (corporates, MBS, municipals, etc.) have widened some. Yet faith still runs deep that Washington won’t allow a crisis. This confidence must hold for sufficiently loose U.S. finance to continue to support our fragile recovery.
The confluence of global financial crisis and intense financial sector scrutiny here at home will at some point prove confidence in Washington overly optimistic. For now, when it comes to pricing risk and disciplining profligate borrowers, our debt markets remain dysfunctional.
http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10376
17 May 2010
13 May 2010
Shock Events & Gold Breakout
One of the few certainties expressed on this blog has been that Gold and Silver are epic investments. I'd say that panned out and will continue to pan out.
by Jim Willie, CB. Editor, Hat Trick Letter | May 12, 2010
The events of the last 12 to 18 months have been as shocking as they have been instrumental in reshaping the global financial structures. In fact, the events have pointed out the fracture of the global monetary system and banking systems. The steady stream of events is accelerating in scope and intensity. The fractures are finally being recognized. The key to understanding the continuation of disruptive and chaotic events is the realization that nothing has been fixed, no remedy put in place, no reform agreed upon, no liquidation of impaired bank assets completed, and no work toward a more stable system. Instead, the old system has been subjected to a patchwork of futile efforts and initiatives that speak more of bilking the system, redeeming impaired assets, and channeling funds to those most responsible for the fractures. Instead of seeking solutions, the banking and political leaders revert to what has been their shelf of failed tools, since they know nothing else, stuck in the Keynesian box, painted into the 0% rate corner. The costs are horrific when solutions are not pursued. The beneficiary is gold, since all wayward policy costs money, which must be created, worsening the debasement. Gold rises with new money creation gone amok. $Trillion rescue packages have become the norm, in a cavalcade of debased currencies. Historical highs come for gold and silver, with gold fighting the political battles, but silver riding through the gates with high speed and raised dust. Central banks own no silver, and industry consumes silver.
The system cannot repair itself because those in charge at the helm making decisions caused the fractures and protect their power base. They live and operate within a system that no longer functions effectively. Reform would involve bankruptcy for the elite in charge. Remedy would involve liquidation of the balance sheets for the elite in charge. True crackdown would involves prosecution and jail time for the elite in charge. Changing of the guard would involve lost power for the elite in charge. Independent audits would involve revelations and disclosures of criminal fraud on a widespread basis. So the system lumbers along, broken. Nowhere has the brokenness gone more unaddressed than under-water mortgages for 22% of the American public. True remedy and crackdown would involve a mushroom of criminal allegations from bond fraud, revelation of duplicate usage for mortgage payment revenue streams, lost property titles, and counterfeit fraud. That is a major reason why Fannie Mae was nationalized, to keep the fraud under the roof of the greatest criminal organization on earth, operating under the United States Government, where the corruption, theft, and fraud can be protected by the numerous agencies. The global response has been and will continue to be a flight into gold, finally recognized as a zero risk safe haven. The global decline in trust for government debt is the death knell for the major currencies, the monetary system, and the central bank franchise system. It is also the harbinger for $2000 gold and $50 silver.
Review briefly the scattering of powerful events in just the last 12 to 18 months. History is being made before our eyes. The franchise system of central banks and paper fiat currency has failed before our eyes, but with no specific recognition. The flood of new money creation testifies to both failure and desperation. New debt within the USEconomy no longer produces positive economic activity. The events are so diverse that any competent analyst must conclude that the global financial system has broken in irretrievable, irrevocable, irreversible manner. If the following diverse topics of disruption, breakdown, malfunction, denunciation, incompetence, compromise, corruption, and contagion do not wake people out of their slumber, nothing will. If investors do not take action amidst the plethora of warning signals, they deserve to be gobbled up and ruined. Before long, personal self-defense activity will be declared improper, illegal, and even possibly terrorist in nature. Please pardon the brevity of each topic, but too many exist, and building an argument for each would require at least 2 to 3 pages. These topics of breakdown, failure, corruption, and contagion are covered every month in the Hat Trick Letter. Skim to the end to review the gold market summary, where new highs are being registered in almost every single currency on earth. The topics covered in brevity are the same ones covered in careful treatment for the last 12 to 18 months. The array of topics arranged in sequence serves to highlight the shocking events and the historically unprecedented desperation in response, all of which has led to a powerful gold rally based on respect, integrity, and standalone value.
REJECTION OF PETRO-DOLLAR & REVOLT
Last May 2009, the Saudis with Russians and Chinese at their sides announced the eventual end to payments for crude oil to be honored in USDollars. The concept was endorsed by Japan and Germany, whose counselors from Berlin might be far more integral in reshaping the global landscape than the US-UK aging power merchants are willing to concede. The disrespect shown the USDollar has turned to revolt, seen in G-7 Meetings. In fact, the G-7 has morphed into a country club meeting for former power brokers. The new G-20 Meeting is the forum of substance, where the Chinese, Russians, Indians, and Brazilians can have a voice and no longer sit in the hallways while decisions are made. The USDollar is on the butt end of a Global Paradigm Shift with extreme force. The beleaguered buck will limp along until alternatives in the planning stage are launched. That is soon, really soon, like before 2011 is too far along. Gold will compete well with both the USDollar and any newly launched currency alternative.
NATIONALIZED BLACK HOLES
The absorption of Fannie Mae and American Intl Group into the USGovt conglomerate of bureaucracy, fraud, waste, confusion, protection, syndicate wings, off-shore accounts, and printing press operations was an urgent step. It placed the corrupted mortgage finance structures and credit derivative framework under the USGovt aegis, where the syndicate agencies can provide both proper attention and protection from prosecution. The Black Holes will cost the USGovt a few trillion$, my forecast made in 2007 and 2008. Shifting ownership of securities and putting them under official stewardship has effectively eliminated the potential for lawsuits by investors foreign and domestic. Fannie Mae is the nexus of numerous criminal fraud rings whose total value is north of $3 trillion. It is the vast sewage pit replete with slush funds, where obscure accounts reside never to face scrutiny, used to balance the accounting without prying eyes. Gold will be viewed as the clean alternative to paper, especially the toilet paper mixed in sewage treatment plant vats.
INSOLVENT BANKS
Nowhere is the brokenness more evident than in the insolvent big banks. Not a one is solvent, all vampires in search of tangible assets, willing to trade worthless stock shares for assets. Lending is a thing of the past. Their loan loss reserves have vanished, as reserves are tucked away from the lending circles in the US Federal Reserve. Insolvent banks engage in minimal lending, since approval is inhibited by the lack of working capital. The banks are loaded down by an endless raft of foreclosed properties, kept from the market, not on the market. Speaking of insolvent, the USFed itself is in wretched shape. A mere 5% decline in their mortgage assets translates to a negative balance sheet. A more likely 40% decline in mortgage assets, in closer tie to reality, translates to hundreds of billion$ in negative balance sheet. This agency, this august USFed is supposed to lift the US financial structure from its underwater grave? Methinks not!
PHONY ACCOUNTING STANDARDS ENDORSED
On April 1st of 2009, the Financial Accounting Standards Board endorsed corrupt accounting of impaired assets. Banks were permitted to place any value they wanted, with clumsy laughable minimal justification. Enter the basis of the great US stock rally. What a joke! Shock waves like on May 6th will likely become the norm. Bond shock waves are in vogue. Without proper accounting, valuation exercises in US financial arenas becomes a farce, joke, travesty.
ENDLESS QUANTITATIVE EASING
The QE1 was welcomed. Vast new money printing for the purpose of meeting federal deficits, rescuing big banks, and providing vast slush funds was deemed necessary. The end of QE1 was heralded but a lie. Perhaps it was proclaimed at an end so that QE2 can be launched amidst fresh needs. The QE2 seems to be launched in Europe with a grand US conduit. In March, USFed Chairman Bernanke lied through his teeth to the USCongress about how Quantitative Easing had come to an end, that USTreasurys were not being monetized. In late April, Bernanke admitted his lie to the same US Congressional committee. Remove QE and the entire system grinds to a halt, then collapses under the weight of debt. Claims of QE removal serve as deceptive political clapptrapp, pure diversion from the reality. The QE is as crucial as the right leg. Uncle Sam cannot negotiate the mine field while skipping and hopping on one leg.
REACTIVE CREATION OF USTREASURY BUBBLE
You gotta love the denials that the USTreasury Bond complex is a bubble. Its needs have grown enough to demand a significant slice of the entire global savings. Actually, the global savers have lost their appetite for further USTBond buys. As a bubble, it is fed by accelerating sources of funds, mostly nowadays from printing press creation of money. The near 0% interest rate is a dead end with no reversal, since higher borrowing costs would bring about a cave-in for the USTBond bubble. The USTreasury Bond bubble is the sentinel signal for the gold market to release, find global acceptance as true safe haven, and find proper value over $2000 per ounce. A supposed safe haven can NEVER be a bubble. In fact, as the USGovt adopts one broken child after another like Fannie Mae and AIG, the US$-based obligations extend beyond federal debt to cover mortgage wreckage and credit derivative fires. To call USTreasurys a safe haven is like calling Al Capone a savior, calling Lloyd Blankfein a crusader for God, calling Alan Greenspan the architect of prosperity, or calling Franklin Roosevelt a friend to gold investors.
ACCELERATION OF BANK FAILURES
Banks are falling victim to death experiences at an accelerated rate. The bank failure rate grew in mid-2008. The rate grew again in mid-2009. In 2010, already the rate has accelerated again. Bank failures are picking up speed rapidly. The FDIC insurance fund is deep in the red. The bank fees were levied at 13-fold increases last year. Even advanced bank fees have been exhausted by the FDIC. Soon the FDIC will need more billion$ in funds. A new wrinkle is that commercial mortgages are killing banks, at a time when many assets are revealed as being held on balance sheets at double their true value. See the recent bank failures and consistent over-valued assets in liquidation. The problem is systematic and endemic.
UNENDING MORTGAGE DELINQUENCIES
Despite claims of a stabilizing housing market, the mortgage delinquencies and enormous inventory of bank owned homes is not being relieved. Fannie Mae reports still rising mortgage delinquencies. Prime Option ARMs are showing delinquency rates that rival the subprimes. Commercial mortgages are also showing delinquency rates that rival the subprimes. The newest wrinkle is Strategic Defaults, where people just stop paying their mortgages, an active decision, often by people with high RICO credit scores. Many are demanding the banks to produce their legitimate property title. Many are sick & tired of bank welfare, with Wall Street taking the lion's share of aid. Some suspect vast bond fraud. Civil disobedience a la Henry David Thoreau has entered the equation. With each new delinquency comes a default and more inventory. The entire USEconomic growth spurt in the 2002 to 2005 timeframe was founded on a housing bubble that was washed away. No new bubbles can be found of practical usage, only the USTreasury Bond bubble acting like a powerful black hole to inhibit capital formation.
REVELATIONS OF RIGGED METALS MARKET
In the last few weeks, the metals markets are abuzz over the revelations by Andrew Maguire that the London silver market is rigged from JPMorgan trading desks. Price suppression has come from naked shorting, otherwise known as selling silver contracts without collateral, without benefit of metal. The paper Ponzi scheme of the London Bullion Market Assn and the COMEX is slowly being unmasked. The concentrated short positions have no economic justification, and represent over a year of global mine output. The GATA organization is being vindicated, soon to be granted great respect. Without the outsized naked short position in silver, all completely illegal, all totally protected by the USGovt and its obedient regulators, the silver price would be north of $50 per ounce. The same rigged market exists in gold. Without the outsized naked short position in gold, the gold price would be north of $2000 per ounce. That is where both are heading.
PROSECUTIONS OF US TITAN BANKS
The Big Four banks in the United States had better grow accustomed to legal charges and lawsuits. For several years, they sold toxic assets, misrepresented asset sales, have engaged in naked shorting of metals, have sold bogus derivative products, have laundered counterfeit bonds of various types, have paid in collusion for debt ratings, have engaged in insider trading schemes, and much more. My sources tell of powerful Chinese interests and indirect agents putting tremendous pressure on the USGovt to enforce the law and enforce the regulations, which would effectively release clogged markets and force prosecution. They are ultimately USTreasury Bond creditors and Gold investors. They are angry. Watch the prosecutions and civil lawsuits continue like an endless parade. Watch for exposés and sting operations also.
REFUSALS FOR BANKING DISCLOSURE
The common practice of off-balance sheet usage is rampant. Various devices for temporary account ledger items are under fire. Banks place unsold home foreclosure inventory often off the balance sheet. Bigger banks place wrecked mortgage assets off the balance sheet. Loser credit derivatives and other derivatives routinely are placed off the balance sheet. The USTreasury funds its own USTBond purchases from agencies in the Caribbean, again off the balance sheet. The entire Enron operation, from its Harvard hatchery, its Citigroup funding, and its JPMorgan special purpose vehicles, was an off-shore enterprise also. Proper disclosure involves proper valuation. False accounting prevents the disclosure process. The motive is simple. The big banks are insolvent and do not wish to disclose their insolvency. Lending as a result suffers.
DEMANDS FOR USFED AUDIT
Imagine a nation whose central bank is part of a foreign owned syndicate, with full control of the monetary management, full control of channels to their favorite bank entities, full control of destinations for funds. The USFed is a paid consultant for the USCongress which refuses to disclose its gold inventory, refuses to disclose its currency management, refuses to disclose its disbursement of TARP Funds, refuses to disclose its monetization of USTreasurys and USAgency Mortgage Bonds, refuses to disclose its Wall Street fund swaps, and desperately conceals its money laundering for CIA narcotics funds that enter the Wall Street system. Demands for a USFed audit coincided with a May 6th freakish stock plunge, resulting in watered down language for power to audit the USFed itself. The new bill at least is a foot in the door. Let's hope it is size 22 like Shaquille O'Neal.
TRILLION DOLLAR USGOVT DEFICITS
After the 2008 fiscal year USGovt deficit was announced in the $1.5 trillion range, shock was felt. The American public was told of a lower $1.3 trillion estimated deficit for 2009. It also ended up in the $1.5 trillion range. Expect the 2010 deficit to again be at least $1.5 trillion. Federal revenue receipts are still trending down for both individual and corporate tax sources. Another stimulus bill is soon to be entered, unless the nonsensical story of a recovery is actually embraced and believed. Funding of the Fannie Mae and AIG black holes is costly. And never overlook the endless wars and defense (offense) programs. Their budgets are sacred, never debated, and always endorsed without delay. The end result is a continued flood of USTreasury creation, at a time when refunding rollovers are required. Gold competes with this travesty, competes successfully, seen as a carnival sideshow moved to center stage. Record debt issuance occurs each month.
MISSING USTREASURY AUCTION BIDDERS
The details of USTreasury official auctions have become a subject of open debate. Irregularities among direct and indirect bidders has attracted attention, bad attention. Simple calculations reveal how USTBond purchases by known sources account for less than half of USTBonds auctioned off, the difference made up by pure monetization in the typical secretive centers like the Caribbean bank centers. The Treasury Investment Capital (TIC) Reports continue to reveal a decline in most nations for USTreasury holdings, yet even more USTBonds are sent into the market. The monetization is the only answer to explain vast anomalies.
PLUMMETING MONEY VELOCITY
A new phenomenon, documented, explained, even with visual aids, was given in the May Macro Economic Report out last week. The monetary base is accelerating upwards at a mindboggling rate. The broad money supply in usage is actually falling, due to reduced lending and loan approval. The money velocity has fallen dangerously low, like to levels seen in the teeth of vicious recessions. Thus the monetary inflation, Bernanke's reason for being, has not been successful. The relationship between broad money supply and declining labor market is well known, tracked expertly by John Williams and his Shadow Govt Statistics staff. The conclusion is to expect a nasty recession to continue, to reappear, depending on your perspective and level of denial. Money is being thrust into the system, but it is not being put to work, as capital formation is non-existent. Think of a big car burning its engine, revving up wildly, but going very slowly down the road. Blown pistons and gaskets litter the roadway.
ABUSE OF EXCHANGE TRADED FUNDS
The Exchange Traded Funds are a system for Wall Street to control prices for key items. The natural gas ETFund has had little bearing on the natural gas price. The silver ETFund (SLV) inventory has diverged from the silver metal price, the lost correlation as testimony to corrupted management. The lazy investors prefer to own an ETFund out of unwillingness to research or manage the asset, preferring to open the door to corrupt management by Wall Street firms, the same ones who corrupted the mortgage bond market, the muni bond market, the oil market, and the entire stock market. The most corrupt of all ETFunds are the Street Tracks SPDR (GLD) gold fund, the Barclays (SLV) silver fund, and the Goldman Sachs (GDX) gold mining fund. Each of these funds serves an important role in the price fixing, price manipulation, and heavy handed leveraged control of price suppression. If investors are loaded with such ETFunds, then someday they will realize a divergence between the share price and the underlying prices, probably some lawsuits for impropriety and malfeasance, and likely forced liquidations without participation in the rallies observed. As Stewart Dougherty put it, "Big Money is going to be way too smart to buy the Exchange Traded Funds that have been pimped to retail investors as a way to sterlize their money and keep it out of the metals market for which it was internded." The solution is to own a gold or silver bullion account. See the Sprott (PHYS) fund which is given a 30% price premium, due to integrity.
