Sorcerer's apprentices are doomed to repeat the same mistakes on and on. In 2007, the authorities' and large financial institutions' attempt to conceal the subprime crisis (1) (which had already started hitting hard on the markets in February-March 2007) resulted in a severe and sustainable shock in summer 2007. Well, in the coming weeks we will experience a “remake” of the same scenario, i.e. a serious aggravation of the January-March 2008 financial crisis at the beginning of summer 2008.
In this 25th issue of the Global Europe Anticipation Bulletin, our team therefore decided to describe five of the seven trends currently at work and soon to result in this new tipping-point of the global systemic crisis (the last two trends – Europe and Asia - will be analysed in GEAB N°26):
Real estate: A bottomless pit
Global financial bubble: Inflation only is progressing
US economy: Recession settles down
US public deficits: The big return
Dollar: The rebound that does not exist
Europe: Decoupling confirmed – The heart of Euroland resists / UK enters recession
Asia: Severe slowdown ahead
We also formulate a complete series of strategic and operational recommendations aimed at preparing oneself to the upcoming Summer-2008 shock (on subscription).
In this public announcement, we also wish to explain in what way this new operation of « euphorisation » in fact will contribute to worsen the upcoming shock.
Indeed, despite all the signs indicating that the crisis is going on (bank losses and continued process of financial asset depreciation (2), proliferation of medium-size bank failures in the US in particular (3), increasing weakness of large insurance companies (4), steady collapse of housing prices (5), contamination to real economy and non-US economies (6), pursuance of the US currency fall (7), economic slowdown in Europe (8),...), financial authorities, large banks and the international media have undertaken to profess that the crisis was under control. Powerless as they are in real-life, these sorcerers' apprentices have come to resort to a « psychological weapon » to curb the crisis. The global systemic crisis still has long to live, having nothing to do with this virtual reality where central bankers, private bankers and financial media seem to be operating. Of course large banks took advantage of today's general “euphoria” and managed to share past and future (even greater (9)) losses by launching vast operations of recapitalisation (10).
US housing: a bottomless pit - Evolution of home prices in US 20 largest cities 01/2000-02/2008 - Source : S&P Case-Shiller
This time however, contrary to last year, operators are unwilling to be fooled. According to LEAP/E2020, this is a major psychological factor, one that will contribute to emphasize the impact of the crisis once the mirage of a crisis-under-control fades away at the beginning of this summer 2008.
Indeed, the global financial system, and in particular its US pillar, is currently staking its all (though our team is not so sure the system is fully aware of it). But the credibility of the Fed and of large banks is extremely low today (not mentioning political authorities'). Operators (whether they are individuals, simple savers or sovereign funds) are suspicious and beginning to wonder if they are not being manipulated. If, as our researchers believe, they realise in a few weeks that indeed they were being manipulated and that the crisis is far from being under control but on the contrary is reemerging even bigger, then real panic movements will swoop down upon financial markets. When it comes to mass-psychology, nothing is worse than the collective feeling of having been fooled on purpose.
Here is a simple illustration that will speak to all those of you who know that banks « hold » the vast masses of investors because of the confidence savers have in their capacity to manage their investments: imagine what would be the consequences of a sudden savers' refusal to keep on letting banks manage their savings as they want, and their insisting upon switching their portfolio into less risky investments! Such a move could provoke a 20 percent drop on global financial places in just a few days. This nightmare probably haunts central banks in general, and the US Federal Reserve and the Bank of England in particular (whose economies are closely linked to stock market behaviours). Paradoxically, it is by refusing to face the direct consequences of the financial crisis that they are paving the way to an even greater shock.
Indeed, contrary to what they say (and maybe to what they really believe), there is no bottom to the pit that can stop the fall; or rather, there might be a bottom but its getting deeper day after day (11). Ironically, those who in the past years used to say that there was no limit to profit and benefit increases, are now trapped in a process where the bottom gets always deeper, where losses keep increasing endlessly as reference asset prices fall always lower, and where the only things that go always higher are energy and food prices. But isn't irony one of the only identifiable features of History?
The tragic part is the billions of people now struggling to buy their food because of soaring inflation in food commodities; or the dozens of millions of people who bought houses in the US, UK or Spain these years and find themselves with endlessly devaluating assets; or the dozens of millions of employees, individual entrepreneurs and government staff about to lose their job.
US opinion on state of the nation's economy (12/2006 – 04/2008) - Source: Washington Post/ABC News
« Was it so necessary to save « private Bear Stearns » at the price of such unprecedented financial leniency? » is the question each and everyone should be asking to financial experts. « How can we save the dozens of millions of unknown economic operators today stormed by the crisis? » will become the central question for all political, economic and financial decision-makers from this summer 2008 onward. In consideration of the virtual atmosphere according to which the manipulation of information is the utmost means of governance, our team tends to be rather pessimistic as to world leaders' capacity in providing efficient responses to the second question. But in any event, it is this second question which is important because it still belongs to the future, even if time is running out.
In the next issue of the GEAB – the summer 2008 edition, our team will describe in detail the outlook for the second semester of 2008 in each great region of the planet; as well as the options available, region by region, sector by sector and category of asset by category of asset
18 May 2008
'Where We Have Been and Where We are Going'
Rasputin August 12, 2007
Yesterday evening I posted a long-winded missive on the events of the last few years that have led us to this present period of, um, “uncertainty” in the housing, debt, and stock markets.
This morning I will make a weak and futile attempt to prognosticate where we are going from here. Again, I'll try to keep it brief, but you know how it is once my little runaway Rasputin fingers get to typing along...
First, please allow me to reiterate the crucial points made in yesterday's rant:
-$2 trillion of very suspect MBS have been created by private label securitizers over the last few years and were sold to bahgolders.
-Currently, Fannie and Freddie hold and/or guarantee about $3 trillion in their MBS.
-Also during this time frame the home-equity/ATM securitizers created $600 billion in HELOC-backed MBS.
-The banking system, in addition to snapping up $1 trillion of the MBS that Fannie/Freddie and the private label boys created, also loaned, directly to homedebtors, an additional $3.4 trillion.
Finally, the Wall Street Quants created approximately $600 billion of CDO-sausages, which included MBS as part of their “mystery meat”, and of course CLOs, CMBS, and other grissle, fat and bone.
Again, let's total all this up and see what we have:
Private Label MBS: $2 trillion
Fannie/Freddie: $4 trillion
HELOC: $600 billion
Banks Direct: $3.4 trillion
CDOs: $600 billion
Total: $11 trillion (approx.)
Setting aside the $3.4 trillion in death pledges that the banks are directly sitting on, that leaves about $7 trillion in securitized debt.
Which was stuffed into every:
-Pension fund
-Mutual fund
-Money market fund
-Foreign Central Bank
-God only knows who else
To recap where we are now:
The world is engorged with $7 trillion in highly-suspect MBS, CDOs, CDO-squareds, ad infinitum.
The cash ain't flowin',
The “value” of the MBS/CDOs are plummeting.
Margin calls are going out all over the place. Stuff is being dumped at fire-sale prices—if they can even GET a bid.
Investors in the various tranches are trying to exit the burning building. But the hedgies and investment banks are locking the exits.
Into the fray this week steps the world's central banks. And like pyromaniacs in charge of the fire station, they offer more gasoline “liquidity” to fight the fires they themselves set with their fiat/fractional reserve lending/central banking/securitization/derivatives matches. They have, literally, offered “Infinite Fiat.”
So, we have now blown a multi-trillion dollar (I'm still gonna stick with my $3 trillion prognostication) hole in the Good Ship Real Estate Titanic.
Okay, that sums up yesterday's diatribe as succinctly as I am capable of doing.
Oops, I forgot to add one, little, detail yesterday:
The ENTIRE credit system—not just the mortgage/MBS/CDO-related stuff—has seized up, with LBOs not getting sold, banks refusing to lend to each other, even overnight, and the hedge funds and investment banks scrambling to make margin calls and liquidate positions to meet margin calls. All of which prompted the world's central banks to create a nice, round, quarter of a trillion dollars in “temporary liquidity” on one, 24-hour period to attempt to keep the inter-connected, amplified, edifice from collapsing in on itself.
There, NOW I am finally ready to move forward with my prognostication of what might happen next.
What happens next?
Nothing.
That's right. I stated “Nothing”.
Now, to be fair, I need to extend that one-word sentence to its logical point:
Nothing DIFFERENT, that is.
For, we are so far down the road in this journey to “Infinite Fiat” there is NO turning back—at least voluntarily.
Nope, it's gonna be NOT only “Business as Usual”, but also very much “Business as UNUSUAL”, with the type of action you saw from the governments and CBs on Thursday and Friday torqued up to an extreme level. Yes, extreme even BEYOND the quarter-trillion dollar “Temporary” hot-beef liquidity injection you just witnessed.
By the way, last night I dispelled the MYTH that the Fed “can't” buy anything but U.S. treasuries/agencies, as some posters here have incorrectly insisted is the case. And, at the risk of making this missive massive, I reprint below and excerpt of just what the Fed is authorized to buy, IN THEIR OWN WORDS:
...paper:
"The Fed could replace Treasury debt in its portfolio with assets such as discount window loans to depository institutions, repurchase agreements with private counterparties, securities of private businesses, debt of state, local or foreign governments, and liabilities of federal agencies or federal government sponsored enterprises, to name several possibilities."
This comes directly from the Richmond, VA Fed and I provided a link to it in the thread where I was asking the esteemed Mr. Moto for some clarification on Fed actions.
Now, back to “We're scroomed!”, er, What will happen next.
Okay, so now “the cat is outta the bag” and even the slow, slovenly, central bankers and governments know we have a genuine, first-class, up-in-your face liquidity crisis going on. And the numbers are HUGE. Huge as in at least:
[$3 trillion in soon-to-be-defaulted home debt, owed by bankrupt sheeple who are sitting in:
Somewhere between 7 million and ten million soon-to-be empty homes.
Trillions more of MBS/CDO/Squared/Cubed/CDS/other derivatives that are more intertwined and inter-tangled than an Appalachian family, and are stuffed into literally every corner of the world's financial system.
$500 billion in LBS sitting on the books of the mezzanine banks, which can't be offloaded onto bagholders
A potential loss of at least $1 trillion per year in mortgage originations (and with it, all the related “Real Estate Industrial Complex industries of sales, building, securitization, furnishings, etc.)
Not to mention a general stock and (other than sovereign, for now) bond market crisis.
So, what do the CBs and governments do?
Simple.
They monetize.
Now, before the two remaining deflationists in the world jump up and say “NO WAY!!!”, please allow me to softly remind them to sit down, look at that one quarter of a trillion dollar TOMO-Tofu the CBs just swallowed, and then reconsider this before making fools of themselves.
To be fair, though, to the die-hard deflationists, I will modify the above statement to:
They will ATTEMPT to monetize.
And they will ALSO do each and every thing I have been predicting for months on this very board, some of which are happening right now:
Debt forbearance (Which the FDIC woman said to Kudlow was now called “Restructuring” on his show on Thursday. And not just homedebtors either, but rather ALL debtors whether they be corporate, financial, or otherwise.