POLITICAL REACTION TO FAILURE & COLLECTIVISM
The public disgust and anger is growing fast. The Tea Party movement has gained acceptance and vigor at the grassroots level. Some like Bill Clinton attempt to associate the Tea Party participants with terrorists, which is ludicrous. George Washington, Patrick Henry, Thomas Jefferson, John Adams, James Madison, and especially the outspoken Benjamin Franklin might be maligned if alive today, or at least harassed with tax audits. At least one might sit in a secret prison without criminal charges filed. The USCongress is distrusted more than Wall Street. Bankers are despised and disrespected. The people did not want a national Health Care program, but their desires are secondary. The USGovt had better beware of a blossoming of civil disobedience in reaction. One form is not to make mortgage payments. Another form is to drain investment accounts and to purchase gold & silver, coins or bullion, either way.
DISRESPECT SHOWN TO THE UNITED STATES
International prestige has vanished for the United States. The revolt that started against the USDollar two years ago has branched in multiple directions. US bankers are on the extreme defensive, the former ambassadors to economic export. The narco war and oil war have tarnished the US reputation. The military services fraud has tarnished the US reputation. The abuse of NATO airbases has tarnished the US reputation. The Wall Street toxic bond export on a global scale has tarnished the US reputation. The interference with foreign sovereign debt by Wall Street and US-based hedge funds has tarnished the US reputation. The heavy hand of IMF and World Bank leverage, pressures, and poison pills has tarnished the US reputation. The ratcheting trade war and stream of tariffs and complaints by the USGovt have tarnished the US reputation. The Madoff Ponzi Scheme has tarnished the US reputation. The numerous nationalized companies has tarnished the US reputation. The new prosecutions against Wall Street fraud have tarnished the US reputation. The flood of new USTreasury Bond supply has tarnished the US reputation. The lack of leadership in times of crisis has tarnished the US reputation.
FLASH TRADING EXPOSED
In the last two years, much attention has been given the Flash Trading, also called High Frequency Trading, even the basic name of Computer Program Trading. Estimates that 73% of the New York Stock Exchange trading volume is from program trading. So Wall Street is essentially deeply committed to circle jerk endeavors, or exercises to eat each other' lunch, certainly not producing anything. Paul Volcker accused the financial industry of one good innovation in 20 years, the automatic teller machine. He finds no value in either credit derivatives or computer program trading. In fact, much of the Flash Trading proprietary devices are elaborate insider trading mechanisms that view the order stream and front run. See the Goldman Sachs incident one year ago, when an employee stole the illegal software, but the FBI came to the rescue of GSax and kept the story and device under wraps. The Flash Trading was unleashed on May 6th again. A grand heist ensued, clearly motivated by insider information of a weekend European bank rescue and $1 trillion monetization package. Lack of liquidity is blamed, but so is lack of value. In today's world of high finance, a flash trade computer program device is a different form of pistol used in a holdup, gunning for the sell stops, filling them at absurdly low levels, mugged on the trading platforms. The Dark Pools in OTC trading account for $60 trillion in annual activity, versus a mere $5 trillion in monitored traffic. That translates to more back alleys for mugging than passageways well lit to prevent criminals at work.
SOVEREIGN DEBT REJECTED
Since late November when the Dubai debt went into default, the sovereign debt crisis has been unleashed like a relentless storm. Following Dubai was Greece, the common denominator being the London and West Europe banks. Denials are shallow minded and stupid when analysts claim that sovereign debt risk is fenced from one nation to another. Contagion will be the norm. Much of the Greek Govt debt is held by Swiss, London, and French banks. So a rescue of Greece is tantamount to a rescue of these big exposed banks. The rash of sovereign debts facing default, or pressure toward default, testifies to the failure of the monetary system. The usage of newly hatched money to fix problems from unbacked untethered unsecured money is lunacy. Eventually, a condition marred by debt constipation results. Uncle Sam needs to visit the toilet for relief but cannot, as his bowels are blocked by debt without benefit of healthy liquidity. His intestines are clogged with financial engineered vehicles, basic fur balls. The next nations to face the sovereign debt hammer of scrutiny and market retaliation are Italy, Spain, France, and then England. The fireworks are nowhere finished. With each new episode, the Gold price will rise further.
FAILURE OF CENTRAL BANK FRANCHISES
The sovereign debt crisis is actually a symptom of the failed central bank franchise system. The central bank had better hurry to produce new global reserve currencies backed and fortified by gold, also possibly by crude oil, or else the fires in the government debt will continue to burn. The end result will be ruined currencies, broken national banking systems, national budgets in tatters beyond remedy, economies ground to a halt, and eventually civil strife. We are witnessing the end convulsions of the fiat paper monetary system. The central banks are powerless to stop the crisis. The $1 trillion European bank bailout plan gave lift to the Euro currency for less than 24 hours. The USDollar is viewed as likewise wrecked and undermined as the Euro. In my view, the simple perspective is that their near 0% interest rates are like a minimal pulse on the banking system, a depleted body lying in the Intensive Care ward. The currencies are all dying. Gold will rise until given proper recognition, then it will rise even more.
GOLD SEEN AS ZERO RISK REFUGE
No charts are necessary. A thousand words might suffice, rather than six charts showing Gold breaking out to new highs across the world. Some major points scream to be told. Here is a list:
Gold is rising in every single major currency
Gold is not a hedge against price inflation, but rather against ruined monetary system
Gold is making new highs in almost every single major currency
Gold had consolidated in price for four months, the base for breakout
Gold will reach $2000 in price within the next two years time
Gold is desperately needed to anchor the failed fiat paper currency system
Gold is planned for a component role in the new Northern Euro currency
The sovereign debt crisis has fueled demand for Gold without the full realization that the central bank franchise system has failed along with the fiat currencies
Quantitative Easing is monetary hyper-inflation, the fuel of the Gold rally
Gold is urgently needed as a bank reserve to ensure proper function
Gold contains no inherent counter-party risk
Gold is in the midst of vast supply shortages
The Gold Cartel is seeing defections among its allies, who are buying gold bullion after the cartel knocks down the price
Nations are hoarding their gold mining output, the latest possibly Venezuela
Gold is seeing panic buying in parts of Europe, like Austria
Gold mining output is trending down for the past few years
Gold was by far the #1 investment asset in the entire 2000-2009 decade
The US Dow Jones Industrial Average is in multi-year decline, in Gold terms
Gold is protected from human corruption, except in its theft and hollow replacement
Gold market is receiving heavy scrutiny for corrupt metal exchanges
The London Bullion Market Assn has been in default since December, bribing on delivery demands to receive cash settlement with a 25% premium paid
The GLD gold exchange traded fund is a corrupt diversion from metal ownership
Hong Kong is soon to offer several exchange traded funds for Gold
Gold can and does rise in price concurrently with the USDollar
Future payment for oil shipments will require a gold-backed currency
New barter systems of trade will contain a gold core component
Gold is the ultimate safe haven asset
The USTreasury has no gold reserves, as Fort Knox is empty, since the Clinton-Rubin gang leased it and sold it all
PIGS nations have more gold reserves than the United States
Switzerland and Canada have almost zero gold in national reserves
The IMF gold sales are lies, actually closed out USGovt gold short transactions from past years when the Clinton-Rubin gang leased gold for sale
Gold leased from the Italian central bank was lost by LongTerm Capital Mgmt
Bear Stearns was targeted for a kill, since it was long in gold, defying Wall Street
China participates with the IMF sideshow game in order to buy its gold pledges
If Gold were revalued at 3x to 5x the price, many national banking systems would be restored to health and solvency
Price hyper-inflation is the likely next blemish on the US landscape, which will fuel broad public gold demand
Any attempt by the USGovt to confiscate gold would result in a gigantic backfire, with the gold price doubling in price, and US foreign assets subjected to freezes
Gold will reach its high range when US bankers along with London bankers face a Nuremberg style criminal trial on the global stage
Prepare for the arrival of a small group of new Gold-backed currencies, the USDollar death knell
As John Pierpont Morgan once stated under oath before the USCongress and the Pujo Commission in 1913, "Gold is money, and nothing else"
Copyright © 2010 Jim Willie, CB
Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials.
Jim Willie CB is the editor of the "HAT TRICK LETTER" Use the below link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.
by Jim Willie, CB. Editor, Hat Trick Letter | May 12, 2010
The events of the last 12 to 18 months have been as shocking as they have been instrumental in reshaping the global financial structures. In fact, the events have pointed out the fracture of the global monetary system and banking systems. The steady stream of events is accelerating in scope and intensity. The fractures are finally being recognized. The key to understanding the continuation of disruptive and chaotic events is the realization that nothing has been fixed, no remedy put in place, no reform agreed upon, no liquidation of impaired bank assets completed, and no work toward a more stable system. Instead, the old system has been subjected to a patchwork of futile efforts and initiatives that speak more of bilking the system, redeeming impaired assets, and channeling funds to those most responsible for the fractures. Instead of seeking solutions, the banking and political leaders revert to what has been their shelf of failed tools, since they know nothing else, stuck in the Keynesian box, painted into the 0% rate corner. The costs are horrific when solutions are not pursued. The beneficiary is gold, since all wayward policy costs money, which must be created, worsening the debasement. Gold rises with new money creation gone amok. $Trillion rescue packages have become the norm, in a cavalcade of debased currencies. Historical highs come for gold and silver, with gold fighting the political battles, but silver riding through the gates with high speed and raised dust. Central banks own no silver, and industry consumes silver.
The system cannot repair itself because those in charge at the helm making decisions caused the fractures and protect their power base. They live and operate within a system that no longer functions effectively. Reform would involve bankruptcy for the elite in charge. Remedy would involve liquidation of the balance sheets for the elite in charge. True crackdown would involves prosecution and jail time for the elite in charge. Changing of the guard would involve lost power for the elite in charge. Independent audits would involve revelations and disclosures of criminal fraud on a widespread basis. So the system lumbers along, broken. Nowhere has the brokenness gone more unaddressed than under-water mortgages for 22% of the American public. True remedy and crackdown would involve a mushroom of criminal allegations from bond fraud, revelation of duplicate usage for mortgage payment revenue streams, lost property titles, and counterfeit fraud. That is a major reason why Fannie Mae was nationalized, to keep the fraud under the roof of the greatest criminal organization on earth, operating under the United States Government, where the corruption, theft, and fraud can be protected by the numerous agencies. The global response has been and will continue to be a flight into gold, finally recognized as a zero risk safe haven. The global decline in trust for government debt is the death knell for the major currencies, the monetary system, and the central bank franchise system. It is also the harbinger for $2000 gold and $50 silver.
Review briefly the scattering of powerful events in just the last 12 to 18 months. History is being made before our eyes. The franchise system of central banks and paper fiat currency has failed before our eyes, but with no specific recognition. The flood of new money creation testifies to both failure and desperation. New debt within the USEconomy no longer produces positive economic activity. The events are so diverse that any competent analyst must conclude that the global financial system has broken in irretrievable, irrevocable, irreversible manner. If the following diverse topics of disruption, breakdown, malfunction, denunciation, incompetence, compromise, corruption, and contagion do not wake people out of their slumber, nothing will. If investors do not take action amidst the plethora of warning signals, they deserve to be gobbled up and ruined. Before long, personal self-defense activity will be declared improper, illegal, and even possibly terrorist in nature. Please pardon the brevity of each topic, but too many exist, and building an argument for each would require at least 2 to 3 pages. These topics of breakdown, failure, corruption, and contagion are covered every month in the Hat Trick Letter. Skim to the end to review the gold market summary, where new highs are being registered in almost every single currency on earth. The topics covered in brevity are the same ones covered in careful treatment for the last 12 to 18 months. The array of topics arranged in sequence serves to highlight the shocking events and the historically unprecedented desperation in response, all of which has led to a powerful gold rally based on respect, integrity, and standalone value.
REJECTION OF PETRO-DOLLAR & REVOLT
Last May 2009, the Saudis with Russians and Chinese at their sides announced the eventual end to payments for crude oil to be honored in USDollars. The concept was endorsed by Japan and Germany, whose counselors from Berlin might be far more integral in reshaping the global landscape than the US-UK aging power merchants are willing to concede. The disrespect shown the USDollar has turned to revolt, seen in G-7 Meetings. In fact, the G-7 has morphed into a country club meeting for former power brokers. The new G-20 Meeting is the forum of substance, where the Chinese, Russians, Indians, and Brazilians can have a voice and no longer sit in the hallways while decisions are made. The USDollar is on the butt end of a Global Paradigm Shift with extreme force. The beleaguered buck will limp along until alternatives in the planning stage are launched. That is soon, really soon, like before 2011 is too far along. Gold will compete well with both the USDollar and any newly launched currency alternative.
NATIONALIZED BLACK HOLES
The absorption of Fannie Mae and American Intl Group into the USGovt conglomerate of bureaucracy, fraud, waste, confusion, protection, syndicate wings, off-shore accounts, and printing press operations was an urgent step. It placed the corrupted mortgage finance structures and credit derivative framework under the USGovt aegis, where the syndicate agencies can provide both proper attention and protection from prosecution. The Black Holes will cost the USGovt a few trillion$, my forecast made in 2007 and 2008. Shifting ownership of securities and putting them under official stewardship has effectively eliminated the potential for lawsuits by investors foreign and domestic. Fannie Mae is the nexus of numerous criminal fraud rings whose total value is north of $3 trillion. It is the vast sewage pit replete with slush funds, where obscure accounts reside never to face scrutiny, used to balance the accounting without prying eyes. Gold will be viewed as the clean alternative to paper, especially the toilet paper mixed in sewage treatment plant vats.
INSOLVENT BANKS
Nowhere is the brokenness more evident than in the insolvent big banks. Not a one is solvent, all vampires in search of tangible assets, willing to trade worthless stock shares for assets. Lending is a thing of the past. Their loan loss reserves have vanished, as reserves are tucked away from the lending circles in the US Federal Reserve. Insolvent banks engage in minimal lending, since approval is inhibited by the lack of working capital. The banks are loaded down by an endless raft of foreclosed properties, kept from the market, not on the market. Speaking of insolvent, the USFed itself is in wretched shape. A mere 5% decline in their mortgage assets translates to a negative balance sheet. A more likely 40% decline in mortgage assets, in closer tie to reality, translates to hundreds of billion$ in negative balance sheet. This agency, this august USFed is supposed to lift the US financial structure from its underwater grave? Methinks not!
PHONY ACCOUNTING STANDARDS ENDORSED
On April 1st of 2009, the Financial Accounting Standards Board endorsed corrupt accounting of impaired assets. Banks were permitted to place any value they wanted, with clumsy laughable minimal justification. Enter the basis of the great US stock rally. What a joke! Shock waves like on May 6th will likely become the norm. Bond shock waves are in vogue. Without proper accounting, valuation exercises in US financial arenas becomes a farce, joke, travesty.
ENDLESS QUANTITATIVE EASING
The QE1 was welcomed. Vast new money printing for the purpose of meeting federal deficits, rescuing big banks, and providing vast slush funds was deemed necessary. The end of QE1 was heralded but a lie. Perhaps it was proclaimed at an end so that QE2 can be launched amidst fresh needs. The QE2 seems to be launched in Europe with a grand US conduit. In March, USFed Chairman Bernanke lied through his teeth to the USCongress about how Quantitative Easing had come to an end, that USTreasurys were not being monetized. In late April, Bernanke admitted his lie to the same US Congressional committee. Remove QE and the entire system grinds to a halt, then collapses under the weight of debt. Claims of QE removal serve as deceptive political clapptrapp, pure diversion from the reality. The QE is as crucial as the right leg. Uncle Sam cannot negotiate the mine field while skipping and hopping on one leg.
REACTIVE CREATION OF USTREASURY BUBBLE
You gotta love the denials that the USTreasury Bond complex is a bubble. Its needs have grown enough to demand a significant slice of the entire global savings. Actually, the global savers have lost their appetite for further USTBond buys. As a bubble, it is fed by accelerating sources of funds, mostly nowadays from printing press creation of money. The near 0% interest rate is a dead end with no reversal, since higher borrowing costs would bring about a cave-in for the USTBond bubble. The USTreasury Bond bubble is the sentinel signal for the gold market to release, find global acceptance as true safe haven, and find proper value over $2000 per ounce. A supposed safe haven can NEVER be a bubble. In fact, as the USGovt adopts one broken child after another like Fannie Mae and AIG, the US$-based obligations extend beyond federal debt to cover mortgage wreckage and credit derivative fires. To call USTreasurys a safe haven is like calling Al Capone a savior, calling Lloyd Blankfein a crusader for God, calling Alan Greenspan the architect of prosperity, or calling Franklin Roosevelt a friend to gold investors.
ACCELERATION OF BANK FAILURES
Banks are falling victim to death experiences at an accelerated rate. The bank failure rate grew in mid-2008. The rate grew again in mid-2009. In 2010, already the rate has accelerated again. Bank failures are picking up speed rapidly. The FDIC insurance fund is deep in the red. The bank fees were levied at 13-fold increases last year. Even advanced bank fees have been exhausted by the FDIC. Soon the FDIC will need more billion$ in funds. A new wrinkle is that commercial mortgages are killing banks, at a time when many assets are revealed as being held on balance sheets at double their true value. See the recent bank failures and consistent over-valued assets in liquidation. The problem is systematic and endemic.