Continued TOMOs and even POMOs from the CB crowd. Hey, it's ONLY electronic fiat credits, right?
Government-sponsored programs to nationalize entire industries and segments of the economies. “RTC II, the Sequel” comes right to mind for the homedebting sheeple, and “Super Duper Ginnie” comes to mind to buy up ALL the outstanding MBS, should the Fed not want to be coerced into taking them on their balance sheet.
Of course, lots and lots of “jawboning” to keep the sheeps complacent. However, if this should fail and the sheeps start a bank run, then another “bank holiday” will certainly be implemented. And it will ALSO include stopping capital flight, so don't get cute and think you will just move your electronic fiat credits to some off-shore haven. Or even keep them there if they are there now. I won't even get into what will happen to the Gold Hoarding Seditionist crowd. But trust me, it will make Gitmo look like a five-star hotel stay!!!
As all this plays out over the next few months, look for wild market gyrations, tons of back-and-forth debate, panic and fear at all levels, more seizures in various markets (including at least trading curbs on the stock exchanges as well as entire shut downs), corporations refusing to extend credit to customers.
Oh, and did I mention that there might be a problem or two getting our communist and muslim debt-enablers to buy off on more MBS/CDOs? Oops.
In conclusion, I believe that the attempts at monetization will ultimately fail and that not only will about $5 trillion be lopped right off the top of the REGULAR debt pyramid, but also at least $10 trillion or more from “The Great Derivatives Edifice”. Not to mention untold trillions in world GDP.
And maybe a few trade wars, some oil disruptions, and perhaps even a larger, regional war as well, for good measure.
Well, I promised to keep this short. And I obviously lied, but what's new?
In any event this is as clear a picture as my teeny, tiny, paranoid, nihilistic, little Rasputin brain is capable of projecting events out into the future.
You are certainly welcome to offer your own vision of the future.
I am willing to cling to ANYTHING that is less pessimistic than my own prognostication.
Ras"
(MrSpock): Clearly Earthling Rasputin was a long-winded soul. Notwithstanding his massive missive, his proposed scenario, given nine months ago, seems to be playing out very much as predicted. Going forward, this Vulcan sees only a continuation of the nationalization of the mortgage industry--via overt and covert means--and further devaluation of the U.S. fiat dollar in order for the U.S. to stealthily default on its obligations to its creditors.
This continuing saga is one best view from a far-distant planet.
Yesterday evening I posted a long-winded missive on the events of the last few years that have led us to this present period of, um, “uncertainty” in the housing, debt, and stock markets.
This morning I will make a weak and futile attempt to prognosticate where we are going from here. Again, I'll try to keep it brief, but you know how it is once my little runaway Rasputin fingers get to typing along...
First, please allow me to reiterate the crucial points made in yesterday's rant:
-$2 trillion of very suspect MBS have been created by private label securitizers over the last few years and were sold to bahgolders.
-Currently, Fannie and Freddie hold and/or guarantee about $3 trillion in their MBS.
-Also during this time frame the home-equity/ATM securitizers created $600 billion in HELOC-backed MBS.
-The banking system, in addition to snapping up $1 trillion of the MBS that Fannie/Freddie and the private label boys created, also loaned, directly to homedebtors, an additional $3.4 trillion.
Finally, the Wall Street Quants created approximately $600 billion of CDO-sausages, which included MBS as part of their “mystery meat”, and of course CLOs, CMBS, and other grissle, fat and bone.
Again, let's total all this up and see what we have:
Private Label MBS: $2 trillion
Fannie/Freddie: $4 trillion
HELOC: $600 billion
Banks Direct: $3.4 trillion
CDOs: $600 billion
Total: $11 trillion (approx.)
Setting aside the $3.4 trillion in death pledges that the banks are directly sitting on, that leaves about $7 trillion in securitized debt.
Which was stuffed into every:
-Pension fund
-Mutual fund
-Money market fund
-Foreign Central Bank
-God only knows who else
To recap where we are now:
The world is engorged with $7 trillion in highly-suspect MBS, CDOs, CDO-squareds, ad infinitum.
The cash ain't flowin',
The “value” of the MBS/CDOs are plummeting.
Margin calls are going out all over the place. Stuff is being dumped at fire-sale prices—if they can even GET a bid.
Investors in the various tranches are trying to exit the burning building. But the hedgies and investment banks are locking the exits.
Into the fray this week steps the world's central banks. And like pyromaniacs in charge of the fire station, they offer more gasoline “liquidity” to fight the fires they themselves set with their fiat/fractional reserve lending/central banking/securitization/derivatives matches. They have, literally, offered “Infinite Fiat.”
So, we have now blown a multi-trillion dollar (I'm still gonna stick with my $3 trillion prognostication) hole in the Good Ship Real Estate Titanic.
Okay, that sums up yesterday's diatribe as succinctly as I am capable of doing.
Oops, I forgot to add one, little, detail yesterday:
The ENTIRE credit system—not just the mortgage/MBS/CDO-related stuff—has seized up, with LBOs not getting sold, banks refusing to lend to each other, even overnight, and the hedge funds and investment banks scrambling to make margin calls and liquidate positions to meet margin calls. All of which prompted the world's central banks to create a nice, round, quarter of a trillion dollars in “temporary liquidity” on one, 24-hour period to attempt to keep the inter-connected, amplified, edifice from collapsing in on itself.
There, NOW I am finally ready to move forward with my prognostication of what might happen next.
What happens next?
Nothing.
That's right. I stated “Nothing”.
Now, to be fair, I need to extend that one-word sentence to its logical point:
Nothing DIFFERENT, that is.
For, we are so far down the road in this journey to “Infinite Fiat” there is NO turning back—at least voluntarily.
Nope, it's gonna be NOT only “Business as Usual”, but also very much “Business as UNUSUAL”, with the type of action you saw from the governments and CBs on Thursday and Friday torqued up to an extreme level. Yes, extreme even BEYOND the quarter-trillion dollar “Temporary” hot-beef liquidity injection you just witnessed.
By the way, last night I dispelled the MYTH that the Fed “can't” buy anything but U.S. treasuries/agencies, as some posters here have incorrectly insisted is the case. And, at the risk of making this missive massive, I reprint below and excerpt of just what the Fed is authorized to buy, IN THEIR OWN WORDS:
...paper:
"The Fed could replace Treasury debt in its portfolio with assets such as discount window loans to depository institutions, repurchase agreements with private counterparties, securities of private businesses, debt of state, local or foreign governments, and liabilities of federal agencies or federal government sponsored enterprises, to name several possibilities."
This comes directly from the Richmond, VA Fed and I provided a link to it in the thread where I was asking the esteemed Mr. Moto for some clarification on Fed actions.
Now, back to “We're scroomed!”, er, What will happen next.
Okay, so now “the cat is outta the bag” and even the slow, slovenly, central bankers and governments know we have a genuine, first-class, up-in-your face liquidity crisis going on. And the numbers are HUGE. Huge as in at least:
[$3 trillion in soon-to-be-defaulted home debt, owed by bankrupt sheeple who are sitting in:
Somewhere between 7 million and ten million soon-to-be empty homes.
Trillions more of MBS/CDO/Squared/Cubed/CDS/other derivatives that are more intertwined and inter-tangled than an Appalachian family, and are stuffed into literally every corner of the world's financial system.
$500 billion in LBS sitting on the books of the mezzanine banks, which can't be offloaded onto bagholders
A potential loss of at least $1 trillion per year in mortgage originations (and with it, all the related “Real Estate Industrial Complex industries of sales, building, securitization, furnishings, etc.)
Not to mention a general stock and (other than sovereign, for now) bond market crisis.
So, what do the CBs and governments do?
Simple.
They monetize.
Now, before the two remaining deflationists in the world jump up and say “NO WAY!!!”, please allow me to softly remind them to sit down, look at that one quarter of a trillion dollar TOMO-Tofu the CBs just swallowed, and then reconsider this before making fools of themselves.
To be fair, though, to the die-hard deflationists, I will modify the above statement to:
They will ATTEMPT to monetize.
And they will ALSO do each and every thing I have been predicting for months on this very board, some of which are happening right now:
Debt forbearance (Which the FDIC woman said to Kudlow was now called “Restructuring” on his show on Thursday. And not just homedebtors either, but rather ALL debtors whether they be corporate, financial, or otherwise.
Continued TOMOs and even POMOs from the CB crowd. Hey, it's ONLY electronic fiat credits, right?
Government-sponsored programs to nationalize entire industries and segments of the economies. “RTC II, the Sequel” comes right to mind for the homedebting sheeple, and “Super Duper Ginnie” comes to mind to buy up ALL the outstanding MBS, should the Fed not want to be coerced into taking them on their balance sheet.
Of course, lots and lots of “jawboning” to keep the sheeps complacent. However, if this should fail and the sheeps start a bank run, then another “bank holiday” will certainly be implemented. And it will ALSO include stopping capital flight, so don't get cute and think you will just move your electronic fiat credits to some off-shore haven. Or even keep them there if they are there now. I won't even get into what will happen to the Gold Hoarding Seditionist crowd. But trust me, it will make Gitmo look like a five-star hotel stay!!!
As all this plays out over the next few months, look for wild market gyrations, tons of back-and-forth debate, panic and fear at all levels, more seizures in various markets (including at least trading curbs on the stock exchanges as well as entire shut downs), corporations refusing to extend credit to customers.
Oh, and did I mention that there might be a problem or two getting our communist and muslim debt-enablers to buy off on more MBS/CDOs? Oops.
In conclusion, I believe that the attempts at monetization will ultimately fail and that not only will about $5 trillion be lopped right off the top of the REGULAR debt pyramid, but also at least $10 trillion or more from “The Great Derivatives Edifice”. Not to mention untold trillions in world GDP.
And maybe a few trade wars, some oil disruptions, and perhaps even a larger, regional war as well, for good measure.
Well, I promised to keep this short. And I obviously lied, but what's new?
In any event this is as clear a picture as my teeny, tiny, paranoid, nihilistic, little Rasputin brain is capable of projecting events out into the future.
You are certainly welcome to offer your own vision of the future.
I am willing to cling to ANYTHING that is less pessimistic than my own prognostication.
Ras"
(MrSpock): Clearly Earthling Rasputin was a long-winded soul. Notwithstanding his massive missive, his proposed scenario, given nine months ago, seems to be playing out very much as predicted. Going forward, this Vulcan sees only a continuation of the nationalization of the mortgage industry--via overt and covert means--and further devaluation of the U.S. fiat dollar in order for the U.S. to stealthily default on its obligations to its creditors.
This continuing saga is one best view from a far-distant planet.
17 May 2008
Peak Gold
According to MineWeb, Peter Munk, the somewhat unpopular chairman and acting CEO of Barrick Gold, the world's largest gold producer, stated at the company's recent AGM that there have been "virtually no new discoveries."
While we might disagree around the edges of that statement, Chairman Munk is technically correct in that the level of discoveries being made is a small fraction of that needed to replace the depleting reserves of the gold producers.
In short, we appear to have reached the era of Peak Gold. Whereas a major discovery used to be 10 million ounces or more, the threshold for attention-getting discoveries these days has fallen to more along the lines of 1 to 3 million ounces... and even those are hardly falling off the trees.
Viewed from the perspective of an investor in the junior resource sector, this lack of discoveries means the fuse is lit - starting with straight-up supply and demand fundamentals - for a rocket shot tomorrow. Adding boosters to the rocket, we have a commodities bull market that shows no sign of ending anytime soon and, while the U.S. dollar will periodically rebound, it is not going to somehow reinvent itself as sound money in our lifetime.
Importantly, as you can clearly read between the lines in Chairman Munk's words, once the majors get cashed up and serious about replacing their reserves, they are going to have to look downstream to the juniors with discoveries... even if those discoveries are below the 5-million-ounce threshold they previously required to even consider taking an ore body into production.
A Risk and an Opportunity
Of course, lowering the threshold on deposit size will require trade-offs. For example, in order to be considered for an acquisition, a smaller deposit will almost certainly have to be near surface and open-pittable. It will also have to be near good infrastructure, and located in a jurisdiction with good laws and reasonable taxation. There is, in this situation, an opportunity and a risk.
Starting with the latter, if your portfolio now includes companies going after deposits in the one- to five-million-ounce range, you need to make sure they are not in a remote location, or will require going underground or building a mill to process sulfides. (Under 1 million ounces? Fuggedaboudit!)
As for the opportunity, while the odds and the amount of exploration spending still favor that we'll see the discovery of at least one and maybe two monster deposits in this cycle (there are a couple of companies advancing projects with that potential), and early shareholders will make fortunes as a result, there has rarely been a better time to invest in junior exploration companies with modestly sized projects in good locations. That said, you should still be focusing only on projects with at least 2 million ounces, or the strong potential of same.
In other words, take the opportunity in these down markets to focus on getting positioned ahead of the majors... that's where the big money will be made as things gather steam again going forward.
David Galland is managing director of Casey Research, publishers of the International Speculator, now in its 28th year. The current edition includes "Courting the Majors," a feature on what attributes the major mining companies are looking for in a junior explorer. All new subscribers are invited to give the International Speculator a three-month trial with an unquestioning 100% money-back guarantee. Learn more and sign up now to receive the current edition.
While we might disagree around the edges of that statement, Chairman Munk is technically correct in that the level of discoveries being made is a small fraction of that needed to replace the depleting reserves of the gold producers.
In short, we appear to have reached the era of Peak Gold. Whereas a major discovery used to be 10 million ounces or more, the threshold for attention-getting discoveries these days has fallen to more along the lines of 1 to 3 million ounces... and even those are hardly falling off the trees.
Viewed from the perspective of an investor in the junior resource sector, this lack of discoveries means the fuse is lit - starting with straight-up supply and demand fundamentals - for a rocket shot tomorrow. Adding boosters to the rocket, we have a commodities bull market that shows no sign of ending anytime soon and, while the U.S. dollar will periodically rebound, it is not going to somehow reinvent itself as sound money in our lifetime.
Importantly, as you can clearly read between the lines in Chairman Munk's words, once the majors get cashed up and serious about replacing their reserves, they are going to have to look downstream to the juniors with discoveries... even if those discoveries are below the 5-million-ounce threshold they previously required to even consider taking an ore body into production.
A Risk and an Opportunity
Of course, lowering the threshold on deposit size will require trade-offs. For example, in order to be considered for an acquisition, a smaller deposit will almost certainly have to be near surface and open-pittable. It will also have to be near good infrastructure, and located in a jurisdiction with good laws and reasonable taxation. There is, in this situation, an opportunity and a risk.
Starting with the latter, if your portfolio now includes companies going after deposits in the one- to five-million-ounce range, you need to make sure they are not in a remote location, or will require going underground or building a mill to process sulfides. (Under 1 million ounces? Fuggedaboudit!)
As for the opportunity, while the odds and the amount of exploration spending still favor that we'll see the discovery of at least one and maybe two monster deposits in this cycle (there are a couple of companies advancing projects with that potential), and early shareholders will make fortunes as a result, there has rarely been a better time to invest in junior exploration companies with modestly sized projects in good locations. That said, you should still be focusing only on projects with at least 2 million ounces, or the strong potential of same.
In other words, take the opportunity in these down markets to focus on getting positioned ahead of the majors... that's where the big money will be made as things gather steam again going forward.
David Galland is managing director of Casey Research, publishers of the International Speculator, now in its 28th year. The current edition includes "Courting the Majors," a feature on what attributes the major mining companies are looking for in a junior explorer. All new subscribers are invited to give the International Speculator a three-month trial with an unquestioning 100% money-back guarantee. Learn more and sign up now to receive the current edition.
16 May 2008
China and India back to the future
From a long-term perspective, the prospect of China becoming the world’s largest economy, and India the third largest, within the next 10-15 years, represents a return to the order which has prevailed throughout most of human history. According to calculations by Angus Maddison5, from at least the beginning of the common era until the early 19th century, China and India accounted for around half of global GDP (see Chart 1). For much of this period China and India were intact polities, had the world’s largest populations and were technological leaders.
As Jared Diamond notes, “until around AD 1450, China was technologically much more innovative and advanced than Europe”6. Chinese inventions before or during this period included the wheelbarrow, gunpowder, matches, cast iron, porcelain, magnetic compasses, sternpost rudders, paper, printing, paper money and a meritocratic civil service.7 Indian inventions from this period include the decimal system (and the concept of zero), the water-wheel, cotton-ginning, cloth dyes, brass and the extraction of crystalline sugar from cane8. The decline in the relative importance of China and India between the early 18th and late 20th centuries resulted from, inter alia, the industrial revolution in Western Europe; the formation and rapid expansion of the United States; China’s retreat from engagement with the global economy beginning during the Ming Dynasty and subsequent decay under the Qing dynasty; the impact of colonial rule on India, and ‘gunboat diplomacy’ and ‘unequal treaties’ on China; nearly fifty years of warfare and social disorder in China in the first half of the 20th century followed by another quarter-century of chaos and misrule under Mao Zedong; and forty years of growth-stultifying Nehruvian socialism in India from independence until the financial crisis of 1991.
A good pdf read. The charts show clearly, the world order is shifting back to Asia. Asian farmers and inventors in China in particular, were incredible in the past. Many inventions like printing of books, books with pages, numbers, algebra, paper money, fire power, integrated farming methods, unitary organization of villages, cities and the government, intensive farming techniques, fertilization, silk weaving, high-fired pottery, astronomy, etc: this is from the great civilizations of the East.
As Jared Diamond notes, “until around AD 1450, China was technologically much more innovative and advanced than Europe”6. Chinese inventions before or during this period included the wheelbarrow, gunpowder, matches, cast iron, porcelain, magnetic compasses, sternpost rudders, paper, printing, paper money and a meritocratic civil service.7 Indian inventions from this period include the decimal system (and the concept of zero), the water-wheel, cotton-ginning, cloth dyes, brass and the extraction of crystalline sugar from cane8. The decline in the relative importance of China and India between the early 18th and late 20th centuries resulted from, inter alia, the industrial revolution in Western Europe; the formation and rapid expansion of the United States; China’s retreat from engagement with the global economy beginning during the Ming Dynasty and subsequent decay under the Qing dynasty; the impact of colonial rule on India, and ‘gunboat diplomacy’ and ‘unequal treaties’ on China; nearly fifty years of warfare and social disorder in China in the first half of the 20th century followed by another quarter-century of chaos and misrule under Mao Zedong; and forty years of growth-stultifying Nehruvian socialism in India from independence until the financial crisis of 1991.
A good pdf read. The charts show clearly, the world order is shifting back to Asia. Asian farmers and inventors in China in particular, were incredible in the past. Many inventions like printing of books, books with pages, numbers, algebra, paper money, fire power, integrated farming methods, unitary organization of villages, cities and the government, intensive farming techniques, fertilization, silk weaving, high-fired pottery, astronomy, etc: this is from the great civilizations of the East.
14 May 2008
Bank of America Sees Higher Losses; Banks Have "Enormous Unrecognized Losses"
More losses at Bank of America. How unusual.
The only bottom we are seeing is the bottom of the barrel which we as a nation are scraping to maintain an unsustainable economy burdened by parasitical corporations that is on its last legs. Anyone who does not 'get this' by now is sucking hard on the bong pipe of government and Wall Street propaganda.
"``Based on information I see,'' it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn't name any companies."
Banks Have ENORMOUS Unrecognized Losses - Carlyle Group's Rubinstein
It appears that the banks are recognizing their losses at the rate at which the Fed can monetize them while hiding the effects on the broader economy. They are manipulating economic indicators and information in the process.
The issue in this web of deceit 'for our own good' is that some are being set up for serious personal losses while a privileged few insiders are being set up for enormous personal gains. It is happening now. It is integral to the process of inequality and croney capitalism.
THAT is the moral hazard with having a centrally controlled economy, under the command of "benevolent economists," that liberal academic economists seem to fantasize about so often at times like these. Power corrupts. Integrity is not incidental to good governance. These fellows need to go back and learn the lessons of the schoolyard. The rule of law matters, because after you have knocked it down, you may not stand up easily in the cold winds that will blow unimpeded after it has gone.
Bank of America Sees Higher Losses on Home Equity
By David Mildenberg
May 13 (Bloomberg) -- Bank of America Corp., the second- biggest U.S. bank, widened its forecast of home-equity loan losses beyond projections offered last month, adding to evidence that more consumers are falling behind on the debts.
The bank expects losses to top 2.5 percent of its $118 billion in loans linked to home values, Liam McGee, president of the Charlotte, North Carolina-based company's consumer and small business division, said at a conference in New York sponsored by UBS AG. The bank previously projected a loss rate of between 2 percent and 2.5 percent.
Bank of America, the nation's largest credit-card issuer, is also seeing a ``recent sharp increase'' in spending on necessities by its credit-card customers. That has curbed retail, travel and entertainment purchases, McGee said. Economists and bankers have said the economy may be teetering near a recession as consumers struggle with job losses and gasoline prices topping $4 a gallon.
McGee said Bank of America expects the economy, measured by real gross domestic product, will shrink in the second quarter. The bank had $184 billion of credit card debt outstanding at the end of the first quarter and about a 20 percent market share.
The bank's $4 billion purchase of Countrywide Financial Corp., the largest U.S. home lender, remains ``on track'' to be completed in the third quarter, McGee said. Bank of America expected ``bumps on the road'' during the transaction, he said.
``There is a lot of talent there that will help us grow our business,'' he said, noting that home lending will join consumer deposits and credit cards as key businesses for Bank of America.