UNENDING MORTGAGE DELINQUENCIES
Despite claims of a stabilizing housing market, the mortgage delinquencies and enormous inventory of bank owned homes is not being relieved. Fannie Mae reports still rising mortgage delinquencies. Prime Option ARMs are showing delinquency rates that rival the subprimes. Commercial mortgages are also showing delinquency rates that rival the subprimes. The newest wrinkle is Strategic Defaults, where people just stop paying their mortgages, an active decision, often by people with high RICO credit scores. Many are demanding the banks to produce their legitimate property title. Many are sick & tired of bank welfare, with Wall Street taking the lion's share of aid. Some suspect vast bond fraud. Civil disobedience a la Henry David Thoreau has entered the equation. With each new delinquency comes a default and more inventory. The entire USEconomic growth spurt in the 2002 to 2005 timeframe was founded on a housing bubble that was washed away. No new bubbles can be found of practical usage, only the USTreasury Bond bubble acting like a powerful black hole to inhibit capital formation.
REVELATIONS OF RIGGED METALS MARKET
In the last few weeks, the metals markets are abuzz over the revelations by Andrew Maguire that the London silver market is rigged from JPMorgan trading desks. Price suppression has come from naked shorting, otherwise known as selling silver contracts without collateral, without benefit of metal. The paper Ponzi scheme of the London Bullion Market Assn and the COMEX is slowly being unmasked. The concentrated short positions have no economic justification, and represent over a year of global mine output. The GATA organization is being vindicated, soon to be granted great respect. Without the outsized naked short position in silver, all completely illegal, all totally protected by the USGovt and its obedient regulators, the silver price would be north of $50 per ounce. The same rigged market exists in gold. Without the outsized naked short position in gold, the gold price would be north of $2000 per ounce. That is where both are heading.
PROSECUTIONS OF US TITAN BANKS
The Big Four banks in the United States had better grow accustomed to legal charges and lawsuits. For several years, they sold toxic assets, misrepresented asset sales, have engaged in naked shorting of metals, have sold bogus derivative products, have laundered counterfeit bonds of various types, have paid in collusion for debt ratings, have engaged in insider trading schemes, and much more. My sources tell of powerful Chinese interests and indirect agents putting tremendous pressure on the USGovt to enforce the law and enforce the regulations, which would effectively release clogged markets and force prosecution. They are ultimately USTreasury Bond creditors and Gold investors. They are angry. Watch the prosecutions and civil lawsuits continue like an endless parade. Watch for exposés and sting operations also.
REFUSALS FOR BANKING DISCLOSURE
The common practice of off-balance sheet usage is rampant. Various devices for temporary account ledger items are under fire. Banks place unsold home foreclosure inventory often off the balance sheet. Bigger banks place wrecked mortgage assets off the balance sheet. Loser credit derivatives and other derivatives routinely are placed off the balance sheet. The USTreasury funds its own USTBond purchases from agencies in the Caribbean, again off the balance sheet. The entire Enron operation, from its Harvard hatchery, its Citigroup funding, and its JPMorgan special purpose vehicles, was an off-shore enterprise also. Proper disclosure involves proper valuation. False accounting prevents the disclosure process. The motive is simple. The big banks are insolvent and do not wish to disclose their insolvency. Lending as a result suffers.
DEMANDS FOR USFED AUDIT
Imagine a nation whose central bank is part of a foreign owned syndicate, with full control of the monetary management, full control of channels to their favorite bank entities, full control of destinations for funds. The USFed is a paid consultant for the USCongress which refuses to disclose its gold inventory, refuses to disclose its currency management, refuses to disclose its disbursement of TARP Funds, refuses to disclose its monetization of USTreasurys and USAgency Mortgage Bonds, refuses to disclose its Wall Street fund swaps, and desperately conceals its money laundering for CIA narcotics funds that enter the Wall Street system. Demands for a USFed audit coincided with a May 6th freakish stock plunge, resulting in watered down language for power to audit the USFed itself. The new bill at least is a foot in the door. Let's hope it is size 22 like Shaquille O'Neal.
TRILLION DOLLAR USGOVT DEFICITS
After the 2008 fiscal year USGovt deficit was announced in the $1.5 trillion range, shock was felt. The American public was told of a lower $1.3 trillion estimated deficit for 2009. It also ended up in the $1.5 trillion range. Expect the 2010 deficit to again be at least $1.5 trillion. Federal revenue receipts are still trending down for both individual and corporate tax sources. Another stimulus bill is soon to be entered, unless the nonsensical story of a recovery is actually embraced and believed. Funding of the Fannie Mae and AIG black holes is costly. And never overlook the endless wars and defense (offense) programs. Their budgets are sacred, never debated, and always endorsed without delay. The end result is a continued flood of USTreasury creation, at a time when refunding rollovers are required. Gold competes with this travesty, competes successfully, seen as a carnival sideshow moved to center stage. Record debt issuance occurs each month.
MISSING USTREASURY AUCTION BIDDERS
The details of USTreasury official auctions have become a subject of open debate. Irregularities among direct and indirect bidders has attracted attention, bad attention. Simple calculations reveal how USTBond purchases by known sources account for less than half of USTBonds auctioned off, the difference made up by pure monetization in the typical secretive centers like the Caribbean bank centers. The Treasury Investment Capital (TIC) Reports continue to reveal a decline in most nations for USTreasury holdings, yet even more USTBonds are sent into the market. The monetization is the only answer to explain vast anomalies.
PLUMMETING MONEY VELOCITY
A new phenomenon, documented, explained, even with visual aids, was given in the May Macro Economic Report out last week. The monetary base is accelerating upwards at a mindboggling rate. The broad money supply in usage is actually falling, due to reduced lending and loan approval. The money velocity has fallen dangerously low, like to levels seen in the teeth of vicious recessions. Thus the monetary inflation, Bernanke's reason for being, has not been successful. The relationship between broad money supply and declining labor market is well known, tracked expertly by John Williams and his Shadow Govt Statistics staff. The conclusion is to expect a nasty recession to continue, to reappear, depending on your perspective and level of denial. Money is being thrust into the system, but it is not being put to work, as capital formation is non-existent. Think of a big car burning its engine, revving up wildly, but going very slowly down the road. Blown pistons and gaskets litter the roadway.
ABUSE OF EXCHANGE TRADED FUNDS
The Exchange Traded Funds are a system for Wall Street to control prices for key items. The natural gas ETFund has had little bearing on the natural gas price. The silver ETFund (SLV) inventory has diverged from the silver metal price, the lost correlation as testimony to corrupted management. The lazy investors prefer to own an ETFund out of unwillingness to research or manage the asset, preferring to open the door to corrupt management by Wall Street firms, the same ones who corrupted the mortgage bond market, the muni bond market, the oil market, and the entire stock market. The most corrupt of all ETFunds are the Street Tracks SPDR (GLD) gold fund, the Barclays (SLV) silver fund, and the Goldman Sachs (GDX) gold mining fund. Each of these funds serves an important role in the price fixing, price manipulation, and heavy handed leveraged control of price suppression. If investors are loaded with such ETFunds, then someday they will realize a divergence between the share price and the underlying prices, probably some lawsuits for impropriety and malfeasance, and likely forced liquidations without participation in the rallies observed. As Stewart Dougherty put it, "Big Money is going to be way too smart to buy the Exchange Traded Funds that have been pimped to retail investors as a way to sterlize their money and keep it out of the metals market for which it was internded." The solution is to own a gold or silver bullion account. See the Sprott (PHYS) fund which is given a 30% price premium, due to integrity.
POLITICAL REACTION TO FAILURE & COLLECTIVISM
The public disgust and anger is growing fast. The Tea Party movement has gained acceptance and vigor at the grassroots level. Some like Bill Clinton attempt to associate the Tea Party participants with terrorists, which is ludicrous. George Washington, Patrick Henry, Thomas Jefferson, John Adams, James Madison, and especially the outspoken Benjamin Franklin might be maligned if alive today, or at least harassed with tax audits. At least one might sit in a secret prison without criminal charges filed. The USCongress is distrusted more than Wall Street. Bankers are despised and disrespected. The people did not want a national Health Care program, but their desires are secondary. The USGovt had better beware of a blossoming of civil disobedience in reaction. One form is not to make mortgage payments. Another form is to drain investment accounts and to purchase gold & silver, coins or bullion, either way.
DISRESPECT SHOWN TO THE UNITED STATES
International prestige has vanished for the United States. The revolt that started against the USDollar two years ago has branched in multiple directions. US bankers are on the extreme defensive, the former ambassadors to economic export. The narco war and oil war have tarnished the US reputation. The military services fraud has tarnished the US reputation. The abuse of NATO airbases has tarnished the US reputation. The Wall Street toxic bond export on a global scale has tarnished the US reputation. The interference with foreign sovereign debt by Wall Street and US-based hedge funds has tarnished the US reputation. The heavy hand of IMF and World Bank leverage, pressures, and poison pills has tarnished the US reputation. The ratcheting trade war and stream of tariffs and complaints by the USGovt have tarnished the US reputation. The Madoff Ponzi Scheme has tarnished the US reputation. The numerous nationalized companies has tarnished the US reputation. The new prosecutions against Wall Street fraud have tarnished the US reputation. The flood of new USTreasury Bond supply has tarnished the US reputation. The lack of leadership in times of crisis has tarnished the US reputation.
FLASH TRADING EXPOSED
In the last two years, much attention has been given the Flash Trading, also called High Frequency Trading, even the basic name of Computer Program Trading. Estimates that 73% of the New York Stock Exchange trading volume is from program trading. So Wall Street is essentially deeply committed to circle jerk endeavors, or exercises to eat each other' lunch, certainly not producing anything. Paul Volcker accused the financial industry of one good innovation in 20 years, the automatic teller machine. He finds no value in either credit derivatives or computer program trading. In fact, much of the Flash Trading proprietary devices are elaborate insider trading mechanisms that view the order stream and front run. See the Goldman Sachs incident one year ago, when an employee stole the illegal software, but the FBI came to the rescue of GSax and kept the story and device under wraps. The Flash Trading was unleashed on May 6th again. A grand heist ensued, clearly motivated by insider information of a weekend European bank rescue and $1 trillion monetization package. Lack of liquidity is blamed, but so is lack of value. In today's world of high finance, a flash trade computer program device is a different form of pistol used in a holdup, gunning for the sell stops, filling them at absurdly low levels, mugged on the trading platforms. The Dark Pools in OTC trading account for $60 trillion in annual activity, versus a mere $5 trillion in monitored traffic. That translates to more back alleys for mugging than passageways well lit to prevent criminals at work.
SOVEREIGN DEBT REJECTED
Since late November when the Dubai debt went into default, the sovereign debt crisis has been unleashed like a relentless storm. Following Dubai was Greece, the common denominator being the London and West Europe banks. Denials are shallow minded and stupid when analysts claim that sovereign debt risk is fenced from one nation to another. Contagion will be the norm. Much of the Greek Govt debt is held by Swiss, London, and French banks. So a rescue of Greece is tantamount to a rescue of these big exposed banks. The rash of sovereign debts facing default, or pressure toward default, testifies to the failure of the monetary system. The usage of newly hatched money to fix problems from unbacked untethered unsecured money is lunacy. Eventually, a condition marred by debt constipation results. Uncle Sam needs to visit the toilet for relief but cannot, as his bowels are blocked by debt without benefit of healthy liquidity. His intestines are clogged with financial engineered vehicles, basic fur balls. The next nations to face the sovereign debt hammer of scrutiny and market retaliation are Italy, Spain, France, and then England. The fireworks are nowhere finished. With each new episode, the Gold price will rise further.
FAILURE OF CENTRAL BANK FRANCHISES
The sovereign debt crisis is actually a symptom of the failed central bank franchise system. The central bank had better hurry to produce new global reserve currencies backed and fortified by gold, also possibly by crude oil, or else the fires in the government debt will continue to burn. The end result will be ruined currencies, broken national banking systems, national budgets in tatters beyond remedy, economies ground to a halt, and eventually civil strife. We are witnessing the end convulsions of the fiat paper monetary system. The central banks are powerless to stop the crisis. The $1 trillion European bank bailout plan gave lift to the Euro currency for less than 24 hours. The USDollar is viewed as likewise wrecked and undermined as the Euro. In my view, the simple perspective is that their near 0% interest rates are like a minimal pulse on the banking system, a depleted body lying in the Intensive Care ward. The currencies are all dying. Gold will rise until given proper recognition, then it will rise even more.
GOLD SEEN AS ZERO RISK REFUGE
No charts are necessary. A thousand words might suffice, rather than six charts showing Gold breaking out to new highs across the world. Some major points scream to be told. Here is a list:
Gold is rising in every single major currency
Gold is not a hedge against price inflation, but rather against ruined monetary system
Gold is making new highs in almost every single major currency
Gold had consolidated in price for four months, the base for breakout
Gold will reach $2000 in price within the next two years time
Gold is desperately needed to anchor the failed fiat paper currency system
Gold is planned for a component role in the new Northern Euro currency
The sovereign debt crisis has fueled demand for Gold without the full realization that the central bank franchise system has failed along with the fiat currencies
Quantitative Easing is monetary hyper-inflation, the fuel of the Gold rally
Gold is urgently needed as a bank reserve to ensure proper function
Gold contains no inherent counter-party risk
Gold is in the midst of vast supply shortages
The Gold Cartel is seeing defections among its allies, who are buying gold bullion after the cartel knocks down the price
Nations are hoarding their gold mining output, the latest possibly Venezuela
Gold is seeing panic buying in parts of Europe, like Austria
Gold mining output is trending down for the past few years
Gold was by far the #1 investment asset in the entire 2000-2009 decade
The US Dow Jones Industrial Average is in multi-year decline, in Gold terms
Gold is protected from human corruption, except in its theft and hollow replacement
Gold market is receiving heavy scrutiny for corrupt metal exchanges
The London Bullion Market Assn has been in default since December, bribing on delivery demands to receive cash settlement with a 25% premium paid
The GLD gold exchange traded fund is a corrupt diversion from metal ownership
Hong Kong is soon to offer several exchange traded funds for Gold
Gold can and does rise in price concurrently with the USDollar
Future payment for oil shipments will require a gold-backed currency
New barter systems of trade will contain a gold core component
Gold is the ultimate safe haven asset
The USTreasury has no gold reserves, as Fort Knox is empty, since the Clinton-Rubin gang leased it and sold it all
PIGS nations have more gold reserves than the United States
Switzerland and Canada have almost zero gold in national reserves
The IMF gold sales are lies, actually closed out USGovt gold short transactions from past years when the Clinton-Rubin gang leased gold for sale
Gold leased from the Italian central bank was lost by LongTerm Capital Mgmt
Bear Stearns was targeted for a kill, since it was long in gold, defying Wall Street
China participates with the IMF sideshow game in order to buy its gold pledges
If Gold were revalued at 3x to 5x the price, many national banking systems would be restored to health and solvency
Price hyper-inflation is the likely next blemish on the US landscape, which will fuel broad public gold demand
Any attempt by the USGovt to confiscate gold would result in a gigantic backfire, with the gold price doubling in price, and US foreign assets subjected to freezes
Gold will reach its high range when US bankers along with London bankers face a Nuremberg style criminal trial on the global stage
Prepare for the arrival of a small group of new Gold-backed currencies, the USDollar death knell
As John Pierpont Morgan once stated under oath before the USCongress and the Pujo Commission in 1913, "Gold is money, and nothing else"
Copyright © 2010 Jim Willie, CB
Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials.
Jim Willie CB is the editor of the "HAT TRICK LETTER" Use the below link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.
28 April 2010
GFC reloaded. The second of the trilogy now in post production.
Hat Tip to Charles Powell.
In Australia we think we’ve escaped the worst of the crunch and recession as we ride China’s booming coat tails to a new prosperity.
And in America it’s a similar situation, the economy is back (the first estimate of first-quarter growth on Friday will show annual growth above 3%), the markets eyed new 19-month highs overnight. The worst is over.
We and the Americans (and Asia) continue to ignore the slow unravelling of Greece, which one thoughtful UK commentator says is “Europe’s subprime crisis”.
Greece is a member of the eurozone and it’s three weeks from default, an event that has the potential to derail the global economic recovery, especially in Europe. The country’s financial black hole has to be stabilised, starting this week, otherwise the end result will be messy and could produce another credit crunch as banks call back money and stop lending, which is just starting to grow again.
And just as the subprime crisis in the US produced a contagion effect across the rest of the global financial system and economy (which everyone said wouldn’t happen), Greece could see pressure on Spain, Portugal, Ireland, Italy and then the UK in coming weeks. Does anyone seriously think that the global financial system can withstand the shock of a Greek default (unless managed by the ECB and EU and Greece itself), less than three years after the big crunch hit in August, 2007?
A Greek default would see banks refuse to extend any more credit to the likes of those countries (including the UK). The same banks that lend in Europe, lend in the US or into the US market. Remember the credit crunch started in Europe on August 8, 2007, then spread to the US that night and into Asia the next day. (It did not start in the US when Lehman Brothers collapsed in September, 2008).
In fact if Greece was a company, it would be on the verge of administration, so fraught is its current financial status of rising debt and interest bills, a major loan about to become due and declining or non-existent cash flows to at least repay the debt (the holders are unlikely to agree to it being rolled over).
The yield on two-year Greek debt jumped to a high of 13.6%, before closing at 13.52%. In fact the yield on those two year securities jumped three percentage points (or 300 basis points) in trading overnight as investors sold to avoid what they saw as the looming possibility of default.
That’s the highest yield anywhere in the world for government debt and Greece is now considered to be a worse credit risk than Argentina and Venezuela, two of the least credit-worthy nations around.
Concern over sovereign credit risk also dragged down the euro and Greek bank stocks and pushed the cost of insuring Portugal’s debt to new highs, underlining concerns that it could be the next eurozone member to suffer a debt crisis.