To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net
Last Updated: May 13, 2008 09:16 EDT
The only bottom we are seeing is the bottom of the barrel which we as a nation are scraping to maintain an unsustainable economy burdened by parasitical corporations that is on its last legs. Anyone who does not 'get this' by now is sucking hard on the bong pipe of government and Wall Street propaganda.
"``Based on information I see,'' it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn't name any companies."
Banks Have ENORMOUS Unrecognized Losses - Carlyle Group's Rubinstein
It appears that the banks are recognizing their losses at the rate at which the Fed can monetize them while hiding the effects on the broader economy. They are manipulating economic indicators and information in the process.
The issue in this web of deceit 'for our own good' is that some are being set up for serious personal losses while a privileged few insiders are being set up for enormous personal gains. It is happening now. It is integral to the process of inequality and croney capitalism.
THAT is the moral hazard with having a centrally controlled economy, under the command of "benevolent economists," that liberal academic economists seem to fantasize about so often at times like these. Power corrupts. Integrity is not incidental to good governance. These fellows need to go back and learn the lessons of the schoolyard. The rule of law matters, because after you have knocked it down, you may not stand up easily in the cold winds that will blow unimpeded after it has gone.
Bank of America Sees Higher Losses on Home Equity
By David Mildenberg
May 13 (Bloomberg) -- Bank of America Corp., the second- biggest U.S. bank, widened its forecast of home-equity loan losses beyond projections offered last month, adding to evidence that more consumers are falling behind on the debts.
The bank expects losses to top 2.5 percent of its $118 billion in loans linked to home values, Liam McGee, president of the Charlotte, North Carolina-based company's consumer and small business division, said at a conference in New York sponsored by UBS AG. The bank previously projected a loss rate of between 2 percent and 2.5 percent.
Bank of America, the nation's largest credit-card issuer, is also seeing a ``recent sharp increase'' in spending on necessities by its credit-card customers. That has curbed retail, travel and entertainment purchases, McGee said. Economists and bankers have said the economy may be teetering near a recession as consumers struggle with job losses and gasoline prices topping $4 a gallon.
McGee said Bank of America expects the economy, measured by real gross domestic product, will shrink in the second quarter. The bank had $184 billion of credit card debt outstanding at the end of the first quarter and about a 20 percent market share.
The bank's $4 billion purchase of Countrywide Financial Corp., the largest U.S. home lender, remains ``on track'' to be completed in the third quarter, McGee said. Bank of America expected ``bumps on the road'' during the transaction, he said.
``There is a lot of talent there that will help us grow our business,'' he said, noting that home lending will join consumer deposits and credit cards as key businesses for Bank of America.
To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net
Last Updated: May 13, 2008 09:16 EDT
13 May 2008
12 May 2008
The problem with capitalism
This piece is intended to be an overview on the end of Capitalism as we know it. It claims to be an analysis of the end of mass economies of scale and the introduction of the concept of qualitative economic process and socially sustainable Capitalism.
While the concepts of commodity fetishism by Karl Marx and conspicuous consumption by Thorstein Veblen were introduced initially as social byproducts inherent in the flawed behaviors of economic models such as the industrial revolution and unrestrained capitalism, it would actually seem that they are constant behavioral flaws of human kind and are only magnified by the economic system we choose as a social organism. Inefficientaccumulation of products and systemic resource waste is inherent with the human condition and present in most economic systems. Capitalism only provided a more acceptable vehicle for such genetic tendency. While it is now generally agreed that Capitalism offered the most efficient system to allocate scarce resources, in practice, Mass Capitalism only offered a short term better system to allocate such resources; and in the trade-off between raising the standard of living of million of people and misallocating resources the ultimate net result was on the positive side. However, the accelerating process of industrialization at the global level, the loop-sided world demographics and the speed at which society now reacts to changes thanks to new technologies calls into question the viability of this state of affair going forward.
The incessant need of Mass Capitalism to continuously increase levels of production pushes the system toward larger and larger misallocations of shrinking resources and lower standards of quality at the production and cultural level. Scarily, the rate of speed at which such process develops is also exponentially increasing.
Mass Capitalism helped raise the standard of living of more people around the world than any other social system ever did (while at the same time- just to mention a few recent other social systems - Socialism, Communism and...Nazism not only impoverished their subjects but also killed millions of them). For this reason we shall always be indebted to this system and recognize why it has worked so much better than other ways of social and economic organization so that we can improve upon it and avoid its potential future implosion.
For this analysis to begin, we need to understand what the main drivers are behind human behavior and social dynamics:
humans are a generally illogical and emotional species
humans have to act on imperfect information
the vast majority of humans acts on even lower standards of imperfect information due to inferior education/knowledge
humans are driven to social organization because it is the only way to guarantee security and eventually the expression of self
humans are creative
humans are driven first by self motives and then by social reasons
humans aspire to a higher living condition
most humans believe in some sort of cosmic order (religion) even though they do not fully understand it nor can they explain it
humans are inherently driven to reproduction.
If we agree that the above elements are indeed correct, it becomes evident that every successful economic and social form of organization will have to include the personal profit motive and the eventual expression of one's self. What seems to be evident is also the need to improve the general level of information available to all participants for their decision making process. This has been improved by new technologies such as internet and mobile communication but I believe we should reach for higher goals and a widespread improvement of education should be the overriding objective of every society.
Society should also promote personal security and systemic stability; these goals should be the main prerogative of every government. Stability and security are the most necessary elements of every successful society. Historically, this has revealed itself to be a sticky point; a point often manipulated by the powers that be (or the wannabe powers that be). Manipulation has often come with the mixing of a spiritual mandate along with secular execution. For this reason, it would seem prudent to increase the division between the personal spiritual sphere of each member of society and the secular business of governing the system. Furthermore, a new and better society should encourage a de-leveraging of the ideological component in the political process and move toward a socially beneficial pragmatism.
Lastly but certainly most importantly, if we agree that humans aspire to higher living conditions for themselves and for their offspring, the concept of basing our society on quality and not quantity becomes a natural evolution of our blueprint for a better future.
Mass Capitalism was a necessary condition at the onset of the industrial revolution; it was needed to put in motion the necessary critical mass to change the world (or at least the Western side of it) from a feudal and agricultural system to a mechanical and modern one. It was a little bit like lighting a fire in the woods by striking two stones against each other to produce that one spark. Mass Capitalism succeeded in changing the rules of production and reward. Meritocracy and not just land exploitation surely crept into the system; entrepreneurship became that never ending spark which propelled the West to the fastest improvement in standards of living ever recorded. More people were made part of the process and more goods were produced and so the story goes.
Unfortunately this process is not sustainable. Part victim of its own success and part spinning out of control, Mass Capitalism must morph into a better system. The never ending need of the system to produce more goods or services which eventually must be sold for ever lower margins has created two major distortions: a strain on physical resources and a watering down and misallocation of cultural resources.
The need to create massive economies of scale force fed products (often completely useless and unquestionably idiotic) down the throats of consumers. The introduction of the concept of a disposable society many years ago was the first unwelcome by-product of Mass Capitalism. The very disturbing element is the now accomplished osmosis of the disposable concept from production to the cultural sphere (Lindsay-Paris-Brittney bubble anyone?). If Mass Capitalism starts negatively interfering with the cultural foundations of society, consumers will become hopeless victims and unconscious executioners of their own demise: they will be demanding more and more unnecessary products/services that the system cannot sustain (due to resource constraints) and they will be making decisions based on lower and lower standards of information therefore fueling a suicidal spiral for the system.
But so far we have been rather esoteric and theoretical; let us analyze a few case studies to gain practical insight into our intuitions. A while ago I got lost in the Chinatown area in Los Angeles. While I was looking for the old Chinatown which is now being transformed into sort of a West Coast SOHO with numerous art galleries (quality) springing up everywhere, I actually ended up in the new Chinatown. The new part is much bigger and full of small and medium markets selling all kinds of junk (quantity). Needless to say that this area was much more popular and that the vast majority of the goods offered were nothing more than a sad waste of natural resources. I was especially surprised to see the mountain of absurdly low quality clothing items for sale and the disproportionate amount of idiotic toys for sale (disproportionate to the amount of kids in this town and the number of idiotic toys they should be wasting their time with daily). The really low prices clearly did not seem to take into consideration the real labor behind the making of these products or the resources needed. Economies of scale might be justifying those products but common sense and resource based accounting might disagree. Even if these products were more useful than they really are (and I bet that 95% of those absolutely un-wearable shirts I have seen will end up being destroyed or hopefully recycled into something else) this dynamic cannot continue. The low prices are guaranteed by the cheap labor of developing nations; such cheap labor and social acceptance of appalling living conditions will quickly dissipate and costs will rise tremendously. Disappearing natural resources will increase the speed of such cost adjustments.
But more to the point: WHY? Why wasting natural resources and human resources to justify economies of scale to produce unnecessary products?
Why instead can't we leverage the human capital available (as raw as it may be) to produce a new spark: Qualitative Capitalism. Why not trying to raise the standard of living of the majority of people on earth by helping them develop useful skills and helping them develop that innate human creativity. Why not create better products not more, better services not more mind numbing. Why not promote craftsmanship and pride instead of multitude and platitude?
Market fundamentalists will argue the above mentioned call for common sense is not a viable course of action because prices will increase, less products will be available, and less people will benefit. I disagree wholeheartedly. We don't need all these products in the first place. Good quality products will last longer and will make us feel better because we will care more for them. No more coffees in despicable plastic cups; let us rediscover the pleasure of a china cup and a hand made spoon. A long lasting quality product may cost more but when amortized over a longer period of time it will actually be cheaper.
And again, do we really need 400 television channels broadcasting 24 hours a day? I guess that explains the barrage of highly foolish reality TV shows, talk shows and so on. A more informed consumer base would require probably less channels but of quality content. Quality must become the new point of reference and permeate all areas of society.
It has been done before. Think of the Italian city states and their role in promoting the Renaissance. Think of their pride in developing the Craft Guilds as vehicles for transmission of knowledge. That was a highly entrepreneurial historical period (within the context of an archaic society) which sparked mechanical discoveries, leaping cultural innovations and set the foundations of the future Western success. Quality was the driving force not quantity.
Capitalistic society needs a new Renaissance.
Here's a few ideas on how to proceed:
Improve the educational system. In the USA this is a measure that should be executed at the Federal level. More money should be directed for education (public or vouchers for private) and higher general standards should become the sanctioned rule. At the global level, the USA should promote higher standards of education in poorer countries and create an international coalition of developed countries based on international standards in education and research
Encourage specialized research and specialized craftsmanship. Make this process a more integrated part of the educational system.
Encourage free trade and free money flows. Free trade of goods, services and most intellectual capital is unquestionably the path to prosperity.
Negotiate higher environmental standards at the global level. This is not a choice we have; it is an inevitable negotiation we all have to face.
Regulate a clear division between the spiritual and secular spheres of society. Citizens' spirituality is welcome but it should not in any way interfere with the secular governing of society. While we achieved this division in the West a long time ago, it was never achieved in most of the Eastern world and it is a division that, regrettably, is blurring in our own society as well.