It is now becoming clear that the financial aid package agreed to with the EC, ECB and IMF will not be enough, that Greece and its creditors will have to reach some sort of agreement to restructure the €273 billion of debt to lower the huge interest bill that is crippling the country’s ability to remain solvent.
That agreement and Greek’s acceptance of it last Thursday night, our time, had settled markets, but just for a day. Then the German government, from Chancellor Angela Merkel down, rattled confidence over the weekend and again yesterday with comments saying Greece would only get the money if it provided a credible plan for deep cuts in spending.
Merkel said Germany was close to agreeing to the Greek request for the money, but also said Athens had to show a readiness to enact new savings and put its economy back on a sustainable path.
Those and other German comments saw the price of Greek debt soar as investors worried about German involvement in the EC agreement on what Greece has to do to get up to €45 billion of financial aid before May 19, when an €8.5 billion Greek government loan is due. Many commentators have now realised that similar loan commitments to Greece will be needed in 2011 and 2012. The markets want to seen evidence of these as well.
And with Merkel’s government facing a tough election in the German state of Rhineland-North Westphalia on May 9 and voters firmly against aiding Greece, there’s growing fears the Germans will baulk at extending aid or that any agreement might be overturned in a legal challenge now under way.
And the problem for Europe is huge, not only the health and strength of the eurozone and the euro are at stake, but more importantly, the strength of the European financial system. The Financial Times’ Alphaville blogsite revealed the following information of just who holds Greek government debt, courtesy of RBS Bank:
“We know which foreign banks have most exposure based on BIS data as at Q3: France has USD75b, Switzerland USD63b, Germany USD43b (all European banks USD252b), the US USD16b and Portugal USD10b!
“For these banks, a restructuring would be imminently preferable to Greece leaving the EUR, where the mother of all asset-liability currency mismatches would send the “new Drachma”, not to mention the real economy, into a dramatic tailspin.
“In a full-fledged, Argentina-style default, investors would lose over half their money — an option that may be too severe for Greece to contemplate seriously. But even a so-called haircut, in which creditors absorb a relatively modest reduction in the face value of Greek bonds, could have dire consequences for the eurozone and the region’s beleaguered banks, which hold most of Greece’s bonds.
“The milder option would spread out Greece’s payments to creditors, who would have to accept a decline in the present value of their investments — an option that is starting to look like the best of an array of bad choices.”
And the best assessment on Greece and Europe is also to be found in the FT in the weekly columns of associate editor Wolfgang Munchau. He wrote yesterday:
“This is going to be the most important week in the 11-year history of Europe’s monetary union. By the end of it we will know whether the Greek fiscal crisis can be contained or whether it will metastasise to other parts of the eurozone.
“What we are seeing here is Europe’s equivalent of the US subprime crisis. Unless we hear some implausibly good news from Athens by Friday, it will soon blow up.”
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In Australia we think we’ve escaped the worst of the crunch and recession as we ride China’s booming coat tails to a new prosperity.
And in America it’s a similar situation, the economy is back (the first estimate of first-quarter growth on Friday will show annual growth above 3%), the markets eyed new 19-month highs overnight. The worst is over.
We and the Americans (and Asia) continue to ignore the slow unravelling of Greece, which one thoughtful UK commentator says is “Europe’s subprime crisis”.
Greece is a member of the eurozone and it’s three weeks from default, an event that has the potential to derail the global economic recovery, especially in Europe. The country’s financial black hole has to be stabilised, starting this week, otherwise the end result will be messy and could produce another credit crunch as banks call back money and stop lending, which is just starting to grow again.
And just as the subprime crisis in the US produced a contagion effect across the rest of the global financial system and economy (which everyone said wouldn’t happen), Greece could see pressure on Spain, Portugal, Ireland, Italy and then the UK in coming weeks. Does anyone seriously think that the global financial system can withstand the shock of a Greek default (unless managed by the ECB and EU and Greece itself), less than three years after the big crunch hit in August, 2007?
A Greek default would see banks refuse to extend any more credit to the likes of those countries (including the UK). The same banks that lend in Europe, lend in the US or into the US market. Remember the credit crunch started in Europe on August 8, 2007, then spread to the US that night and into Asia the next day. (It did not start in the US when Lehman Brothers collapsed in September, 2008).
In fact if Greece was a company, it would be on the verge of administration, so fraught is its current financial status of rising debt and interest bills, a major loan about to become due and declining or non-existent cash flows to at least repay the debt (the holders are unlikely to agree to it being rolled over).
The yield on two-year Greek debt jumped to a high of 13.6%, before closing at 13.52%. In fact the yield on those two year securities jumped three percentage points (or 300 basis points) in trading overnight as investors sold to avoid what they saw as the looming possibility of default.
That’s the highest yield anywhere in the world for government debt and Greece is now considered to be a worse credit risk than Argentina and Venezuela, two of the least credit-worthy nations around.
Concern over sovereign credit risk also dragged down the euro and Greek bank stocks and pushed the cost of insuring Portugal’s debt to new highs, underlining concerns that it could be the next eurozone member to suffer a debt crisis.
It is now becoming clear that the financial aid package agreed to with the EC, ECB and IMF will not be enough, that Greece and its creditors will have to reach some sort of agreement to restructure the €273 billion of debt to lower the huge interest bill that is crippling the country’s ability to remain solvent.
That agreement and Greek’s acceptance of it last Thursday night, our time, had settled markets, but just for a day. Then the German government, from Chancellor Angela Merkel down, rattled confidence over the weekend and again yesterday with comments saying Greece would only get the money if it provided a credible plan for deep cuts in spending.
Merkel said Germany was close to agreeing to the Greek request for the money, but also said Athens had to show a readiness to enact new savings and put its economy back on a sustainable path.
Those and other German comments saw the price of Greek debt soar as investors worried about German involvement in the EC agreement on what Greece has to do to get up to €45 billion of financial aid before May 19, when an €8.5 billion Greek government loan is due. Many commentators have now realised that similar loan commitments to Greece will be needed in 2011 and 2012. The markets want to seen evidence of these as well.
And with Merkel’s government facing a tough election in the German state of Rhineland-North Westphalia on May 9 and voters firmly against aiding Greece, there’s growing fears the Germans will baulk at extending aid or that any agreement might be overturned in a legal challenge now under way.
And the problem for Europe is huge, not only the health and strength of the eurozone and the euro are at stake, but more importantly, the strength of the European financial system. The Financial Times’ Alphaville blogsite revealed the following information of just who holds Greek government debt, courtesy of RBS Bank:
“We know which foreign banks have most exposure based on BIS data as at Q3: France has USD75b, Switzerland USD63b, Germany USD43b (all European banks USD252b), the US USD16b and Portugal USD10b!
“For these banks, a restructuring would be imminently preferable to Greece leaving the EUR, where the mother of all asset-liability currency mismatches would send the “new Drachma”, not to mention the real economy, into a dramatic tailspin.
“In a full-fledged, Argentina-style default, investors would lose over half their money — an option that may be too severe for Greece to contemplate seriously. But even a so-called haircut, in which creditors absorb a relatively modest reduction in the face value of Greek bonds, could have dire consequences for the eurozone and the region’s beleaguered banks, which hold most of Greece’s bonds.
“The milder option would spread out Greece’s payments to creditors, who would have to accept a decline in the present value of their investments — an option that is starting to look like the best of an array of bad choices.”
And the best assessment on Greece and Europe is also to be found in the FT in the weekly columns of associate editor Wolfgang Munchau. He wrote yesterday:
“This is going to be the most important week in the 11-year history of Europe’s monetary union. By the end of it we will know whether the Greek fiscal crisis can be contained or whether it will metastasise to other parts of the eurozone.
“What we are seeing here is Europe’s equivalent of the US subprime crisis. Unless we hear some implausibly good news from Athens by Friday, it will soon blow up.”
http://www.facebook.com/l.php?u=http%3A%2F%2Fwww.crikey.com.au%2F2010%2F04%2F27%2Fdont-write-off-another-credit-crunch-if-greece-defaults%2F&h=80533
12 March 2010
Sudden intensification of the global systemic crisis – Strengthening of five fundamental negative trends
LEAP/E2020 is of the view that the effect of States’ spending trillions to « counteract the crisis » will have fizzled out. These vast sums had the effect of slowing down the development of the systemic global crisis for several months but, as anticipated in previous GEAB reports, this strategy will only have ultimately served to clearly drag States into the crisis caused by the financial institutions.
Therefore our team anticipates, in this 42nd issue of the GEAB, a sudden intensification of the crisis in the second half of 2010, caused by a double effect of a catching up of events which were temporarily « frozen » in the second half of 2009 and the impossibility of maintaining the palliative remedies of past years.
As a matter of fact, in February 2010, a year after us stating that the end of 2009 would mark the beginning of the phase of global geopolitical dislocation, anyone can see that this process is well established: states on the edge of bankruptcy, remorseless rise in unemployment, millions of people coming to the end of their social security benefits, falling wages and salaries, limiting of public services and disintegration of the global governance system (failure of the Copenhagen summit, growing Chinese/US confrontation, return of the risk of an Iran/Israel/USA conflict, wars worldwide… (1)). However, we are only at the start of this phase for which LEAP/E2020 will supply a likely timeframe in the next GEAB issue.
The sudden intensification of the global systemic crisis will be characterised by the acceleration and/or strengthening of five fundamental negative trends:
. the explosion of the bubble in public deficits and a corresponding increase in state defaults
. the fatal impact of the Western banking system with mounting debt defaults and the wall of debt coming to maturity
. the inescapable rise in interest rates
. the increase in issues causing international tension
. a growing social insecurity.
In this GEAB issue our team expands on the first three trends of these developments including an anticipation on Russia’s position in the face of the crisis, as well as, of course, our monthly suggestions.
In this public announcement, we have chosen to analyse the « Greek case », on the one hand because it seems indicative of what 2010 has in store for us, and on the other because it is a perfect illustration of the way in which news and information on the world crisis is moving towards « make-believe news » between blocs and interests which are increasingly in conflict. Clearly it is a « must » to learn how to decipher worldwide news and information in the months and years to come which will be a growing means of manipulatory activity.
Progression of the percentage of net new U.S. debt bought by China, net new U.S. government borrowing, percentage of outstanding U.S. Treasuries owned by China (2002-2009) – Sources: US Treasury, Haver Analytics, New York Times
The five characteristics which make up the « Greek case » into the tree with which one tries to hide the forest
Let’s take a look at the « Greek case » which has concerned the media and experts for several weeks now. Before entering into the detail of what is happening, there are five key points to our anticipation on the subject:
1. As we stated in our anticipations for 2010, which appeared in the last GEAB issue (GEAB N°41, the Greek problem will have disappeared from the international media’s radar several weeks from now. It is the tree used to hide both a forest of much more dangerous sovereign debt (to be precise that of Washington and London) and the beginning of a further fall in the world economy, led by the United States (2).
2. The Greek problem is an internal issue for the Eurozone and the EU, and the current situation provides, at last, a unique occasion for the Eurozone leaders to require Greece (a case of « failed enlargement » since 1982) to leave its feudal political and economic system behind. The other Eurozone countries, led by Germany, will do the necessary to make Greek leaders bring their country into the XXIst century in exchange for their help, at the same time making use of the fact that Greece only represents 2.5% of Eurozone GDP (3) to test the stabilisation mechanisms that the Eurozone needs in times of crisis (4).
3. Ango-Saxon leaders and media are using the current situation (just like last year with the so-called banking tsunami coming from Eastern Europe which was going to carry the Eurozone away with it (5)) to hide the catastrophic progression of their economies and public debt and attempt to weaken the attractiveness of the Eurozone at a time when the USA and the United Kingdom have increasing difficulty in attracting the capital which they so desperately need. At the same time Washington and London (which, since the coming into effect of the Lisbon Treaty is completely excluded from any management of the Euro) would be overjoyed to see the IMF, which they control completely (6), brought into Eurozone management.
4. Eurozone leaders are very happy to see the Euro fall to 1.35 against the Dollar. They well know that it won’t last because the current problem is the fall in the value of the Dollar (and the Pound Sterling), but they appreciate this « whiff of oxygen » for their exporters.
5. The speculators (hedge funds and others) and banks heavily involved with Greece (7), have a common interest in trying to bring about rapid Eurozone financial support for Greece, since otherwise the rating agencies will, unintentionally, pull a fast one on them if the Europeans refuse to dig into their pockets (like the scandalous actions of Paulson and Geithner over AIG and Wall Street in 2008/2009): indeed a lowering of Greece’s rating will plunge this small world into the throes of serious financial losses if, for the banks, their Greek loans are similarly devalued, or if their bets against the Euro don’t work out in due course (8).
2008 comparison of the deficits and Eurozone GDP of Portugal, Ireland, Greece, Spain, France and Germany – Source: Der Spiegel / European Commission, 02/2010
Goldman Sachs’ role in this Greek tragedy… and the next sovereign defaults
In the « Greek case », just like in every suspense story, a « bad guy » is needed (or, following the logic of an old-style tragedy, a « deus ex machina »). In this phase of the global systemic crisis, the role of the « bad guy » is usually played by one of Wall Street’s big investment banks, in particular by the leader of the gang, Goldman Sachs. The « Greek case » is no different as indeed this New York investment bank is directly implicated in the budgetary conjuring tricks which allowed Greece to qualify for Euro entry, whilst its actual budget deficits would have disqualified it. In reality it was Goldman Sachs who, in 2002, created one of its cunning financial models of which it holds the secret (9) and which, almost systematically resurfaces several years later, to blow up the client. But what does it matter, since GS (Goldman Sachs) profits were the beneficiary!
In the Greek case what the investment bank proposed was very simple: raise a loan which didn’t appear in the budget (a swap agreement which enabled a ficticious reduction in the size of the Greek public deficit (10). The Greek leaders at the time were, of course, 100% liable and should, in LEAP/E2020’s opinion, be subjected to Greek and European political and legal process for having cheated the EU and their own citizens within the framework of a major historic event, the creation of the single European currency.
But, let’s be clear, the liability of the New York investment bank (as an accomplice) is just as great, especially when one is aware of the fact that Goldman Sachs’ vice-president for Europe was, at the time, a certain Mario Draghi (11), currently President of the Italian Central Bank and a candidate (12) to succeed Jean-Claude Trichet at the head of the European Central Bank (13).
Without wishing to pre-judge Mr. Draghi’s role in the affair of the loan manipulating Greece’s statistics (14), one should ask oneself if it wouldn’t be worthwhile to question his involvement in the affair (15). In a democracy, the press (16), like parliaments (in this case Greek and European), are expected to take on this task themselves. Considering the importance of GS in world financial affairs these last few years, nothing that this bank does should leave governments and legislators indifferent. It is Paul Volcker, current head of Barack Obama’s financial advisors, who has become one of the strongest critics of Goldman Sachs’ activities (17). We already had the occasion to write, at the time of the election of the current US President, that he is the only person in his entourage having the experience and skills to push through tough measures (18) and who, at this moment, knows what, or rather whom, he is talking about.
With this same logic, on the issue of transparency in financial activities and state budgets and using the ill-fated role of Goldman Sachs and of the large investment banks in general as an illustration, LEAP/E2020 takes the view that it would be beneficial for the European Union and its five hundred million citizens, to exclude former managers of these investment banks (19) from any post of financial, budgetary and economic control (ECB, European Commission, National Central Banks). The mixing of these relationships can only lead to even greater confusion between public and private interests, which can only be to the detriment of European public interests. To begin with, the Eurozone should immediately require the Greek government to stop calling on the services of Goldman Sachs which, according to the Financial Times of 01/28/2010, it still uses.
If the head of Goldman Sachs believes he is « God » as he described himself in a recent interview (20), it would be prudent to consider that his bank, and its lookalikes, can seriously behave like devils, and it is therefore wise to draw all the consequences. This piece of advice, according to our team, is valid for the whole of Europe, as well as every other continent. There are « private services » which clash with « public interests »: just ask Greek citizens and American real estate owners whose houses have been repossessed by the banks!
To conclude, our team suggests a game to convince those who seek where the next sovereign debt crisis will surface: simply look for those states which have called upon Goldman Sachs’ services in the last few years and you will have a serious lead (21)!
http://www.leap2020.eu/GEAB-N-42-is-available!-Second-half-of-2010-Sudden-intensification-of-the-global-systemic-crisis-Strengthening-of-five_a4294.html
Therefore our team anticipates, in this 42nd issue of the GEAB, a sudden intensification of the crisis in the second half of 2010, caused by a double effect of a catching up of events which were temporarily « frozen » in the second half of 2009 and the impossibility of maintaining the palliative remedies of past years.
As a matter of fact, in February 2010, a year after us stating that the end of 2009 would mark the beginning of the phase of global geopolitical dislocation, anyone can see that this process is well established: states on the edge of bankruptcy, remorseless rise in unemployment, millions of people coming to the end of their social security benefits, falling wages and salaries, limiting of public services and disintegration of the global governance system (failure of the Copenhagen summit, growing Chinese/US confrontation, return of the risk of an Iran/Israel/USA conflict, wars worldwide… (1)). However, we are only at the start of this phase for which LEAP/E2020 will supply a likely timeframe in the next GEAB issue.
The sudden intensification of the global systemic crisis will be characterised by the acceleration and/or strengthening of five fundamental negative trends:
. the explosion of the bubble in public deficits and a corresponding increase in state defaults
. the fatal impact of the Western banking system with mounting debt defaults and the wall of debt coming to maturity
. the inescapable rise in interest rates
. the increase in issues causing international tension
. a growing social insecurity.
In this GEAB issue our team expands on the first three trends of these developments including an anticipation on Russia’s position in the face of the crisis, as well as, of course, our monthly suggestions.
In this public announcement, we have chosen to analyse the « Greek case », on the one hand because it seems indicative of what 2010 has in store for us, and on the other because it is a perfect illustration of the way in which news and information on the world crisis is moving towards « make-believe news » between blocs and interests which are increasingly in conflict. Clearly it is a « must » to learn how to decipher worldwide news and information in the months and years to come which will be a growing means of manipulatory activity.
Progression of the percentage of net new U.S. debt bought by China, net new U.S. government borrowing, percentage of outstanding U.S. Treasuries owned by China (2002-2009) – Sources: US Treasury, Haver Analytics, New York Times
The five characteristics which make up the « Greek case » into the tree with which one tries to hide the forest
Let’s take a look at the « Greek case » which has concerned the media and experts for several weeks now. Before entering into the detail of what is happening, there are five key points to our anticipation on the subject:
1. As we stated in our anticipations for 2010, which appeared in the last GEAB issue (GEAB N°41, the Greek problem will have disappeared from the international media’s radar several weeks from now. It is the tree used to hide both a forest of much more dangerous sovereign debt (to be precise that of Washington and London) and the beginning of a further fall in the world economy, led by the United States (2).
2. The Greek problem is an internal issue for the Eurozone and the EU, and the current situation provides, at last, a unique occasion for the Eurozone leaders to require Greece (a case of « failed enlargement » since 1982) to leave its feudal political and economic system behind. The other Eurozone countries, led by Germany, will do the necessary to make Greek leaders bring their country into the XXIst century in exchange for their help, at the same time making use of the fact that Greece only represents 2.5% of Eurozone GDP (3) to test the stabilisation mechanisms that the Eurozone needs in times of crisis (4).
3. Ango-Saxon leaders and media are using the current situation (just like last year with the so-called banking tsunami coming from Eastern Europe which was going to carry the Eurozone away with it (5)) to hide the catastrophic progression of their economies and public debt and attempt to weaken the attractiveness of the Eurozone at a time when the USA and the United Kingdom have increasing difficulty in attracting the capital which they so desperately need. At the same time Washington and London (which, since the coming into effect of the Lisbon Treaty is completely excluded from any management of the Euro) would be overjoyed to see the IMF, which they control completely (6), brought into Eurozone management.
4. Eurozone leaders are very happy to see the Euro fall to 1.35 against the Dollar. They well know that it won’t last because the current problem is the fall in the value of the Dollar (and the Pound Sterling), but they appreciate this « whiff of oxygen » for their exporters.
5. The speculators (hedge funds and others) and banks heavily involved with Greece (7), have a common interest in trying to bring about rapid Eurozone financial support for Greece, since otherwise the rating agencies will, unintentionally, pull a fast one on them if the Europeans refuse to dig into their pockets (like the scandalous actions of Paulson and Geithner over AIG and Wall Street in 2008/2009): indeed a lowering of Greece’s rating will plunge this small world into the throes of serious financial losses if, for the banks, their Greek loans are similarly devalued, or if their bets against the Euro don’t work out in due course (8).
2008 comparison of the deficits and Eurozone GDP of Portugal, Ireland, Greece, Spain, France and Germany – Source: Der Spiegel / European Commission, 02/2010
Goldman Sachs’ role in this Greek tragedy… and the next sovereign defaults
In the « Greek case », just like in every suspense story, a « bad guy » is needed (or, following the logic of an old-style tragedy, a « deus ex machina »). In this phase of the global systemic crisis, the role of the « bad guy » is usually played by one of Wall Street’s big investment banks, in particular by the leader of the gang, Goldman Sachs. The « Greek case » is no different as indeed this New York investment bank is directly implicated in the budgetary conjuring tricks which allowed Greece to qualify for Euro entry, whilst its actual budget deficits would have disqualified it. In reality it was Goldman Sachs who, in 2002, created one of its cunning financial models of which it holds the secret (9) and which, almost systematically resurfaces several years later, to blow up the client. But what does it matter, since GS (Goldman Sachs) profits were the beneficiary!
In the Greek case what the investment bank proposed was very simple: raise a loan which didn’t appear in the budget (a swap agreement which enabled a ficticious reduction in the size of the Greek public deficit (10). The Greek leaders at the time were, of course, 100% liable and should, in LEAP/E2020’s opinion, be subjected to Greek and European political and legal process for having cheated the EU and their own citizens within the framework of a major historic event, the creation of the single European currency.
But, let’s be clear, the liability of the New York investment bank (as an accomplice) is just as great, especially when one is aware of the fact that Goldman Sachs’ vice-president for Europe was, at the time, a certain Mario Draghi (11), currently President of the Italian Central Bank and a candidate (12) to succeed Jean-Claude Trichet at the head of the European Central Bank (13).
Without wishing to pre-judge Mr. Draghi’s role in the affair of the loan manipulating Greece’s statistics (14), one should ask oneself if it wouldn’t be worthwhile to question his involvement in the affair (15). In a democracy, the press (16), like parliaments (in this case Greek and European), are expected to take on this task themselves. Considering the importance of GS in world financial affairs these last few years, nothing that this bank does should leave governments and legislators indifferent. It is Paul Volcker, current head of Barack Obama’s financial advisors, who has become one of the strongest critics of Goldman Sachs’ activities (17). We already had the occasion to write, at the time of the election of the current US President, that he is the only person in his entourage having the experience and skills to push through tough measures (18) and who, at this moment, knows what, or rather whom, he is talking about.
With this same logic, on the issue of transparency in financial activities and state budgets and using the ill-fated role of Goldman Sachs and of the large investment banks in general as an illustration, LEAP/E2020 takes the view that it would be beneficial for the European Union and its five hundred million citizens, to exclude former managers of these investment banks (19) from any post of financial, budgetary and economic control (ECB, European Commission, National Central Banks). The mixing of these relationships can only lead to even greater confusion between public and private interests, which can only be to the detriment of European public interests. To begin with, the Eurozone should immediately require the Greek government to stop calling on the services of Goldman Sachs which, according to the Financial Times of 01/28/2010, it still uses.
If the head of Goldman Sachs believes he is « God » as he described himself in a recent interview (20), it would be prudent to consider that his bank, and its lookalikes, can seriously behave like devils, and it is therefore wise to draw all the consequences. This piece of advice, according to our team, is valid for the whole of Europe, as well as every other continent. There are « private services » which clash with « public interests »: just ask Greek citizens and American real estate owners whose houses have been repossessed by the banks!
To conclude, our team suggests a game to convince those who seek where the next sovereign debt crisis will surface: simply look for those states which have called upon Goldman Sachs’ services in the last few years and you will have a serious lead (21)!
http://www.leap2020.eu/GEAB-N-42-is-available!-Second-half-of-2010-Sudden-intensification-of-the-global-systemic-crisis-Strengthening-of-five_a4294.html
11 March 2010
Theory of Positive Thinking
Hat tip to Charles Powell. The divergence between economic conditions in Australia, hitched as it is to China and India and the US and UK is amazing. I would hazard a guess that things will be worse here on a six month outlook, but who can be sure.
I’ve seldom seen so much rubbish written by people who ought to know better in a single day. Many able people have heaped the scorn and incredulity on three articles, one a piece on Rahm Emanuel slotted to run in the Sunday New York Times Magazine, another an artfully packed laudatory piece on Timothy Geithner by John Cassidy in the New Yorker and a more even handed looking one (I stress “looking”) in the Atlantic.
Ed Harrison has skillfully shredded parsed the Geithner pieces . Simon Johnson thrashed the New Yorker story. A key paragraph below:
The main feature of the plan, of course, was – following the stress tests – to communicate effectively that there was a government guarantee behind every major bank or quasi-bank in the United States. Of course this works in the short-term – investors like such guarantees. But there’s a good reason we usually don’t guarantee all financial institutions – or act happy when other countries do the same. Unconditional bailouts lead to trouble, encouraging reckless risk-taking and undermining responsible governance. You can’t run any form of reasonable market system when some big players hold “get out of bankruptcy free” cards.
Banking expert Chris Whalen was so disturbed by the numerous distortions in the New Yorker piece that he had already fired off a long letter to the editor by the time I pinged him, with these starting paragraphs:
Jack Cassidy tells us that “Timothy Geithner’s financial plan is working—and making him very unpopular.” Unfortunately this is completely wrong. Cassidy’s comment just illustrates why the New Yorker has fallen into such obscurity, namely because it is more Vanity Fair than its vivacious sibling and unable to perform critical journalism.
In fact, the banking system is continuing to sink under bad loans and even worse securities losses. Telling the public that the banks are “fixed” is irresponsible. Unfortunately this false perception is widespread, including among major media such as CNBC and also with a number of my clients in the hedge fund world.
And from Marshall Auerback, who had a ringside view of the aftermath of the Japanese bubble:
Cassidy’s article brings to mind a retort by Chou En Lai when he was asked about the success of the French Revolution. He said, “It’s too early to tell”. Yet here we have John Cassidy from the New Yorker and Joshua Green from The Atlantic both making the assumption that the Geithner plan “worked”. This whole line about “taxpayers to recover bailout money” is based on an accounting fraud, because accounting abuses are the primary means by which TARP recipients have repaid bailout money — putting us at greater risk. That may seem paradoxical, but the rush to repay is driven by a desire to have unrestrained executive bonuses (a very bad thing associated with far greater accounting fraud and failures — requiring future, larger taxpayer bailouts) and accounting abuses produce the (fictional) ability to repay the United States (primarily by failing to recognize existing losses). The TARP recipients weakened their financial condition, and increased moral hazard, when they rushed to repay the TARP funds. Both factors increase the risk of making more expensive future bailouts more likely.
Yves here. The reason that people who can discern clearly what is afoot are so deeply disturbed is simple, and all the comments touch on it. The campaign to defend Geithner and Emanuel, both architects of the administration’s finance friendly policies has gone beyond what most people would see as spin into such an aggressive effort to manipulate popular perceptions that it is not a stretch to call it propaganda.
This strategy, of relying on propaganda to mask their true intent, has become inevitable, given the strategic corner the Obama Adminstration has painted itself in. And this campaign has become increasingly desperate as the inconsistency between the Adminsitration’s “product positioning” and observable reality become increasingly evident.
Recall how we got here. Early in 2009, the banking industry was on the ropes. Both the stock and the credit default swaps markets said that many of the big players were at serious risk of failure. Commentators debated whether to nationalize Citibank, Bank of America, and other large, floundering institutions.
The case for bold action was sound. The history of financial crises showed that the least costly approach is to resolve mortally wounded organizations, install new management, set strict guidelines, and separate out the bad loans and investments in order to restructure and sell them. An IMF study of 124 banking crises concluded that regulatory forbearance, the term of art for letting impaired banks soldier on, found:
The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred…
Shuttering sick banks is hardly a radical idea; the FDIC does it on a routine basis. So the difference here was not in the nature of the exercise, but its operational complexity.
This juncture was a crucial window of opportunity. The financial services industry had become systematically predatory. Its victims now extended well beyond precarious, clueless, and sometimes undisciplined consumers who took on too much debt via credit cards with gotcha features that successfully enticed into a treadmill of chronic debt, or now infamous subprime and option-ARM mortgages.
Over twenty years of malfeasance, from the savings and loan crisis (where fraud was a leading cause of bank failures) to a catastrophic set of blow-ups in over the counter derivatives in 1994, which produced total losses of $1.5 trillion, the biggest wipeout since the 1929 crash, through a 1990s subprime meltdown, dot com chicanery, Enron and other accounting scandals, and now the global financial crisis, the industry each time had been able to beat neuter meaningful reform. But this time, the scale of the damage was so great that it extended beyond investors to hapless bystanders, ordinary citizens who were also paying via their taxes and job losses. And unlike the past, where news of financial blow-ups was largely confined to the business section, the public could not miss the scale of the damage and how it came about, and was outraged.
The widespread, vocal opposition to the TARP was evidence that a once complacent populace had been roused. Reform, if proposed with energy and confidence, wasn’t a risk; not only was it badly needed, it was just what voters wanted.
But incoming president Obama failed to act. Whether he failed to see the opportunity, didn’t understand it, or was simply not interested is moot. Rather than bring vested banking interests to heel, the Obama administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff. There would be no Nixon goes to China moment from the architects of the policies that created the crisis, namely Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Director of the National Economic Council Larry Summers.
Defenders of the administration no doubt will content that the public was not ready for measures like the putting large banks like Citigroup into receivership. Even if that were true (and the current widespread outrage against banks says otherwise), that view assumes that the executive branch is a mere spectator, when it has the most powerful bully pulpit in the nation. Other leaders have taken unpopular moves and still maintained public support.
Obama’s repudiation of his campaign promise of change, by turning his back on meaningful reform of the financial services industry, in turn locked his Administration into a course of action. The new administration would have no choice other that working fist in glove with the banksters, supporting and amplifying their own, well established, propaganda efforts.
Thus Obama’s incentives are to come up with “solutions” that paper over problems, avoid meaningful conflict with the industry, minimize complaints, and restore the old practice of using leverage and investment gains to cover up stagnation in worker incomes. Potemkin reforms dovetail with the financial service industry’s goal of forestalling any measures that would interfere with its looting. So the only problem with this picture was how to fool the now-impoverished public into thinking a program of Mussolini-style corporatism represented progress.
How did the Administration and financial services message control teams work together?
The first was the refusal to consider investigations of any kind. Obama is widely reported to have studied the early days of Franklin Delano Roosevelt’s administration for inspiration; it would be impossible for him to miss the dramatic steps FDR took, including supporting the continuation of a Senate Banking Committee investigation into the misdeeds of the Roaring Twenties, the Pecora Commission. The Pecora Commission not only kept the bankers on the defensive, but it also did the forensic work into the abuses. It was critical to bring the nefarious practices to light to devise durable and lasting reforms.
Why were there no inquiries into how the firms that needed bailouts got themselves into a mess? This was an obvious and comparatively easy avenue of inquiry which would make a great deal of useful background accessible and identified issues for further examination. For instance, after the rescue of UBS, the Swiss Federal Banking Commission required UBS to provide an extensive report of what went wrong, and also had the bank make considerable portions of that information public, via a special report to its shareholders. Yet no US firm has been asked to make any explanation of how it managed its affairs so badly as to require extensive public support to keep from failing.
The choice here was obvious. A refusal to investigate was tantamount to a refusal to reform. A good understanding of what had happened was essential, not merely to develop sound new rules, but also to keep the industry from muddying the waters, which would be easy to do, given how complex and opaque many of the products are
More compelling evidence of the Administration’s lack of interest in reining in the money-changers came via Treasury Secretary Timothy Geithner’s first presentation on his reform plan, which was more accurately a plan to have a plan. It was widely criticized for its sketchiness, but most observers missed the true significance. Had the Obama transition team done any serious thinking about the financial crisis? Obviously not, because you don’t need to think too hard if the game plan is to go back to business as usual to the extent possible. Geither’s presentation came nearly three weeks after Obama was sworn in, and all its initiatives were Bush/Paulson wine in new bottles: a new go at the failed idea of having the government overpay for bad bank assets; “stress tests” to put more discipline around the process of handing out TARP funds to the needy; and a mortgage modification program which pretended to be able to square the circle of saving borrowers without taking on investors in mortgage securitizations.
Geithner’s not-much-of-a-plan exemplified the second tool in the Obama campaign to sell doing as little as possible to the financiers: the Theory of Positive Thinking.
.
That notion has a proud tradition in America and was much in evidence in the run-up to the crisis. It promises that the economy will be fine as long as everyone thinks happy thoughts about it. For instance, I noted in a March 2007 blog post that while the tone of the Financial Times as of March 2007 had become generally grim, the US had become a Tinkerbell market, where valuations are held aloft by faith, and participants conspire to stoke true belief. And as the crisis wore on, other magical personages intervened. As a hedge fund manager who writes as Augustus Melmotte noted,
The market responded with enthusiasm to reports that the Tooth Fairy has agreed to acquire Lehman. The purchase price has not yet been determined and will be set by Dick Fuld wishing upon a star, clicking his heels three times, and being transported back to that magical place where Lehman still sells for over $70 per share….. Meanwhile, the SEC has announced an investigation of mean, evil, bad short-seller David Einhorn. …. Einhorn reportedly suggested that the Tooth Fairy does not exist and that wishing upon a star is not a wholly reliable price discovery mechanism. Christopher Cox, chairman of the SEC, said, “Vicious rumors attacking the Tooth Fairy will not be tolerated. Our entire financial system and indeed the American way of life depend on the Tooth Fairy and wishing upon a star…” The SEC is reportedly planning to set up re-education camps for short-sellers.
Remember that the US has an entire cable channel devoted to the Theory of Positive Thinking, namely CNBC, and a goodly portion of the financial media falls into CNBC-style cheerleading with more than occasional abandon.
Now it is true that this idea has a kernel of truth. John Maynard Keynes attributed the Depression to a change in investor “liquidity preferences,” which meant they had suddenly become very risk averse and preferred to hold cash until they felt conditions had improved, with devastating consequences for economic activity. Uncertainty can morph into a self-reinforcing downcycle. But it is one thing to use confidence boosting as a tool, quite another to regard it as a magic bullet. Merely clapping our hands all together will not cure the long-standing ailments in the economy.