Along the lines of the previous point, de-leverage the ideological component in the political process. In the USA, it requires new rules of engagement to be less prone to media manipulation and more pragmatic oriented. Debates on issues and solutions, not on ideological hot air; require every candidate to have a specific platform to be allowed to run. Regulate the media exposure allowed to limit the manipulative factor, to reduce the costs (a billion dollars to run for President??!!??) and limit the ideological leveraging.
The executive powers should have at the Federal level main areas of competence such as defense, security, education and health coverage and a few others but more pragmatic decision making should be happening at the localized level.
In the end however, a new Renaissance will not spark out of regulations and mandates; it will blossom out of creativity and need, it will creep into each one of us out of a biological need to be better. People will wake up one morning thirsty for quality, hungry for knowledge. I think that moment is near.
The End of Capitalism as We Know It
by Davide Accomazzo
C/- safehaven
While the concepts of commodity fetishism by Karl Marx and conspicuous consumption by Thorstein Veblen were introduced initially as social byproducts inherent in the flawed behaviors of economic models such as the industrial revolution and unrestrained capitalism, it would actually seem that they are constant behavioral flaws of human kind and are only magnified by the economic system we choose as a social organism. Inefficientaccumulation of products and systemic resource waste is inherent with the human condition and present in most economic systems. Capitalism only provided a more acceptable vehicle for such genetic tendency. While it is now generally agreed that Capitalism offered the most efficient system to allocate scarce resources, in practice, Mass Capitalism only offered a short term better system to allocate such resources; and in the trade-off between raising the standard of living of million of people and misallocating resources the ultimate net result was on the positive side. However, the accelerating process of industrialization at the global level, the loop-sided world demographics and the speed at which society now reacts to changes thanks to new technologies calls into question the viability of this state of affair going forward.
The incessant need of Mass Capitalism to continuously increase levels of production pushes the system toward larger and larger misallocations of shrinking resources and lower standards of quality at the production and cultural level. Scarily, the rate of speed at which such process develops is also exponentially increasing.
Mass Capitalism helped raise the standard of living of more people around the world than any other social system ever did (while at the same time- just to mention a few recent other social systems - Socialism, Communism and...Nazism not only impoverished their subjects but also killed millions of them). For this reason we shall always be indebted to this system and recognize why it has worked so much better than other ways of social and economic organization so that we can improve upon it and avoid its potential future implosion.
For this analysis to begin, we need to understand what the main drivers are behind human behavior and social dynamics:
humans are a generally illogical and emotional species
humans have to act on imperfect information
the vast majority of humans acts on even lower standards of imperfect information due to inferior education/knowledge
humans are driven to social organization because it is the only way to guarantee security and eventually the expression of self
humans are creative
humans are driven first by self motives and then by social reasons
humans aspire to a higher living condition
most humans believe in some sort of cosmic order (religion) even though they do not fully understand it nor can they explain it
humans are inherently driven to reproduction.
If we agree that the above elements are indeed correct, it becomes evident that every successful economic and social form of organization will have to include the personal profit motive and the eventual expression of one's self. What seems to be evident is also the need to improve the general level of information available to all participants for their decision making process. This has been improved by new technologies such as internet and mobile communication but I believe we should reach for higher goals and a widespread improvement of education should be the overriding objective of every society.
Society should also promote personal security and systemic stability; these goals should be the main prerogative of every government. Stability and security are the most necessary elements of every successful society. Historically, this has revealed itself to be a sticky point; a point often manipulated by the powers that be (or the wannabe powers that be). Manipulation has often come with the mixing of a spiritual mandate along with secular execution. For this reason, it would seem prudent to increase the division between the personal spiritual sphere of each member of society and the secular business of governing the system. Furthermore, a new and better society should encourage a de-leveraging of the ideological component in the political process and move toward a socially beneficial pragmatism.
Lastly but certainly most importantly, if we agree that humans aspire to higher living conditions for themselves and for their offspring, the concept of basing our society on quality and not quantity becomes a natural evolution of our blueprint for a better future.
Mass Capitalism was a necessary condition at the onset of the industrial revolution; it was needed to put in motion the necessary critical mass to change the world (or at least the Western side of it) from a feudal and agricultural system to a mechanical and modern one. It was a little bit like lighting a fire in the woods by striking two stones against each other to produce that one spark. Mass Capitalism succeeded in changing the rules of production and reward. Meritocracy and not just land exploitation surely crept into the system; entrepreneurship became that never ending spark which propelled the West to the fastest improvement in standards of living ever recorded. More people were made part of the process and more goods were produced and so the story goes.
Unfortunately this process is not sustainable. Part victim of its own success and part spinning out of control, Mass Capitalism must morph into a better system. The never ending need of the system to produce more goods or services which eventually must be sold for ever lower margins has created two major distortions: a strain on physical resources and a watering down and misallocation of cultural resources.
The need to create massive economies of scale force fed products (often completely useless and unquestionably idiotic) down the throats of consumers. The introduction of the concept of a disposable society many years ago was the first unwelcome by-product of Mass Capitalism. The very disturbing element is the now accomplished osmosis of the disposable concept from production to the cultural sphere (Lindsay-Paris-Brittney bubble anyone?). If Mass Capitalism starts negatively interfering with the cultural foundations of society, consumers will become hopeless victims and unconscious executioners of their own demise: they will be demanding more and more unnecessary products/services that the system cannot sustain (due to resource constraints) and they will be making decisions based on lower and lower standards of information therefore fueling a suicidal spiral for the system.
But so far we have been rather esoteric and theoretical; let us analyze a few case studies to gain practical insight into our intuitions. A while ago I got lost in the Chinatown area in Los Angeles. While I was looking for the old Chinatown which is now being transformed into sort of a West Coast SOHO with numerous art galleries (quality) springing up everywhere, I actually ended up in the new Chinatown. The new part is much bigger and full of small and medium markets selling all kinds of junk (quantity). Needless to say that this area was much more popular and that the vast majority of the goods offered were nothing more than a sad waste of natural resources. I was especially surprised to see the mountain of absurdly low quality clothing items for sale and the disproportionate amount of idiotic toys for sale (disproportionate to the amount of kids in this town and the number of idiotic toys they should be wasting their time with daily). The really low prices clearly did not seem to take into consideration the real labor behind the making of these products or the resources needed. Economies of scale might be justifying those products but common sense and resource based accounting might disagree. Even if these products were more useful than they really are (and I bet that 95% of those absolutely un-wearable shirts I have seen will end up being destroyed or hopefully recycled into something else) this dynamic cannot continue. The low prices are guaranteed by the cheap labor of developing nations; such cheap labor and social acceptance of appalling living conditions will quickly dissipate and costs will rise tremendously. Disappearing natural resources will increase the speed of such cost adjustments.
But more to the point: WHY? Why wasting natural resources and human resources to justify economies of scale to produce unnecessary products?
Why instead can't we leverage the human capital available (as raw as it may be) to produce a new spark: Qualitative Capitalism. Why not trying to raise the standard of living of the majority of people on earth by helping them develop useful skills and helping them develop that innate human creativity. Why not create better products not more, better services not more mind numbing. Why not promote craftsmanship and pride instead of multitude and platitude?
Market fundamentalists will argue the above mentioned call for common sense is not a viable course of action because prices will increase, less products will be available, and less people will benefit. I disagree wholeheartedly. We don't need all these products in the first place. Good quality products will last longer and will make us feel better because we will care more for them. No more coffees in despicable plastic cups; let us rediscover the pleasure of a china cup and a hand made spoon. A long lasting quality product may cost more but when amortized over a longer period of time it will actually be cheaper.
And again, do we really need 400 television channels broadcasting 24 hours a day? I guess that explains the barrage of highly foolish reality TV shows, talk shows and so on. A more informed consumer base would require probably less channels but of quality content. Quality must become the new point of reference and permeate all areas of society.
It has been done before. Think of the Italian city states and their role in promoting the Renaissance. Think of their pride in developing the Craft Guilds as vehicles for transmission of knowledge. That was a highly entrepreneurial historical period (within the context of an archaic society) which sparked mechanical discoveries, leaping cultural innovations and set the foundations of the future Western success. Quality was the driving force not quantity.
Capitalistic society needs a new Renaissance.
Here's a few ideas on how to proceed:
Improve the educational system. In the USA this is a measure that should be executed at the Federal level. More money should be directed for education (public or vouchers for private) and higher general standards should become the sanctioned rule. At the global level, the USA should promote higher standards of education in poorer countries and create an international coalition of developed countries based on international standards in education and research
Encourage specialized research and specialized craftsmanship. Make this process a more integrated part of the educational system.
Encourage free trade and free money flows. Free trade of goods, services and most intellectual capital is unquestionably the path to prosperity.
Negotiate higher environmental standards at the global level. This is not a choice we have; it is an inevitable negotiation we all have to face.
Regulate a clear division between the spiritual and secular spheres of society. Citizens' spirituality is welcome but it should not in any way interfere with the secular governing of society. While we achieved this division in the West a long time ago, it was never achieved in most of the Eastern world and it is a division that, regrettably, is blurring in our own society as well.
Along the lines of the previous point, de-leverage the ideological component in the political process. In the USA, it requires new rules of engagement to be less prone to media manipulation and more pragmatic oriented. Debates on issues and solutions, not on ideological hot air; require every candidate to have a specific platform to be allowed to run. Regulate the media exposure allowed to limit the manipulative factor, to reduce the costs (a billion dollars to run for President??!!??) and limit the ideological leveraging.
The executive powers should have at the Federal level main areas of competence such as defense, security, education and health coverage and a few others but more pragmatic decision making should be happening at the localized level.
In the end however, a new Renaissance will not spark out of regulations and mandates; it will blossom out of creativity and need, it will creep into each one of us out of a biological need to be better. People will wake up one morning thirsty for quality, hungry for knowledge. I think that moment is near.
The End of Capitalism as We Know It
by Davide Accomazzo
C/- safehaven
The global slump has begun as poison spreads
Ambrose Evans-Pritchard: The global slump has begun as poison spreads
Submitted by cpowell on 07:53PM ET Sunday, May 11, 2008. Section: Daily Dispatches
By Ambrose Evans-Pritchard
The Telegraph, London
Monday, May 12, 2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/12/ccambr...
The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year.
As a "non-believer" in the instant rebound story, I am not easily shocked by gloomy reports. But the latest note by Standard & Poor's -- "The Bust After The Boom" -- gave me a fright.
The sick list is varied, though most for now are victims of the housing crash: Linens 'n Things, ($650 million), Kimball Hill ($703 million), Home Interiors ($310 million), French Lick Resorts ($142 million), Recycled Paper Greetings ($187 million), and Tropicana Entertainment ($2.49 billion).
As the Fed's latest loan survey makes clear, lenders have dropped the guillotine. With the usual delay, the poison is spreading from banks to the real world.
Diane Vazza, S&P's credit chief, says defaults are rising at almost twice the rate of past downturns. "Companies are heading into this recession with a much more toxic mix. Their margin for error is razor-thin," she said.