Moreover, the Theory of Positive Thinking has been used, upon occasion, to suggest that conditions will only deteriorate if the public examines the financial services industry critically. It isn’t hard to see whose interests benefit from that posture.
Now it is hard to prove in a tidy way that the tone of financial press coverage had shifted suddenly, and decisively, to optimism as of early March. But many professional investors in my circle started regularly talking of cheerleading. Two Wall Street veterans, Sandy Lewis and William Cohan, weighed in on this pattern at the New York Times:
Whether at a fund-raising dinner for wealthy supporters in Beverly Hills, or at an Air Force base in Nevada, or at Charlie Rose’s table in New York City, President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible… We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March.
This result relied on more than mere dint of personality. A Pew Research Center study found that roughly government and businesses originated over half the economics-related news after the crisis. Obama himself “dominated” the key images and ideas. The reporting had a clear arc. The early coverage focused on the struggles over the stimulus plan and the banking industry plans, and as those faded, so did coverage of the crisis in any form. The tacit assumption was that the crisis was over, and the performance of the supposedly forward looking stock market was proof. But as anyone with a modicum of detachment could see, the market was a false positive, treating an aversion of utter disaster as an imminent return to normalcy.
The stock market has rallied over 60% from its early March lows, enabling the wounded banks to sell new equity to the public and avoid further contentious taxpayer-funded rescue measures. But the justification for the soft glove treatment of the banking classes, that what was good for them would prove to be good for everyone else, has proven to be wildly false. When the Dow levitated over 10,000, mainstream news outlets celebrated the event, with nary a mention of the continued train wreck in the real economy. As Matt Taibbi observed, “the dichotomy between the economic health of ordinary people and the traditional ‘market indicators’ is not merely a non-story, it is a sort of taboo — unmentionable in major news coverage.”
But banking boosterism has succeeded all too well, allowing Team Obama to fantasize that it can get away with creating Potemkin prosperity in lieu of waging the pitched battles needed to lay the groundwork for the real thing.
Indeed, the adoption of the Theory of Positive Thinking has virtually guaranteed that nothing will change, unless there is sufficient deterioration in the real economy or the financial markets to provide compelling counter-evidence. One example is the “paying back the TARP” charade. As the banks continued to post improved earnings, no matter how phony they were, they argued that they were now healthy and should be allowed to pay back the TARP funding that had been crucial to their survival. The reason they were so keenly motivated to do should have been reason enough to deny their request: namely, that they wanted to escape restraints on executive compensation, virtually the only demand that the government had made. But overpaying staff and keeping too little in the way of risk reserves was precisely the behavior that led to the near collapse of the financial system. Going back to business as usual would virtually guarantee more looting of major financial firm and another series of collapses.
But the Obama administration miscalculated badly. First, it bought the financiers’ false promise that massive subsidies to them would kick start a economy. But economists are now estimating that it is likely to take five years to return to pre-crisis levels of unemployment. Obama took his eye off the ball. A Democratic President’s most important responsibility is job creation. It is simply unacceptable to most Americans for Wall Street to be reaping record profits and bonuses while the rest of the country is suffering. Second, it assumed finance was too complicated to hold the attention of most citizens, and so the (non) initiatives under way now would attract comparatively little scrutiny. But as public ire remains high, the press coverage has become almost schizophrenic. Obvious public relations plants, like Ben Bernanke designation as Time Magazine’s Man of the Year (precisely when his confirmation is running into unexpected opposition) and stories in the New York Times that incorrectly reported some Goldman executive bonus cosmetics as meaningful concessions have co-existed with reports on the abject failure of Geithner’s mortgage modification program. While mainstream press coverage is still largely flattering, the desperation of the recent PR moves versus the continued public ire and recognition of where the Adminsitrations’s priorities truly lie means the fissures are becoming a gaping chasm.
So with Obama’s popularity falling sharply, it should be no surprise that the Administration is resorting to more concerted propaganda efforts. It may have no choice. Having ceded so much ground to the financiers, it has lost control of the battlefield. The banking lobbyists have perfected their tactics for blocking reform over the last two decades. Team Obama naively cast its lot with an industry that is vastly more skilled in the the dark art of the manufacture of consent than it is.
http://www.nakedcapitalism.com/2010/03/the-empire-continues-to-strike-back-team-obama-propaganda-campaign-reaches-fever-pitch.html
I’ve seldom seen so much rubbish written by people who ought to know better in a single day. Many able people have heaped the scorn and incredulity on three articles, one a piece on Rahm Emanuel slotted to run in the Sunday New York Times Magazine, another an artfully packed laudatory piece on Timothy Geithner by John Cassidy in the New Yorker and a more even handed looking one (I stress “looking”) in the Atlantic.
Ed Harrison has skillfully shredded parsed the Geithner pieces . Simon Johnson thrashed the New Yorker story. A key paragraph below:
The main feature of the plan, of course, was – following the stress tests – to communicate effectively that there was a government guarantee behind every major bank or quasi-bank in the United States. Of course this works in the short-term – investors like such guarantees. But there’s a good reason we usually don’t guarantee all financial institutions – or act happy when other countries do the same. Unconditional bailouts lead to trouble, encouraging reckless risk-taking and undermining responsible governance. You can’t run any form of reasonable market system when some big players hold “get out of bankruptcy free” cards.
Banking expert Chris Whalen was so disturbed by the numerous distortions in the New Yorker piece that he had already fired off a long letter to the editor by the time I pinged him, with these starting paragraphs:
Jack Cassidy tells us that “Timothy Geithner’s financial plan is working—and making him very unpopular.” Unfortunately this is completely wrong. Cassidy’s comment just illustrates why the New Yorker has fallen into such obscurity, namely because it is more Vanity Fair than its vivacious sibling and unable to perform critical journalism.
In fact, the banking system is continuing to sink under bad loans and even worse securities losses. Telling the public that the banks are “fixed” is irresponsible. Unfortunately this false perception is widespread, including among major media such as CNBC and also with a number of my clients in the hedge fund world.
And from Marshall Auerback, who had a ringside view of the aftermath of the Japanese bubble:
Cassidy’s article brings to mind a retort by Chou En Lai when he was asked about the success of the French Revolution. He said, “It’s too early to tell”. Yet here we have John Cassidy from the New Yorker and Joshua Green from The Atlantic both making the assumption that the Geithner plan “worked”. This whole line about “taxpayers to recover bailout money” is based on an accounting fraud, because accounting abuses are the primary means by which TARP recipients have repaid bailout money — putting us at greater risk. That may seem paradoxical, but the rush to repay is driven by a desire to have unrestrained executive bonuses (a very bad thing associated with far greater accounting fraud and failures — requiring future, larger taxpayer bailouts) and accounting abuses produce the (fictional) ability to repay the United States (primarily by failing to recognize existing losses). The TARP recipients weakened their financial condition, and increased moral hazard, when they rushed to repay the TARP funds. Both factors increase the risk of making more expensive future bailouts more likely.
Yves here. The reason that people who can discern clearly what is afoot are so deeply disturbed is simple, and all the comments touch on it. The campaign to defend Geithner and Emanuel, both architects of the administration’s finance friendly policies has gone beyond what most people would see as spin into such an aggressive effort to manipulate popular perceptions that it is not a stretch to call it propaganda.
This strategy, of relying on propaganda to mask their true intent, has become inevitable, given the strategic corner the Obama Adminstration has painted itself in. And this campaign has become increasingly desperate as the inconsistency between the Adminsitration’s “product positioning” and observable reality become increasingly evident.
Recall how we got here. Early in 2009, the banking industry was on the ropes. Both the stock and the credit default swaps markets said that many of the big players were at serious risk of failure. Commentators debated whether to nationalize Citibank, Bank of America, and other large, floundering institutions.
The case for bold action was sound. The history of financial crises showed that the least costly approach is to resolve mortally wounded organizations, install new management, set strict guidelines, and separate out the bad loans and investments in order to restructure and sell them. An IMF study of 124 banking crises concluded that regulatory forbearance, the term of art for letting impaired banks soldier on, found:
The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred…
Shuttering sick banks is hardly a radical idea; the FDIC does it on a routine basis. So the difference here was not in the nature of the exercise, but its operational complexity.
This juncture was a crucial window of opportunity. The financial services industry had become systematically predatory. Its victims now extended well beyond precarious, clueless, and sometimes undisciplined consumers who took on too much debt via credit cards with gotcha features that successfully enticed into a treadmill of chronic debt, or now infamous subprime and option-ARM mortgages.
Over twenty years of malfeasance, from the savings and loan crisis (where fraud was a leading cause of bank failures) to a catastrophic set of blow-ups in over the counter derivatives in 1994, which produced total losses of $1.5 trillion, the biggest wipeout since the 1929 crash, through a 1990s subprime meltdown, dot com chicanery, Enron and other accounting scandals, and now the global financial crisis, the industry each time had been able to beat neuter meaningful reform. But this time, the scale of the damage was so great that it extended beyond investors to hapless bystanders, ordinary citizens who were also paying via their taxes and job losses. And unlike the past, where news of financial blow-ups was largely confined to the business section, the public could not miss the scale of the damage and how it came about, and was outraged.
The widespread, vocal opposition to the TARP was evidence that a once complacent populace had been roused. Reform, if proposed with energy and confidence, wasn’t a risk; not only was it badly needed, it was just what voters wanted.
But incoming president Obama failed to act. Whether he failed to see the opportunity, didn’t understand it, or was simply not interested is moot. Rather than bring vested banking interests to heel, the Obama administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff. There would be no Nixon goes to China moment from the architects of the policies that created the crisis, namely Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Director of the National Economic Council Larry Summers.
Defenders of the administration no doubt will content that the public was not ready for measures like the putting large banks like Citigroup into receivership. Even if that were true (and the current widespread outrage against banks says otherwise), that view assumes that the executive branch is a mere spectator, when it has the most powerful bully pulpit in the nation. Other leaders have taken unpopular moves and still maintained public support.
Obama’s repudiation of his campaign promise of change, by turning his back on meaningful reform of the financial services industry, in turn locked his Administration into a course of action. The new administration would have no choice other that working fist in glove with the banksters, supporting and amplifying their own, well established, propaganda efforts.
Thus Obama’s incentives are to come up with “solutions” that paper over problems, avoid meaningful conflict with the industry, minimize complaints, and restore the old practice of using leverage and investment gains to cover up stagnation in worker incomes. Potemkin reforms dovetail with the financial service industry’s goal of forestalling any measures that would interfere with its looting. So the only problem with this picture was how to fool the now-impoverished public into thinking a program of Mussolini-style corporatism represented progress.
How did the Administration and financial services message control teams work together?
The first was the refusal to consider investigations of any kind. Obama is widely reported to have studied the early days of Franklin Delano Roosevelt’s administration for inspiration; it would be impossible for him to miss the dramatic steps FDR took, including supporting the continuation of a Senate Banking Committee investigation into the misdeeds of the Roaring Twenties, the Pecora Commission. The Pecora Commission not only kept the bankers on the defensive, but it also did the forensic work into the abuses. It was critical to bring the nefarious practices to light to devise durable and lasting reforms.
Why were there no inquiries into how the firms that needed bailouts got themselves into a mess? This was an obvious and comparatively easy avenue of inquiry which would make a great deal of useful background accessible and identified issues for further examination. For instance, after the rescue of UBS, the Swiss Federal Banking Commission required UBS to provide an extensive report of what went wrong, and also had the bank make considerable portions of that information public, via a special report to its shareholders. Yet no US firm has been asked to make any explanation of how it managed its affairs so badly as to require extensive public support to keep from failing.
The choice here was obvious. A refusal to investigate was tantamount to a refusal to reform. A good understanding of what had happened was essential, not merely to develop sound new rules, but also to keep the industry from muddying the waters, which would be easy to do, given how complex and opaque many of the products are
More compelling evidence of the Administration’s lack of interest in reining in the money-changers came via Treasury Secretary Timothy Geithner’s first presentation on his reform plan, which was more accurately a plan to have a plan. It was widely criticized for its sketchiness, but most observers missed the true significance. Had the Obama transition team done any serious thinking about the financial crisis? Obviously not, because you don’t need to think too hard if the game plan is to go back to business as usual to the extent possible. Geither’s presentation came nearly three weeks after Obama was sworn in, and all its initiatives were Bush/Paulson wine in new bottles: a new go at the failed idea of having the government overpay for bad bank assets; “stress tests” to put more discipline around the process of handing out TARP funds to the needy; and a mortgage modification program which pretended to be able to square the circle of saving borrowers without taking on investors in mortgage securitizations.
Geithner’s not-much-of-a-plan exemplified the second tool in the Obama campaign to sell doing as little as possible to the financiers: the Theory of Positive Thinking.
.
That notion has a proud tradition in America and was much in evidence in the run-up to the crisis. It promises that the economy will be fine as long as everyone thinks happy thoughts about it. For instance, I noted in a March 2007 blog post that while the tone of the Financial Times as of March 2007 had become generally grim, the US had become a Tinkerbell market, where valuations are held aloft by faith, and participants conspire to stoke true belief. And as the crisis wore on, other magical personages intervened. As a hedge fund manager who writes as Augustus Melmotte noted,
The market responded with enthusiasm to reports that the Tooth Fairy has agreed to acquire Lehman. The purchase price has not yet been determined and will be set by Dick Fuld wishing upon a star, clicking his heels three times, and being transported back to that magical place where Lehman still sells for over $70 per share….. Meanwhile, the SEC has announced an investigation of mean, evil, bad short-seller David Einhorn. …. Einhorn reportedly suggested that the Tooth Fairy does not exist and that wishing upon a star is not a wholly reliable price discovery mechanism. Christopher Cox, chairman of the SEC, said, “Vicious rumors attacking the Tooth Fairy will not be tolerated. Our entire financial system and indeed the American way of life depend on the Tooth Fairy and wishing upon a star…” The SEC is reportedly planning to set up re-education camps for short-sellers.
Remember that the US has an entire cable channel devoted to the Theory of Positive Thinking, namely CNBC, and a goodly portion of the financial media falls into CNBC-style cheerleading with more than occasional abandon.
Now it is true that this idea has a kernel of truth. John Maynard Keynes attributed the Depression to a change in investor “liquidity preferences,” which meant they had suddenly become very risk averse and preferred to hold cash until they felt conditions had improved, with devastating consequences for economic activity. Uncertainty can morph into a self-reinforcing downcycle. But it is one thing to use confidence boosting as a tool, quite another to regard it as a magic bullet. Merely clapping our hands all together will not cure the long-standing ailments in the economy.
Moreover, the Theory of Positive Thinking has been used, upon occasion, to suggest that conditions will only deteriorate if the public examines the financial services industry critically. It isn’t hard to see whose interests benefit from that posture.
Now it is hard to prove in a tidy way that the tone of financial press coverage had shifted suddenly, and decisively, to optimism as of early March. But many professional investors in my circle started regularly talking of cheerleading. Two Wall Street veterans, Sandy Lewis and William Cohan, weighed in on this pattern at the New York Times:
Whether at a fund-raising dinner for wealthy supporters in Beverly Hills, or at an Air Force base in Nevada, or at Charlie Rose’s table in New York City, President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible… We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March.
This result relied on more than mere dint of personality. A Pew Research Center study found that roughly government and businesses originated over half the economics-related news after the crisis. Obama himself “dominated” the key images and ideas. The reporting had a clear arc. The early coverage focused on the struggles over the stimulus plan and the banking industry plans, and as those faded, so did coverage of the crisis in any form. The tacit assumption was that the crisis was over, and the performance of the supposedly forward looking stock market was proof. But as anyone with a modicum of detachment could see, the market was a false positive, treating an aversion of utter disaster as an imminent return to normalcy.
The stock market has rallied over 60% from its early March lows, enabling the wounded banks to sell new equity to the public and avoid further contentious taxpayer-funded rescue measures. But the justification for the soft glove treatment of the banking classes, that what was good for them would prove to be good for everyone else, has proven to be wildly false. When the Dow levitated over 10,000, mainstream news outlets celebrated the event, with nary a mention of the continued train wreck in the real economy. As Matt Taibbi observed, “the dichotomy between the economic health of ordinary people and the traditional ‘market indicators’ is not merely a non-story, it is a sort of taboo — unmentionable in major news coverage.”
But banking boosterism has succeeded all too well, allowing Team Obama to fantasize that it can get away with creating Potemkin prosperity in lieu of waging the pitched battles needed to lay the groundwork for the real thing.
Indeed, the adoption of the Theory of Positive Thinking has virtually guaranteed that nothing will change, unless there is sufficient deterioration in the real economy or the financial markets to provide compelling counter-evidence. One example is the “paying back the TARP” charade. As the banks continued to post improved earnings, no matter how phony they were, they argued that they were now healthy and should be allowed to pay back the TARP funding that had been crucial to their survival. The reason they were so keenly motivated to do should have been reason enough to deny their request: namely, that they wanted to escape restraints on executive compensation, virtually the only demand that the government had made. But overpaying staff and keeping too little in the way of risk reserves was precisely the behavior that led to the near collapse of the financial system. Going back to business as usual would virtually guarantee more looting of major financial firm and another series of collapses.