Two-thirds have a "speculative" rating, compared to 50 percent before the dotcom bust, and 40 percent in the early 1990s. The culprit is debt. "They ramped it up in the last 18 months of the credit boom. A lot of deals were funded that should not have been funded," she said.
Some 174 US companies are trading at "distress levels." Spreads on their bonds have rocketed above 1,000 basis points. This does not cover the carnage among smaller firms outside the rating universe.
The California city of Vallejo (117,000 inhabitants) has just made history by opting for Chapter 9 bankruptcy, the result of tax erosion from a 26 percent fall in local house prices. Half Moon Bay may be next.
"This is the tip of the iceberg. Everybody is going to line up for Chapter 9 in California," said John Moorlach, Orange County board chief.
US consumers are juggling plastic to put off their day of reckoning. The Fed survey said credit card debt had jumped 6.7 percent in the first quarter to $957 billion, or $6,000 per working American, despite usury rates near 20 percent.
"My guess is that many Americans continue to run up massive credit card debt because they have little intention of paying it off," said Peter Schiff at Euro Pacific Capital. Quite.
Thankfully, the Fed's monetary blitz has averted a depression. Emergency lending under the "unusual and exigent circumstances" clause of the Fed Act -- the nuclear Article 13 (3), unused since the 1930s -- has put a floor under the banking system.
There will be no "reset Armaggedon" as rates vault on honey-trap mortgages. Drastic Fed cuts -- to 2 percent from 5.25 percent in September -- have conjured away that disaster, at least.
One dreads to think what would have happened if Fed liquidationists (Plosser, Hoenig, Fisher) had prevailed, as they did in 1930 -- and still do in Euroland, where Germany's Axel Weber holds sway, and nobody of sense dares lead a mutiny.
Despite the rescue, US house prices are likely to fall 25 percent from peak to trough (Lehman Brothers, Goldman Sachs). We are barely half done, yet 10 to 12 million households are in negative equity already.
The bears at Societe Generale are going into Siberian hibernation, issuing an "Ice Age" alert. They have slashed exposure to global equities to a minimum 30 percent for the first time ever.
Their weighting of super-safe "AAA" government bonds has been raised to a maximum 50 percent. This is a bet on gruelling "Japanese" deflation. The bank expects equities to fall by 50 to 75 percent.
"Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist.
"We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.
Today's "bear rally" may live on into June. Don't count on it. Global bourses are no longer rising hand-in-hand with oil in exuberant celebration of liquidity relief (US, UK, and Canadian rate cuts).
Crude ceased to be a friend of equities when it reached around $110 a barrel. At last week's close of $126, it became an outright threat. The Bush rescue package -- $800 in rebate cheques per household -- has been rendered null and void by the latest spike. The average US home is now spending over 8 percent of income on energy or fuel.
OPEC is playing with fire by refusing to pump more oil to offset rebel attacks in Nigeria. The cartel's output drop of 350,000 barrels a day in April is a hostile act at this point.
But there again, why should Middle Eastern states help America as long as the White House keeps filling the US petroleum reserve to prepare for war with Iran? Bush is playing with fire too.
The oil spike will burn itself out. China has hit the buffers. With inflation at 8.5 percent, it risks political turmoil. Moreover, it has repeated Japan's mistakes in the 1980s, building too many factories shipping too many goods at slender margins into a crumbling export market.
Lehman Brothers' Sun Mingchun says China will tip over in the second half of this year. "With so much latent overcapacity, an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of financial and economic system," he said.
Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.
Submitted by cpowell on 07:53PM ET Sunday, May 11, 2008. Section: Daily Dispatches
By Ambrose Evans-Pritchard
The Telegraph, London
Monday, May 12, 2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/12/ccambr...
The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year.
As a "non-believer" in the instant rebound story, I am not easily shocked by gloomy reports. But the latest note by Standard & Poor's -- "The Bust After The Boom" -- gave me a fright.
The sick list is varied, though most for now are victims of the housing crash: Linens 'n Things, ($650 million), Kimball Hill ($703 million), Home Interiors ($310 million), French Lick Resorts ($142 million), Recycled Paper Greetings ($187 million), and Tropicana Entertainment ($2.49 billion).
As the Fed's latest loan survey makes clear, lenders have dropped the guillotine. With the usual delay, the poison is spreading from banks to the real world.
Diane Vazza, S&P's credit chief, says defaults are rising at almost twice the rate of past downturns. "Companies are heading into this recession with a much more toxic mix. Their margin for error is razor-thin," she said.
Two-thirds have a "speculative" rating, compared to 50 percent before the dotcom bust, and 40 percent in the early 1990s. The culprit is debt. "They ramped it up in the last 18 months of the credit boom. A lot of deals were funded that should not have been funded," she said.
Some 174 US companies are trading at "distress levels." Spreads on their bonds have rocketed above 1,000 basis points. This does not cover the carnage among smaller firms outside the rating universe.
The California city of Vallejo (117,000 inhabitants) has just made history by opting for Chapter 9 bankruptcy, the result of tax erosion from a 26 percent fall in local house prices. Half Moon Bay may be next.
"This is the tip of the iceberg. Everybody is going to line up for Chapter 9 in California," said John Moorlach, Orange County board chief.
US consumers are juggling plastic to put off their day of reckoning. The Fed survey said credit card debt had jumped 6.7 percent in the first quarter to $957 billion, or $6,000 per working American, despite usury rates near 20 percent.
"My guess is that many Americans continue to run up massive credit card debt because they have little intention of paying it off," said Peter Schiff at Euro Pacific Capital. Quite.
Thankfully, the Fed's monetary blitz has averted a depression. Emergency lending under the "unusual and exigent circumstances" clause of the Fed Act -- the nuclear Article 13 (3), unused since the 1930s -- has put a floor under the banking system.
There will be no "reset Armaggedon" as rates vault on honey-trap mortgages. Drastic Fed cuts -- to 2 percent from 5.25 percent in September -- have conjured away that disaster, at least.
One dreads to think what would have happened if Fed liquidationists (Plosser, Hoenig, Fisher) had prevailed, as they did in 1930 -- and still do in Euroland, where Germany's Axel Weber holds sway, and nobody of sense dares lead a mutiny.
Despite the rescue, US house prices are likely to fall 25 percent from peak to trough (Lehman Brothers, Goldman Sachs). We are barely half done, yet 10 to 12 million households are in negative equity already.
The bears at Societe Generale are going into Siberian hibernation, issuing an "Ice Age" alert. They have slashed exposure to global equities to a minimum 30 percent for the first time ever.
Their weighting of super-safe "AAA" government bonds has been raised to a maximum 50 percent. This is a bet on gruelling "Japanese" deflation. The bank expects equities to fall by 50 to 75 percent.
"Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist.
"We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.
Today's "bear rally" may live on into June. Don't count on it. Global bourses are no longer rising hand-in-hand with oil in exuberant celebration of liquidity relief (US, UK, and Canadian rate cuts).
Crude ceased to be a friend of equities when it reached around $110 a barrel. At last week's close of $126, it became an outright threat. The Bush rescue package -- $800 in rebate cheques per household -- has been rendered null and void by the latest spike. The average US home is now spending over 8 percent of income on energy or fuel.
OPEC is playing with fire by refusing to pump more oil to offset rebel attacks in Nigeria. The cartel's output drop of 350,000 barrels a day in April is a hostile act at this point.
But there again, why should Middle Eastern states help America as long as the White House keeps filling the US petroleum reserve to prepare for war with Iran? Bush is playing with fire too.
The oil spike will burn itself out. China has hit the buffers. With inflation at 8.5 percent, it risks political turmoil. Moreover, it has repeated Japan's mistakes in the 1980s, building too many factories shipping too many goods at slender margins into a crumbling export market.
Lehman Brothers' Sun Mingchun says China will tip over in the second half of this year. "With so much latent overcapacity, an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of financial and economic system," he said.
Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.
Buy Gold Now
With foreign-financed U.S. debt levels continuing to soar, an intensifying real estate bust, and other signs of economic exhaustion following one of the longest booms in history, the probability of a dollar crash is now openly talked about in financial circles. Yet gold—the ultimate escape from financial risk throughout human history—remains one of the least-owned financial assets, representing less than 2% of the typical investment portfolio.
Pushing aside Wall Street's perennial aversion to gold, in Buy Gold Now, investment expert Shayne McGuire skillfully reveals why the opportunity to profit from this precious metal, as well as protect yourself from risk, has rarely been better. Long forgotten, the 2,300% gold surge in the 1970s—when debt was one-tenth the level present in our economy today—is a return not even the 1990s NASDAQ could beat.
Masterfully researched and written in a straightforward style, Buy Gold Now makes a case for buying gold as protection against the rising risks of an unprecedented global currency crisis and as a profitable investment vehicle. It examines the country's current financial situation from a historical perspective, addressing some of the alarming issues that many economists today are pointing to with concern.
Shayne McGuire is the Director of Global Research at Teacher Retirement System of Texas, one of the nation's largest pension funds with $115 billion in assets. With 15 years of international financial experience, McGuire has managed a $2 billion European equity portfolio and was ranked among the best Latin American analysts by Institutional Investor in 1995 and 1996. McGuire graduated from Fordham University and holds a Masters in History and an MBA from the University of Texas at Austin. He lives in Austin, Texas with his family.
audio interview
Pushing aside Wall Street's perennial aversion to gold, in Buy Gold Now, investment expert Shayne McGuire skillfully reveals why the opportunity to profit from this precious metal, as well as protect yourself from risk, has rarely been better. Long forgotten, the 2,300% gold surge in the 1970s—when debt was one-tenth the level present in our economy today—is a return not even the 1990s NASDAQ could beat.
Masterfully researched and written in a straightforward style, Buy Gold Now makes a case for buying gold as protection against the rising risks of an unprecedented global currency crisis and as a profitable investment vehicle. It examines the country's current financial situation from a historical perspective, addressing some of the alarming issues that many economists today are pointing to with concern.
Shayne McGuire is the Director of Global Research at Teacher Retirement System of Texas, one of the nation's largest pension funds with $115 billion in assets. With 15 years of international financial experience, McGuire has managed a $2 billion European equity portfolio and was ranked among the best Latin American analysts by Institutional Investor in 1995 and 1996. McGuire graduated from Fordham University and holds a Masters in History and an MBA from the University of Texas at Austin. He lives in Austin, Texas with his family.
audio interview
10 May 2008
Jokers Down Under - avarice and greed for four pilliars
“Greed and avarice, avarice and greed” intones Dr Fell, the new persona of Hannibal Lecter as Anthony Hopkins again brings this wonderful character to life in Robert Harris’ “Hannibal”. Hannibal’s soliloquy at the Salone dei Cinquecento in the Palazzo Vecchio, Roma takes us on a tour of historical personifications of these samples of the Seven Deadly Sins as he traces artistic representations of the consequences of avarice and greed from Judas Iscariot to the fabled Medicis, bankers to Florence and rulers of Tuscany from the 13th to the18th century, patrons of the arts and architecture.