But the Obama administration miscalculated badly. First, it bought the financiers’ false promise that massive subsidies to them would kick start a economy. But economists are now estimating that it is likely to take five years to return to pre-crisis levels of unemployment. Obama took his eye off the ball. A Democratic President’s most important responsibility is job creation. It is simply unacceptable to most Americans for Wall Street to be reaping record profits and bonuses while the rest of the country is suffering. Second, it assumed finance was too complicated to hold the attention of most citizens, and so the (non) initiatives under way now would attract comparatively little scrutiny. But as public ire remains high, the press coverage has become almost schizophrenic. Obvious public relations plants, like Ben Bernanke designation as Time Magazine’s Man of the Year (precisely when his confirmation is running into unexpected opposition) and stories in the New York Times that incorrectly reported some Goldman executive bonus cosmetics as meaningful concessions have co-existed with reports on the abject failure of Geithner’s mortgage modification program. While mainstream press coverage is still largely flattering, the desperation of the recent PR moves versus the continued public ire and recognition of where the Adminsitrations’s priorities truly lie means the fissures are becoming a gaping chasm.
So with Obama’s popularity falling sharply, it should be no surprise that the Administration is resorting to more concerted propaganda efforts. It may have no choice. Having ceded so much ground to the financiers, it has lost control of the battlefield. The banking lobbyists have perfected their tactics for blocking reform over the last two decades. Team Obama naively cast its lot with an industry that is vastly more skilled in the the dark art of the manufacture of consent than it is.
http://www.nakedcapitalism.com/2010/03/the-empire-continues-to-strike-back-team-obama-propaganda-campaign-reaches-fever-pitch.html
10 February 2010
How Brussels Is Trying to Prevent a Collapse of the Euro
Hat Tip to charles Powell.
How Brussels Is Trying to Prevent a Collapse of the Euro
By Armin Mahler, Christian Reiermann, Wolfgang Reuter and Hans-Jürgen Schlamp
The problems facing Greece are just the beginning. The countries belonging to Europe's common currency zone are drifting further and further apart, and national bankruptcies are a distinct possibility. Brussels is faced with a number of choices, none of them good.
Men like Wilhelm Nölling, former member of the German Central Bank Council, and Wilhelm Hankel, an economics professor critical of the euro, have been out of the spotlight for years. In the 1990s, they fought against the introduction of the common currency, even calling on Germany's high court to prevent the creation of the euro zone. But none of it worked.
Now both men are in demand again, and the old euro critics' beliefs are more relevant than ever. Were the skeptics right back then, when they said Europe wasn't ready for the euro zone? Were the differences too great and the politicians too weak to ensure a strict and stable course?
"The euro should really be called the Icarus," Hankel suggested back then. He predicted the currency would meet the same end as the hero of Greek legend, who paid for his dream of flight with his life.
Is the euro's high flight over now too? The news these days is alarming. It's causing a commotion on financial markets and intense discussion in capitals across Europe, as well as in Frankfurt, seat of the European Central Bank (ECB).
Brussels took a hard line with Athens last week. Greece must cut costs drastically under close European Union supervision, a sacrifice of a share of its sovereignty. Risk premiums for Greek government bonds have risen drastically, and the country has to pay higher and higher charges.
The Possibility of State Bankruptcies
Accruing debt is becoming increasingly expensive for other countries in the euro zone as well, among them Portugal and Spain. The southern members of the euro zone are especially being eyed with mistrust. Speculators are betting that bonds will continue to fall and that, eventually, the countries won't be able to borrow any more money at all. State bankruptcies are seen as a possibility.
"We've reached a point where it's possible to deal individual countries a lethal blow by downgrading their credit and boycotting their government bonds," Nölling warns.
Many are now wondering how the stronger euro-zone countries should react -- whether it's possible to help the weaker ones without jeopardizing themselves and the common currency. Furthermore, there is a risk that euro-zone members will continue to grow apart economically, a trend that could cause the monetary union to eventually collapse.
Doing nothing is not an option. In light of the national debt in Greece, Portugal, Spain and Ireland, the euro zone is in danger of transforming from a "common destiny to a common liability," Nölling says.
And so it won't be any ordinary meeting when finance ministers from the 16-euro zone countries meet for a regularly scheduled get-together in Brussels next Monday. The European Commission plans to assign each country homework to be completed in the coming years.
Cohesion and Stability
The Commission doesn't hold Greece solely responsible for the current euro woes. Experts close to Economic and Monetary Affairs Commissioner Joaquín Almunia say nearly every participating country is compromising the cohesion and stability of the common currency.
"The combination of decreasing competitiveness and excessive accumulation of national debt is alarming," the experts wrote in a recent report, adding that if the member countries don't get their problems under control, it will "jeopardize the cohesion of the monetary union."
Differing economic development within the euro zone and a lack of political coordination are to blame, they say. In the more than 10 years since the euro was introduced, the Commission states, it has become clear that simply controlling the development of member states' budgets is not enough. What that means, more concretely, is that the stability provisions stipulated in the Maastricht Treaty to regulate the common currency aren't working, and member states need to better coordinate their financial and economic policy measures.
That is precisely what euro skeptics have said from the beginning -- that a common currency can't work in the long run without a common economic and financial policy. The member countries' governments ignored these objections, unready to give up a further aspect of their national sovereignty.
Now politicians are facing a difficult decision: Should they continue as they have, thus potentially undermining the euro's ability to function? Or should they yield a portion of their national sovereignty to Brussels?
Without common policies, the individual countries drift further and further apart. Before the euro was introduced, exchange rate adjustments served to dispel tensions. Now the common currency zone lacks the option of adapting by revaluing currencies.
Watching with Alarm
EU officials are watching with alarm as the various euro-zone countries' competitiveness diverges sharply. The differences are especially large between countries like Germany, the Netherlands and Finland, which are characterized by current account surpluses, and countries with high budget deficits. Along with Greece, this second category includes especially Spain, Portugal and Ireland.
These countries' competitiveness has dropped steadily since the euro was introduced. They lived on credit for years, seduced by the unusually low interest rates within the euro zone, and imported far more than they exported.
When demand collapsed in the wake of the global financial crisis, governments jumped in to fill the gap, with serious consequences -- debt skyrocketed. Spain's budget deficit was at 11 percent last year, while Greece's was nearly 13 percent. Such high debt is simply not sustainable in the long term.
In the past, the solution for these countries would have been to devalue their currency, which in turn would make imports more expensive and exports cheaper. Such a move would stimulate their national economies and strengthen their competitiveness.
Now, however, these countries must submit to a drastic therapy regime at the hands of the European Commission. They need to balance their budgets, while simultaneously creating more competition on the labor and goods markets.
The directives from Brussels translate into difficult sacrifices for the citizens of the affected countries. Employees will have to scale back wage demands for years, and civil servants will see their salaries cut. Ireland has already embarked on this path; Greece and Spain will follow.
Is Germany to Blame?
The Commission has recommended that Spain, booming until recently, radically restructure its economy. Spain must significantly shrink its bloated construction sector and focus on economic sectors with higher productivity.
France and Italy have been given homework assignments of their own. Both countries are being asked to apply austerity packages and increase labor-market flexibility. France must also get its significant welfare and unemployment expenses under control.
Resentment is growing in the countries most directly affected. But that frustration is not directed, as might be expected, toward the Commission. Instead, it is increasingly surplus countries coming under fire -- with Germany at the forefront.
Representatives from Spain and Portugal especially -- but also from France -- hold Germany accountable for their current woes. They aren't alone in that opinion either. "The Greek crisis has German roots," says Heiner Flassbeck, chief economist at the United Nations Conference on Trade and Development (UNCTAD), in Geneva. It was German wage dumping that got the country's European neighbors in trouble, he says.
At Its Neighbors' Expense
EU officials don't phrase it quite so strongly, but they still accuse Germany more than any other country of gaining advantages for itself at its neighbors' expense, using its policy of low wages to make German products increasingly attractive relative to those from other countries.
As a precautionary measure, officials at Berlin's Finance Ministry have gathered arguments that Finance Minister Wolfgang Schäuble can put forward in the country's defense. Germany's position is that the countries now in crisis are themselves at fault for their situation. They lived beyond their means for years, the German government says, financing their economic boom on credit. Now the financial crisis has revealed their weaknesses.
Germany didn't have it easy with the euro in the beginning either, continues the argument, because the country wasn't competitive compared to other member countries -- but it regained its strength with a great deal of trouble and effort, through reforms.
German officials point to the fact that the country made its labor market more flexible through the Hartz package of welfare reforms and say that state finances are more stable than before, despite the crisis. They add that taking this same path would lead the currently troubled countries out of the crisis. And, they continue, the federal government is not responsible for lagging wage growth because, in Germany, salaries and wages are negotiated between employers and unions rather than being imposed by the government.
The German government also claims no responsibility for the country's export surplus. German firms are competitive not because of government policy, it says, but because of entrepreneurial decisions and the preferences of customers around the world.
Create More Competition
When this debate flared up recently within the euro-zone countries, Schäuble received support from the top for his position. The southern members of the euro zone shouldn't be ungrateful, warned ECB President Jean-Claude Trichet. After all, he reasons, Germany funded the deficits with its surpluses. Nonetheless, the Commission called on Germany to make further changes as well. The country should boost domestic demand, increase investment in infrastructure and create more competition in the service sector.
The Commission believes the currency union can exist in the long term only if member countries' governments implement reforms and coordinate their economic policies. Schäuble's experts agree. They are proposing -- partly with an eye toward mollifying France -- a common German-French initiative.
Both countries' governments should work toward better coordination, the German financial experts say. Merely monitoring deficits has turned out to be inadequate. In the future, they suggest, euro-zone governments should also focus on combating differing inflation rates and step in early when capital bubbles develop.
France, no doubt, would gladly accept such a proposal. Paris, after all, has long called for Europe-wide financial governance. Until now it was Germany that opposed the idea.
The euro-zone governments have started to rethink their positions, but will action necessarily follow? The past never lacked in good intentions either, but political calculation always won out in the end. How else would Greece have managed to become a member of the common currency zone? Why else would Brussels stand by for so long without taking action? It was far from secret that Greece had been cooking its books for years.
Financial Trickery
Back in the fall of 2004, Eurostat, the EU body in charge of statistics, calculated that Greece's officially announced debts of between 1.4 percent and 2.0 percent of gross domestic product between 2000 and 2003 were incorrect. In reality, the amount was nearly three times as high, falling between 3.7 percent and 4.6 percent. The statisticians surmised that Athens had whitewashed its finances in previous years, too. Greece, in fact, would never have met the conditions for membership in the common currency without such trickery.
But the country was not immediately banned from the euro zone, nor were other sanctions imposed. Instead, member countries discussed how the statistics could be improved and made more accurate. Not much emerged from all the talk.
Outgoing European Commissioner for Enterprise and Industry Günter Verheugen remembers all too well that, for a long time, the problem with Greece was simply not something that was talked about. He finds it hard to believe that this "disproportionate regard" for Greece had nothing to do with that fact that conservative allies of European Commission President José Manuel Barroso governed in Athens for five years.
Not until last fall's elections brought Greece's socialist opposition to power did new data arrive from Athens -- and new questions and accusations from Brussels.
The Greek parliament and government are now virtually stripped of power. They're not allowed to decide on any new expenditures without EU approval. Finance Minister Giorgos Papakonstantinou is required to report every four weeks on progress made in budget restructuring.
An EU Protectorate
Brussels, not Athens, now controls whether and how the austerity program takes effect. If "detailed and ongoing inspection" shows that the actual results fall short of those predicted, Almunia says, then Brussels' watchdogs will demand additional measures. There were even calls at the European Parliament last week to send a special EU representative with extensive authority to Greece. The small country has become little more than an EU protectorate.
The EU Commission and the euro-zone leaders hope these compulsory measures will steady markets. They also hope Greek unions and associations, from farmers to taxi drivers, won't mobilize against the reduction in the country's standard of living that will accompany these new measures.
German Finance Minister Schäuble and German Federal Bank President Axel Weber rule out giving aid to the struggling country. Indeed, EU treaties strictly forbid any such aid. The message is that Greece must help itself.
As a precautionary measure, though, both German officials, along with their colleagues in other EU countries, are keeping open the possibility of lending a hand anyway. The EU can't afford for a member state to go bankrupt, either politically or economically.
Out of the Question
The experts always debate the same possibilities. The first would be a common euro-zone bond, which would be placed at Greece's disposal. The advantages for Greece are obvious -- the country would receive funds more cheaply than it currently does because the euro zone as a whole wouldn't have to pay as high a risk premium as Greece alone does. The disadvantage is that countries with good credit, like Germany, would have to pay higher interest rates. Consequently, the German government insists that such a loan is out of the question.
An alternative would be bilateral financial aid. Solvent countries, such as Germany, would take out loans on the financial market at good rates and pass these on to Greece. But euro-zone governments are also reluctant to take this path.
The last option is the International Monetary Fund (IMF), which could use its resources to help Greece out of its credit crunch. It would likely impose much stricter conditions on its aid money than the EU would. But the IMF's involvement would also mean a loss of face for the entire euro zone and a triumph for the Washington-based institution, which was always skeptical of the euro.
If Greece doesn't stabilize in the coming weeks, the euro-zone's leaders will be left facing a choice between a rock and a hard place, with the third option being even worse.
Translated from the German by Ella Ornstein
http://www.spiegel.de/international/business/0,1518,druck-676507,00.html
How Brussels Is Trying to Prevent a Collapse of the Euro
By Armin Mahler, Christian Reiermann, Wolfgang Reuter and Hans-Jürgen Schlamp
The problems facing Greece are just the beginning. The countries belonging to Europe's common currency zone are drifting further and further apart, and national bankruptcies are a distinct possibility. Brussels is faced with a number of choices, none of them good.
Men like Wilhelm Nölling, former member of the German Central Bank Council, and Wilhelm Hankel, an economics professor critical of the euro, have been out of the spotlight for years. In the 1990s, they fought against the introduction of the common currency, even calling on Germany's high court to prevent the creation of the euro zone. But none of it worked.
Now both men are in demand again, and the old euro critics' beliefs are more relevant than ever. Were the skeptics right back then, when they said Europe wasn't ready for the euro zone? Were the differences too great and the politicians too weak to ensure a strict and stable course?
"The euro should really be called the Icarus," Hankel suggested back then. He predicted the currency would meet the same end as the hero of Greek legend, who paid for his dream of flight with his life.
Is the euro's high flight over now too? The news these days is alarming. It's causing a commotion on financial markets and intense discussion in capitals across Europe, as well as in Frankfurt, seat of the European Central Bank (ECB).
Brussels took a hard line with Athens last week. Greece must cut costs drastically under close European Union supervision, a sacrifice of a share of its sovereignty. Risk premiums for Greek government bonds have risen drastically, and the country has to pay higher and higher charges.
The Possibility of State Bankruptcies
Accruing debt is becoming increasingly expensive for other countries in the euro zone as well, among them Portugal and Spain. The southern members of the euro zone are especially being eyed with mistrust. Speculators are betting that bonds will continue to fall and that, eventually, the countries won't be able to borrow any more money at all. State bankruptcies are seen as a possibility.
"We've reached a point where it's possible to deal individual countries a lethal blow by downgrading their credit and boycotting their government bonds," Nölling warns.
Many are now wondering how the stronger euro-zone countries should react -- whether it's possible to help the weaker ones without jeopardizing themselves and the common currency. Furthermore, there is a risk that euro-zone members will continue to grow apart economically, a trend that could cause the monetary union to eventually collapse.
Doing nothing is not an option. In light of the national debt in Greece, Portugal, Spain and Ireland, the euro zone is in danger of transforming from a "common destiny to a common liability," Nölling says.
And so it won't be any ordinary meeting when finance ministers from the 16-euro zone countries meet for a regularly scheduled get-together in Brussels next Monday. The European Commission plans to assign each country homework to be completed in the coming years.
Cohesion and Stability
The Commission doesn't hold Greece solely responsible for the current euro woes. Experts close to Economic and Monetary Affairs Commissioner Joaquín Almunia say nearly every participating country is compromising the cohesion and stability of the common currency.
"The combination of decreasing competitiveness and excessive accumulation of national debt is alarming," the experts wrote in a recent report, adding that if the member countries don't get their problems under control, it will "jeopardize the cohesion of the monetary union."
Differing economic development within the euro zone and a lack of political coordination are to blame, they say. In the more than 10 years since the euro was introduced, the Commission states, it has become clear that simply controlling the development of member states' budgets is not enough. What that means, more concretely, is that the stability provisions stipulated in the Maastricht Treaty to regulate the common currency aren't working, and member states need to better coordinate their financial and economic policy measures.
That is precisely what euro skeptics have said from the beginning -- that a common currency can't work in the long run without a common economic and financial policy. The member countries' governments ignored these objections, unready to give up a further aspect of their national sovereignty.
Now politicians are facing a difficult decision: Should they continue as they have, thus potentially undermining the euro's ability to function? Or should they yield a portion of their national sovereignty to Brussels?
Without common policies, the individual countries drift further and further apart. Before the euro was introduced, exchange rate adjustments served to dispel tensions. Now the common currency zone lacks the option of adapting by revaluing currencies.
Watching with Alarm
EU officials are watching with alarm as the various euro-zone countries' competitiveness diverges sharply. The differences are especially large between countries like Germany, the Netherlands and Finland, which are characterized by current account surpluses, and countries with high budget deficits. Along with Greece, this second category includes especially Spain, Portugal and Ireland.
These countries' competitiveness has dropped steadily since the euro was introduced. They lived on credit for years, seduced by the unusually low interest rates within the euro zone, and imported far more than they exported.