While the Medici family are largely lauded for producing three Popes, Leo X and Clement VII in the 16th century and later Leo XI who was elected Pope in April 1605 and died within the month, their real power and lasting influence on politics, art and architecture came from their pre-eminence in European banking with the Medici Bank being a European powerhouse and making the Medicis, for a time the wealthiest family in Europe. With great wealth came great power as the Medicis became Dukes of Florence and extended their influence through Tuscany and all Italy.
The Pazzi conspiracy to which Hannibal referred occurred in April 1478. Lesser rivals of the Medici, the Pazzi were caught up in a conspiracy to replace the Medici as de facto rulers of Tuscany with a nephew of Francesco della Rovere, who was reigning as Pope Sixtus IV. Power politics, often ruthless in the Italian Renaissance, as now, was the motive.
The Salviti clan, Papal bankers in Florence together with Francisdo de’ Pazzi, planned to assassinate the ruling Medicis, Lorenzo and Giuliano. On Sunday, April 26, 1478, during High Mass at the Duomo before a crowd of 10,000, Giuliano de' Medici was stabbed 19 times by a gang that included a priest, and bled to death on the cathedral floor. His brother Lorenzo escaped with serious, but non life-threatening wounds. The coup d'état failed, and the enraged Florentines seized and killed the conspirators. Jacopo de' Pazzi was tossed from a window, finished off by the mob, dragged naked through the streets and thrown into the Arno River. The Pazzi family were stripped of their possessions in Florence. Every vestige of their name effaced. Salviati was hanged on the walls of the Palazzo della Signoria. Although Lorenzo appealed to the crowd not to exact summary justice, many of the conspirators, as well as many people accused of being conspirators, were killed (source Wikipedia).
Greed and avarice followed to its logical conclusion becomes the backbone of modern capitalism, where businesses squabble for benefits that inherently transfer wealth from nations and communities to individuals. The real “Wealth of Nations” is systematically transferred to preferred individuals through patronage which stems from power.
The mechanisms are varied but are always a variant of economic or legal barriers to entry. The Pazzi conspiracy was preceded by Pope Sixtus granting the alum monopoly at Tolfa, Italy to the Pazzi family as a reward for financing his purchase of the stronghold of Imola, a strategic holding on the Papal-Tuscan border. Alum was an essential ingredient in fabric dyeing in the textile trade that was central to the Florentine economy. Papal power, backed by real military might, in this case the army of Ferdinand I, King of Naples, enforced the right to grant valuable monopolies. Greed and avarice lead to murder. Dr Fell was quite right!
Greed and avarice are still the drivers of banks and bankers everywhere. In Australia, four major banks, the Commonwealth, ANZ, Westpac and NAB are the dominant players. The Federal governments’ Four Pillars policy restricts mergers and acquisitions of this group so they are virtually a protected species since it is functionally impossible to build a store front banking group from the street up. Nothing about this group is especially meritorious other than their abilities to remunerate their officers with absurd rewards for their strikingly limited abilities, and their dysfunctional capacity to learn nothing from history.
Wikipedia carries this pithy comment under the Four Pillars:
The abolition of banking restrictions increased credit availability amid the asset price boom in the 'roaring 80s', fuelling uncontrolled credit lending and poor screening practices as banks geared up with ambitious plans to maintain competitiveness. This led many banks to accumulate enormous bad debts following worldwide collapse of asset prices in the 1990s
Not so long ago, but they’re at it again!
Dwellers Down Under are so busy enjoying the good life of sports, sun and booze in the lucky country that they have developed a precise recipe for dealing with matters either unpleasant or more complicated than reading yesterday’s horse racing results. They ignore them. One is forced to the conclusion that the financial media too is spending too many hours in the sun instead of focusing on the banks, the jokers in the pack.
There is not the focused journalistic attention on banks and banking matters that this sector of the financial community deserves, so news when it comes is elusive. Reuters has plenty but Aussie newspapers just don’t think it rates. The announcement by ANZ Bank last week that it had “securitized internally A$11.2 billion ($10.6 billion) of residential mortgage loans to give it greater access to liquidity if needed” is simply code that it is taking advantage of an unheralded change late last year by the Reserve Bank of Australia to make bank backed mortgage securities eligible for repos. What the terms and conditions of these extended repos might be is anyone’s guess as RBA simply refuses to disclose those details but it is an immensely popular measure with banks as Reuters continues:
ANZ is the third bank to adopt the approach, following Westpac Banking Corp which earlier in the year converted A$10.6 billion of mortgages into securities that became repo-eligible with the Reserve Bank of Australia. Bank of Queensland followed suit in March with a A$500 million similar issue. Late last year, the RBA widened the type of assets it would accept as collateral in repurchase agreements to promote liquidity in financial markets. The new list of collateral included certain types of residential mortgage-backed securities. Issuance of RMBS in Australia has slumped to zero in 2008, from A$57 billion in 2007.
Other Reuters news shows that minor banking groups such as St George and Macquarie Securities have also followed the trend to “securitisation not for sale to investors” (impossible), but to latch on to the Reserve Bank’s ever generous teats! This from Robert Gottliebsen:
Internal securitization in Australia this year now stands at $50 billion, almost as much as the entire volume of RMBS sold to investors last year. Internal securitization consists of converting mortgages into securities that become eligible for repurchase agreements with the Reserve Bank of Australia. Last year, the RBA widened the type of assets it would accept as collateral at its repo operations, including certain types of RMBS, to promote liquidity in financial markets.
WOW! So that’s how they’re doing it. Of course this conduct is promoted by banks as just another prudent course of action they are taking as deeper contingency planning, but yesterday’s announcement by the Commonwealth Bank, the daddy of them all, puts the lie to this subterfuge. From Melbourne’s The Age Newspaper, Business Day:
CommBank jostles for freebie. The Commonwealth Bank is positioning itself to take a giant freebie from the taxpayer by packaging $15.6 billion of its mortgages to swap for cash from the Reserve Bank. The aim is to shore up its liquidity. The bank said it had created a portfolio of $15.6 billion residential mortgage backed securities (RMBS) through its Medallion Trust. ''These RMBS will be held by the group and if required, the Class A notes can be used for repurchase agreements with the Reserve Bank of Australia (RBA) to generate up to an additional $12.25 billion of liquidity for the group,'' said the statement.
Last month the RBA followed its central bank counterparts in the US and Britain as a white knight for banks struggling to fund their structured mortgage products, The RBA does not comment on particular counterparties and so it is left for the market to speculate on both the type and the size of its various plunges, and of course the counterparties involved. Now, post sub-prime, the CBA is doing it not to sell but to create securities which it can pledge to the central bank. The indirect story is of course that anyone - anyone at all - who is reliant on the securitisation market for funding is not looking good - and the central bank has become the liquidity provider of last resort. For the banking market, what is particularly worrying about this announcement is the name on the top of the release: Commonwealth Bank of Australia.
So you can see the implied law of consequences in the free enterprise system has in fact been repealed. At the repo rate current Down Under, banks and associated hangers on under the patronage of the Reserve Bank of Australia are having the whole of their annual fund raising requirements effectively provided by the taxpayers at highly concessional rates and without even the spotlight of public scrutiny on this sorry state of affairs. The unspoken message is that absent the RBA largess, these financial institutions would be going with begging bowl outstretched to their Arab or Chinese friends in search of a bailout by a sovereign wealth fund. That would come at a very much higher price than the RBA asks. Reasonable questions such as the impairment rates in these supposed securities are not addressed because they simply haven’t been raised by press or legislators.
Now, to add stupidity to incredulity comes this stunning announcement from the Australian Securitisation Forum as reported by Reuters:
ASF is calling for the creation of an agency that would package mortgages into government-guaranteed debt, making it less risky and so more attractive to buyers. "The proposal aims to address housing affordability and accessibility, enhance mortgage provider competition, increase market liquidity and improve financial system solvency," says the ASF, an industry body representing more than 120 banks, non-bank lenders and other organisations. Such an agency would also be expected to pay less to borrow, thus reducing the costs of mortgages for many stretched Australian homebuyers, say proponents.
What rubbish! The proposal is just another self serving attempt by ASF members to get its hands into the taxpayers pockets and line its own with some more risk free scams. Since when did banks care about housing affordability. These are the clowns who have driven the housing market to breaking point with their own irresponsible lending practices. And it’s hardly original. The University of Melbourne Business School floated a more direct version in a paper entitled “Aussie Mac-A policy initiative for the Australian Government to protect households and the financial system against current and future credit crises”. It is filed as “Idea Pitch No 1” which gives you the right idea about how these lunatic ideas take shape. In a nice counterpoint of timing, the biggest agency, Fannie Mae, reported on Tuesday a massive loss on the slumping housing market forcing it to seek $6 billion in capital. The final word on this continuing farce goes to the Aussie banker reported as saying "The assumption is that something is broken and needs to be fixed, but problems are temporary, it's a transition period during which some will survive and others won't, but the market will take care of itself." Of course bankers insist that free market discipline prevail on others whilst they make sure they are insulated from anything so dire.
Where, and on what planet is it equitable for banks and financial intermediaries, the least moral and least deserving members of the business community to be cushioned from market discipline whilst having the cheek to insist that others face the market’s wrath alone? Truly a conspiracy worthy of a Medici or a Pazzi. Dr Fell knew how to deal with them!
Avarice and greed; greed and avarice.
While the Medici family are largely lauded for producing three Popes, Leo X and Clement VII in the 16th century and later Leo XI who was elected Pope in April 1605 and died within the month, their real power and lasting influence on politics, art and architecture came from their pre-eminence in European banking with the Medici Bank being a European powerhouse and making the Medicis, for a time the wealthiest family in Europe. With great wealth came great power as the Medicis became Dukes of Florence and extended their influence through Tuscany and all Italy.
The Pazzi conspiracy to which Hannibal referred occurred in April 1478. Lesser rivals of the Medici, the Pazzi were caught up in a conspiracy to replace the Medici as de facto rulers of Tuscany with a nephew of Francesco della Rovere, who was reigning as Pope Sixtus IV. Power politics, often ruthless in the Italian Renaissance, as now, was the motive.
The Salviti clan, Papal bankers in Florence together with Francisdo de’ Pazzi, planned to assassinate the ruling Medicis, Lorenzo and Giuliano. On Sunday, April 26, 1478, during High Mass at the Duomo before a crowd of 10,000, Giuliano de' Medici was stabbed 19 times by a gang that included a priest, and bled to death on the cathedral floor. His brother Lorenzo escaped with serious, but non life-threatening wounds. The coup d'état failed, and the enraged Florentines seized and killed the conspirators. Jacopo de' Pazzi was tossed from a window, finished off by the mob, dragged naked through the streets and thrown into the Arno River. The Pazzi family were stripped of their possessions in Florence. Every vestige of their name effaced. Salviati was hanged on the walls of the Palazzo della Signoria. Although Lorenzo appealed to the crowd not to exact summary justice, many of the conspirators, as well as many people accused of being conspirators, were killed (source Wikipedia).