When demand collapsed in the wake of the global financial crisis, governments jumped in to fill the gap, with serious consequences -- debt skyrocketed. Spain's budget deficit was at 11 percent last year, while Greece's was nearly 13 percent. Such high debt is simply not sustainable in the long term.
In the past, the solution for these countries would have been to devalue their currency, which in turn would make imports more expensive and exports cheaper. Such a move would stimulate their national economies and strengthen their competitiveness.
Now, however, these countries must submit to a drastic therapy regime at the hands of the European Commission. They need to balance their budgets, while simultaneously creating more competition on the labor and goods markets.
The directives from Brussels translate into difficult sacrifices for the citizens of the affected countries. Employees will have to scale back wage demands for years, and civil servants will see their salaries cut. Ireland has already embarked on this path; Greece and Spain will follow.
Is Germany to Blame?
The Commission has recommended that Spain, booming until recently, radically restructure its economy. Spain must significantly shrink its bloated construction sector and focus on economic sectors with higher productivity.
France and Italy have been given homework assignments of their own. Both countries are being asked to apply austerity packages and increase labor-market flexibility. France must also get its significant welfare and unemployment expenses under control.
Resentment is growing in the countries most directly affected. But that frustration is not directed, as might be expected, toward the Commission. Instead, it is increasingly surplus countries coming under fire -- with Germany at the forefront.
Representatives from Spain and Portugal especially -- but also from France -- hold Germany accountable for their current woes. They aren't alone in that opinion either. "The Greek crisis has German roots," says Heiner Flassbeck, chief economist at the United Nations Conference on Trade and Development (UNCTAD), in Geneva. It was German wage dumping that got the country's European neighbors in trouble, he says.
At Its Neighbors' Expense
EU officials don't phrase it quite so strongly, but they still accuse Germany more than any other country of gaining advantages for itself at its neighbors' expense, using its policy of low wages to make German products increasingly attractive relative to those from other countries.
As a precautionary measure, officials at Berlin's Finance Ministry have gathered arguments that Finance Minister Wolfgang Schäuble can put forward in the country's defense. Germany's position is that the countries now in crisis are themselves at fault for their situation. They lived beyond their means for years, the German government says, financing their economic boom on credit. Now the financial crisis has revealed their weaknesses.
Germany didn't have it easy with the euro in the beginning either, continues the argument, because the country wasn't competitive compared to other member countries -- but it regained its strength with a great deal of trouble and effort, through reforms.
German officials point to the fact that the country made its labor market more flexible through the Hartz package of welfare reforms and say that state finances are more stable than before, despite the crisis. They add that taking this same path would lead the currently troubled countries out of the crisis. And, they continue, the federal government is not responsible for lagging wage growth because, in Germany, salaries and wages are negotiated between employers and unions rather than being imposed by the government.
The German government also claims no responsibility for the country's export surplus. German firms are competitive not because of government policy, it says, but because of entrepreneurial decisions and the preferences of customers around the world.
Create More Competition
When this debate flared up recently within the euro-zone countries, Schäuble received support from the top for his position. The southern members of the euro zone shouldn't be ungrateful, warned ECB President Jean-Claude Trichet. After all, he reasons, Germany funded the deficits with its surpluses. Nonetheless, the Commission called on Germany to make further changes as well. The country should boost domestic demand, increase investment in infrastructure and create more competition in the service sector.
The Commission believes the currency union can exist in the long term only if member countries' governments implement reforms and coordinate their economic policies. Schäuble's experts agree. They are proposing -- partly with an eye toward mollifying France -- a common German-French initiative.
Both countries' governments should work toward better coordination, the German financial experts say. Merely monitoring deficits has turned out to be inadequate. In the future, they suggest, euro-zone governments should also focus on combating differing inflation rates and step in early when capital bubbles develop.
France, no doubt, would gladly accept such a proposal. Paris, after all, has long called for Europe-wide financial governance. Until now it was Germany that opposed the idea.
The euro-zone governments have started to rethink their positions, but will action necessarily follow? The past never lacked in good intentions either, but political calculation always won out in the end. How else would Greece have managed to become a member of the common currency zone? Why else would Brussels stand by for so long without taking action? It was far from secret that Greece had been cooking its books for years.
Financial Trickery
Back in the fall of 2004, Eurostat, the EU body in charge of statistics, calculated that Greece's officially announced debts of between 1.4 percent and 2.0 percent of gross domestic product between 2000 and 2003 were incorrect. In reality, the amount was nearly three times as high, falling between 3.7 percent and 4.6 percent. The statisticians surmised that Athens had whitewashed its finances in previous years, too. Greece, in fact, would never have met the conditions for membership in the common currency without such trickery.
But the country was not immediately banned from the euro zone, nor were other sanctions imposed. Instead, member countries discussed how the statistics could be improved and made more accurate. Not much emerged from all the talk.
Outgoing European Commissioner for Enterprise and Industry Günter Verheugen remembers all too well that, for a long time, the problem with Greece was simply not something that was talked about. He finds it hard to believe that this "disproportionate regard" for Greece had nothing to do with that fact that conservative allies of European Commission President José Manuel Barroso governed in Athens for five years.
Not until last fall's elections brought Greece's socialist opposition to power did new data arrive from Athens -- and new questions and accusations from Brussels.
The Greek parliament and government are now virtually stripped of power. They're not allowed to decide on any new expenditures without EU approval. Finance Minister Giorgos Papakonstantinou is required to report every four weeks on progress made in budget restructuring.
An EU Protectorate
Brussels, not Athens, now controls whether and how the austerity program takes effect. If "detailed and ongoing inspection" shows that the actual results fall short of those predicted, Almunia says, then Brussels' watchdogs will demand additional measures. There were even calls at the European Parliament last week to send a special EU representative with extensive authority to Greece. The small country has become little more than an EU protectorate.
The EU Commission and the euro-zone leaders hope these compulsory measures will steady markets. They also hope Greek unions and associations, from farmers to taxi drivers, won't mobilize against the reduction in the country's standard of living that will accompany these new measures.
German Finance Minister Schäuble and German Federal Bank President Axel Weber rule out giving aid to the struggling country. Indeed, EU treaties strictly forbid any such aid. The message is that Greece must help itself.
As a precautionary measure, though, both German officials, along with their colleagues in other EU countries, are keeping open the possibility of lending a hand anyway. The EU can't afford for a member state to go bankrupt, either politically or economically.
Out of the Question
The experts always debate the same possibilities. The first would be a common euro-zone bond, which would be placed at Greece's disposal. The advantages for Greece are obvious -- the country would receive funds more cheaply than it currently does because the euro zone as a whole wouldn't have to pay as high a risk premium as Greece alone does. The disadvantage is that countries with good credit, like Germany, would have to pay higher interest rates. Consequently, the German government insists that such a loan is out of the question.
An alternative would be bilateral financial aid. Solvent countries, such as Germany, would take out loans on the financial market at good rates and pass these on to Greece. But euro-zone governments are also reluctant to take this path.
The last option is the International Monetary Fund (IMF), which could use its resources to help Greece out of its credit crunch. It would likely impose much stricter conditions on its aid money than the EU would. But the IMF's involvement would also mean a loss of face for the entire euro zone and a triumph for the Washington-based institution, which was always skeptical of the euro.
If Greece doesn't stabilize in the coming weeks, the euro-zone's leaders will be left facing a choice between a rock and a hard place, with the third option being even worse.
Translated from the German by Ella Ornstein
http://www.spiegel.de/international/business/0,1518,druck-676507,00.html
4 February 2010
Radical Shifts Take Hold in U.S. Manufacturing
America's industrial base is undergoing its most radical restructuring in decades as manufacturers rethink their businesses in the wake of the recession.
From Dow Chemical Co. to Intel Corp., iconic companies are telling stories of wrenching change -- both contraction and recovery -- as they report their earnings for 2009.
Dow Chemical said Tuesday it is aiming to shed some $2 billion worth of basic-chemical factories and other assets this year as it moves into more-profitable specialty chemicals. Appliance maker Whirlpool Corp. said it cut about a tenth of its capacity in 2009 as it struggled with a 9.6% drop in sales. Intel, by contrast, is investing billions of dollars in its U.S. plants as demand for computer gear recovers.
"We are emerging from one of the most challenging economic environments we've seen in decades," said Whirlpool Chief Executive Jeff Fettig, on a conference call Tuesday.
The latest moves are accelerating the U.S. manufacturing economy's longer-term shrinkage, as well as its shift away from heavy sectors, such as automobiles and basic chemicals, toward higher-tech products like super-fast computer chips. In some cases, as with auto makers, companies are stripping down to adjust to diminished U.S. demand or investing in smaller, more-efficient facilities. In other cases, as with chemical makers, they are relocating labor-intensive operations to countries where wages are cheaper.
During 2009, the nation's capacity to produce motor vehicles and chemicals fell 4.4% and 1.7%, respectively, the largest such declines since at least 1949, according to Federal Reserve estimates. Its capacity to produce semiconductors, by contrast, grew an estimated 10.4%. Overall, U.S. industrial capacity fell by an estimated 1% in 2009, the largest year-to-year decline on record, while goods-producing businesses shed more than 2.3 million jobs.
As a result, economists expect unemployment to remain high for many years as millions of American workers in the hardest-hit sectors struggle to find new jobs. And while some economists see the restructuring as necessary to make U.S. industry leaner and more profitable, others worry that the sheer scope of the cutbacks could doom companies that ought to survive.
"The earthquake that we felt was so big, and the aftershocks so strong, that we could easily destroy perfectly good manufacturers that are crucial in the supply chain," such as auto-parts makers that supply the entire industry, said Diane Swonk, chief economist at Mesirow Financial in Chicago. "That's the great danger, and it's still a risk."
The restructuring now under way offers insights into what kinds of goods the U.S. should produce, and in what volumes. In industries such as automobiles, housing and appliances, the move to shed capacity is at least partly correcting distortions that built up over many years of easy credit and profligate consumer spending. Now, companies are adjusting to lower demand.
Whirpool's Mr. Fettig, for example, said his company will "take out more" capacity in 2010, after shutting down some five million units in yearly capacity over the past 15 months -- including a factory in Evansville, Ind., that produced refrigerators and ice makers. Ford Motor Co. Chief Executive Alan Mulally forecast total U.S. auto and truck sales at between 11.5 million and 12.5 million units in 2010, far below their recent peak of 17.5 million in 2005.
For chemical makers, the recession has intensified an exodus from the U.S. that has been going on for at least a decade, amid rising energy costs, environmental concerns and growing demand in developing countries. In the past year, Dow Chemical, has closed, or announced plans to close, six plants producing ethylene-related chemicals in Louisiana and Texas.
"The chemical industry is leaving the United States, and it won't be back," said Peter Huntsman, chief executive of Texas-based chemical giant Huntsman Corp., which plans to report fourth-quarter earnings on Feb 19. "When demand picks back up, they'll build new capacity overseas -- in the Middle East, Singapore and China."
Huntsman, he said, is expanding its capacity in the Mideast and China to make chemicals used in products like insulation and high-speed railway construction. It now has about a third of its capacity in the U.S., down from more than four-fifths a decade ago. That capacity is increasingly focused on producing more-specialized chemicals, such as epoxies that can be used in building airplanes.
The situation is different for semiconductor makers, which saw U.S. demand recover sharply as computer makers scrambled to catch up with a spurt of business investment toward the end of 2009. Intel, which produces chips in Chandler, Ariz., Rio Rancho, N.M. and Hillsboro, Ore., boosted its capital investments to $1.08 billion in the fourth quarter, up 15% from the previous quarter and part of a two-year, $7 billion program to upgrade its U.S. plants.
A large chunk of semiconductor production takes place abroad, but many companies still prefer to produce in the U.S., particularly if their manufacturing entails little human labor or is highly complex. Being close to the U.S.-based design centers of major chip users like computer maker Dell Inc. and consumer-electronics maker Apple Inc. also can be an advantage.
"This is a kind of manufacturing that will make sense to do in the U.S. for a long time to come," said Tim Peddecord, chief executive of privately held memory-module producer Avant Technology, which recently opened a new 50,000-square-foot plant in Pflugerville, Texas. The new plant will boost the company's capacity to 800,000 modules a month from 500,000.
Mr. Peddecord said his company is bulking up after a shakeout that drove many rivals out of business. Manufacturing in the U.S., he said, allows Avant to turn around U.S. orders in 24 hours, an advantage in an industry where demand is volatile and clients try to keep inventories low. In addition, the reduced freight costs, compared with shipping goods from China, can offset the added cost of U.S. labor, since labor accounts for less than a hundredth of his average sales price.
-- Bob Tita contributed to this article.
From Dow Chemical Co. to Intel Corp., iconic companies are telling stories of wrenching change -- both contraction and recovery -- as they report their earnings for 2009.
Dow Chemical said Tuesday it is aiming to shed some $2 billion worth of basic-chemical factories and other assets this year as it moves into more-profitable specialty chemicals. Appliance maker Whirlpool Corp. said it cut about a tenth of its capacity in 2009 as it struggled with a 9.6% drop in sales. Intel, by contrast, is investing billions of dollars in its U.S. plants as demand for computer gear recovers.
"We are emerging from one of the most challenging economic environments we've seen in decades," said Whirlpool Chief Executive Jeff Fettig, on a conference call Tuesday.
The latest moves are accelerating the U.S. manufacturing economy's longer-term shrinkage, as well as its shift away from heavy sectors, such as automobiles and basic chemicals, toward higher-tech products like super-fast computer chips. In some cases, as with auto makers, companies are stripping down to adjust to diminished U.S. demand or investing in smaller, more-efficient facilities. In other cases, as with chemical makers, they are relocating labor-intensive operations to countries where wages are cheaper.
During 2009, the nation's capacity to produce motor vehicles and chemicals fell 4.4% and 1.7%, respectively, the largest such declines since at least 1949, according to Federal Reserve estimates. Its capacity to produce semiconductors, by contrast, grew an estimated 10.4%. Overall, U.S. industrial capacity fell by an estimated 1% in 2009, the largest year-to-year decline on record, while goods-producing businesses shed more than 2.3 million jobs.
As a result, economists expect unemployment to remain high for many years as millions of American workers in the hardest-hit sectors struggle to find new jobs. And while some economists see the restructuring as necessary to make U.S. industry leaner and more profitable, others worry that the sheer scope of the cutbacks could doom companies that ought to survive.
"The earthquake that we felt was so big, and the aftershocks so strong, that we could easily destroy perfectly good manufacturers that are crucial in the supply chain," such as auto-parts makers that supply the entire industry, said Diane Swonk, chief economist at Mesirow Financial in Chicago. "That's the great danger, and it's still a risk."
The restructuring now under way offers insights into what kinds of goods the U.S. should produce, and in what volumes. In industries such as automobiles, housing and appliances, the move to shed capacity is at least partly correcting distortions that built up over many years of easy credit and profligate consumer spending. Now, companies are adjusting to lower demand.
Whirpool's Mr. Fettig, for example, said his company will "take out more" capacity in 2010, after shutting down some five million units in yearly capacity over the past 15 months -- including a factory in Evansville, Ind., that produced refrigerators and ice makers. Ford Motor Co. Chief Executive Alan Mulally forecast total U.S. auto and truck sales at between 11.5 million and 12.5 million units in 2010, far below their recent peak of 17.5 million in 2005.
For chemical makers, the recession has intensified an exodus from the U.S. that has been going on for at least a decade, amid rising energy costs, environmental concerns and growing demand in developing countries. In the past year, Dow Chemical, has closed, or announced plans to close, six plants producing ethylene-related chemicals in Louisiana and Texas.
"The chemical industry is leaving the United States, and it won't be back," said Peter Huntsman, chief executive of Texas-based chemical giant Huntsman Corp., which plans to report fourth-quarter earnings on Feb 19. "When demand picks back up, they'll build new capacity overseas -- in the Middle East, Singapore and China."
Huntsman, he said, is expanding its capacity in the Mideast and China to make chemicals used in products like insulation and high-speed railway construction. It now has about a third of its capacity in the U.S., down from more than four-fifths a decade ago. That capacity is increasingly focused on producing more-specialized chemicals, such as epoxies that can be used in building airplanes.
The situation is different for semiconductor makers, which saw U.S. demand recover sharply as computer makers scrambled to catch up with a spurt of business investment toward the end of 2009. Intel, which produces chips in Chandler, Ariz., Rio Rancho, N.M. and Hillsboro, Ore., boosted its capital investments to $1.08 billion in the fourth quarter, up 15% from the previous quarter and part of a two-year, $7 billion program to upgrade its U.S. plants.
A large chunk of semiconductor production takes place abroad, but many companies still prefer to produce in the U.S., particularly if their manufacturing entails little human labor or is highly complex. Being close to the U.S.-based design centers of major chip users like computer maker Dell Inc. and consumer-electronics maker Apple Inc. also can be an advantage.
"This is a kind of manufacturing that will make sense to do in the U.S. for a long time to come," said Tim Peddecord, chief executive of privately held memory-module producer Avant Technology, which recently opened a new 50,000-square-foot plant in Pflugerville, Texas. The new plant will boost the company's capacity to 800,000 modules a month from 500,000.
Mr. Peddecord said his company is bulking up after a shakeout that drove many rivals out of business. Manufacturing in the U.S., he said, allows Avant to turn around U.S. orders in 24 hours, an advantage in an industry where demand is volatile and clients try to keep inventories low. In addition, the reduced freight costs, compared with shipping goods from China, can offset the added cost of U.S. labor, since labor accounts for less than a hundredth of his average sales price.
-- Bob Tita contributed to this article.
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