Greed and avarice followed to its logical conclusion becomes the backbone of modern capitalism, where businesses squabble for benefits that inherently transfer wealth from nations and communities to individuals. The real “Wealth of Nations” is systematically transferred to preferred individuals through patronage which stems from power.
The mechanisms are varied but are always a variant of economic or legal barriers to entry. The Pazzi conspiracy was preceded by Pope Sixtus granting the alum monopoly at Tolfa, Italy to the Pazzi family as a reward for financing his purchase of the stronghold of Imola, a strategic holding on the Papal-Tuscan border. Alum was an essential ingredient in fabric dyeing in the textile trade that was central to the Florentine economy. Papal power, backed by real military might, in this case the army of Ferdinand I, King of Naples, enforced the right to grant valuable monopolies. Greed and avarice lead to murder. Dr Fell was quite right!
Greed and avarice are still the drivers of banks and bankers everywhere. In Australia, four major banks, the Commonwealth, ANZ, Westpac and NAB are the dominant players. The Federal governments’ Four Pillars policy restricts mergers and acquisitions of this group so they are virtually a protected species since it is functionally impossible to build a store front banking group from the street up. Nothing about this group is especially meritorious other than their abilities to remunerate their officers with absurd rewards for their strikingly limited abilities, and their dysfunctional capacity to learn nothing from history.
Wikipedia carries this pithy comment under the Four Pillars:
The abolition of banking restrictions increased credit availability amid the asset price boom in the 'roaring 80s', fuelling uncontrolled credit lending and poor screening practices as banks geared up with ambitious plans to maintain competitiveness. This led many banks to accumulate enormous bad debts following worldwide collapse of asset prices in the 1990s
Not so long ago, but they’re at it again!
Dwellers Down Under are so busy enjoying the good life of sports, sun and booze in the lucky country that they have developed a precise recipe for dealing with matters either unpleasant or more complicated than reading yesterday’s horse racing results. They ignore them. One is forced to the conclusion that the financial media too is spending too many hours in the sun instead of focusing on the banks, the jokers in the pack.
There is not the focused journalistic attention on banks and banking matters that this sector of the financial community deserves, so news when it comes is elusive. Reuters has plenty but Aussie newspapers just don’t think it rates. The announcement by ANZ Bank last week that it had “securitized internally A$11.2 billion ($10.6 billion) of residential mortgage loans to give it greater access to liquidity if needed” is simply code that it is taking advantage of an unheralded change late last year by the Reserve Bank of Australia to make bank backed mortgage securities eligible for repos. What the terms and conditions of these extended repos might be is anyone’s guess as RBA simply refuses to disclose those details but it is an immensely popular measure with banks as Reuters continues:
ANZ is the third bank to adopt the approach, following Westpac Banking Corp which earlier in the year converted A$10.6 billion of mortgages into securities that became repo-eligible with the Reserve Bank of Australia. Bank of Queensland followed suit in March with a A$500 million similar issue. Late last year, the RBA widened the type of assets it would accept as collateral in repurchase agreements to promote liquidity in financial markets. The new list of collateral included certain types of residential mortgage-backed securities. Issuance of RMBS in Australia has slumped to zero in 2008, from A$57 billion in 2007.
Other Reuters news shows that minor banking groups such as St George and Macquarie Securities have also followed the trend to “securitisation not for sale to investors” (impossible), but to latch on to the Reserve Bank’s ever generous teats! This from Robert Gottliebsen:
Internal securitization in Australia this year now stands at $50 billion, almost as much as the entire volume of RMBS sold to investors last year. Internal securitization consists of converting mortgages into securities that become eligible for repurchase agreements with the Reserve Bank of Australia. Last year, the RBA widened the type of assets it would accept as collateral at its repo operations, including certain types of RMBS, to promote liquidity in financial markets.
WOW! So that’s how they’re doing it. Of course this conduct is promoted by banks as just another prudent course of action they are taking as deeper contingency planning, but yesterday’s announcement by the Commonwealth Bank, the daddy of them all, puts the lie to this subterfuge. From Melbourne’s The Age Newspaper, Business Day:
CommBank jostles for freebie. The Commonwealth Bank is positioning itself to take a giant freebie from the taxpayer by packaging $15.6 billion of its mortgages to swap for cash from the Reserve Bank. The aim is to shore up its liquidity. The bank said it had created a portfolio of $15.6 billion residential mortgage backed securities (RMBS) through its Medallion Trust. ''These RMBS will be held by the group and if required, the Class A notes can be used for repurchase agreements with the Reserve Bank of Australia (RBA) to generate up to an additional $12.25 billion of liquidity for the group,'' said the statement.
Last month the RBA followed its central bank counterparts in the US and Britain as a white knight for banks struggling to fund their structured mortgage products, The RBA does not comment on particular counterparties and so it is left for the market to speculate on both the type and the size of its various plunges, and of course the counterparties involved. Now, post sub-prime, the CBA is doing it not to sell but to create securities which it can pledge to the central bank. The indirect story is of course that anyone - anyone at all - who is reliant on the securitisation market for funding is not looking good - and the central bank has become the liquidity provider of last resort. For the banking market, what is particularly worrying about this announcement is the name on the top of the release: Commonwealth Bank of Australia.
So you can see the implied law of consequences in the free enterprise system has in fact been repealed. At the repo rate current Down Under, banks and associated hangers on under the patronage of the Reserve Bank of Australia are having the whole of their annual fund raising requirements effectively provided by the taxpayers at highly concessional rates and without even the spotlight of public scrutiny on this sorry state of affairs. The unspoken message is that absent the RBA largess, these financial institutions would be going with begging bowl outstretched to their Arab or Chinese friends in search of a bailout by a sovereign wealth fund. That would come at a very much higher price than the RBA asks. Reasonable questions such as the impairment rates in these supposed securities are not addressed because they simply haven’t been raised by press or legislators.
Now, to add stupidity to incredulity comes this stunning announcement from the Australian Securitisation Forum as reported by Reuters:
ASF is calling for the creation of an agency that would package mortgages into government-guaranteed debt, making it less risky and so more attractive to buyers. "The proposal aims to address housing affordability and accessibility, enhance mortgage provider competition, increase market liquidity and improve financial system solvency," says the ASF, an industry body representing more than 120 banks, non-bank lenders and other organisations. Such an agency would also be expected to pay less to borrow, thus reducing the costs of mortgages for many stretched Australian homebuyers, say proponents.
What rubbish! The proposal is just another self serving attempt by ASF members to get its hands into the taxpayers pockets and line its own with some more risk free scams. Since when did banks care about housing affordability. These are the clowns who have driven the housing market to breaking point with their own irresponsible lending practices. And it’s hardly original. The University of Melbourne Business School floated a more direct version in a paper entitled “Aussie Mac-A policy initiative for the Australian Government to protect households and the financial system against current and future credit crises”. It is filed as “Idea Pitch No 1” which gives you the right idea about how these lunatic ideas take shape. In a nice counterpoint of timing, the biggest agency, Fannie Mae, reported on Tuesday a massive loss on the slumping housing market forcing it to seek $6 billion in capital. The final word on this continuing farce goes to the Aussie banker reported as saying "The assumption is that something is broken and needs to be fixed, but problems are temporary, it's a transition period during which some will survive and others won't, but the market will take care of itself." Of course bankers insist that free market discipline prevail on others whilst they make sure they are insulated from anything so dire.
Where, and on what planet is it equitable for banks and financial intermediaries, the least moral and least deserving members of the business community to be cushioned from market discipline whilst having the cheek to insist that others face the market’s wrath alone? Truly a conspiracy worthy of a Medici or a Pazzi. Dr Fell knew how to deal with them!
Avarice and greed; greed and avarice.
4 May 2008
Revisting Financial Arbitrage Capitalism
I’ll admit to occasionally being annoyed by the clan over at Pimco. Clearly, there’s more than a little envy at work here. They are extremely smart, master market operators and skilled theoreticians. Those guys are really good at articulating the financial issue de jour, as well as backing it up with some reasonable-sounding solutions. But do they somehow not appreciate that they are part of the problem?
Pimco is – here we go again - the most vocal Wall Street proponent for strong reflationary policy measures and government interventions to battle so-called “deflation” risk. Back in 2002, they were the head cheerleader for reflationary measures that historians will surely view as a Monetary Policy Blunder for the Ages. Then, the deflation threat was said to reside with downside risk to the general price level; today it’s with sinking home prices. Overwhelming force is again prescribed to fight the latest symptoms, while sidestepping diagnosis of the underlying ailment.
Furthermore, as someone who incorporates Minskian analysis deep into my analytical framework, I view their (and others’) application of Minsky’s work as largely superficial - and rather self-serving at that. For one, the often referred Minskian concept of “stability is destabilizing” simply hasn’t been relevant to the U.S. Credit system in several decades. More importantly, implementing the Keynesian/Minskian policy toolkit to perpetuate Bubbles and existing malignant structures and processes – in contrast to instruments that would help buttress the system through arduous post-Bubble adjustment periods – has been a momentous analytical and policymaking failure over recent years.
I believe strongly that if Hyman Minsky were alive today he would see the huge investment fund managers, the hedge fund community, and Wall Street firms as the fundamental force behind today’s Acute Financial and Economic Fragility. He would surely see the current financial order as dysfunctional and unsustainable. And I am quite confident he would view the current trajectory of financial system and policy development as laying the groundwork for the next crash and depression.
Back in late-2001, I titled a Bulletin “Financial Arbitrage Capitalism.” I coined this term in what I referred to at the time as “updating” Minsky’s stages of financial Capitalism. Minsky theorized that a troubling stage of “Money Manager Capitalism” had evolved from the earlier manifestations of Manager Capitalism, Financial Capitalism, and Commercial Capitalism.
Minksy on “Money Manager Capitalism:” “The emergence of return and capital-gains-oriented block of managed money resulted in financial markets once again being a major influence in determining the performance of the economy. However, unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits… As managed money grew in relative importance, more and more of the market for financial instruments was characterized by position-taking by financial intermediaries. These positions were bank-financed. The main financial houses became highly-leveraged dealers in securities, beholden to banks for continued refinancing. A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilities of the corporations were fully priced in the financial market...The question of whether a financial structure that commits a large part of cash flows to debt validation leads to a debacle such as took place between 1929 and 1933 is now an open question…
“In the present stage of development the financiers are not acting as the ephors of the economy, editing the financing that takes place so that the capital development of the economy is promoted. Today’s managers of money are but little concerned with the development of the capital asset of an economy. Today’s narrowly-focused financiers do not conform to Schumpeter’s vision of bankers as the ephors of capitalism who assure that finance serves progress. Today’s financial structure is more akin to Keynes’ characterization of the financial arrangements of advanced capitalism as a casino. The Schumpeter-Keynes vision of the economy as evolving under the stimulus of perceived profit possibilities remains valid. However, we must recognize that evolution is not necessarily a progressive process: the financing evolution of the past decade may well have been retrograde.” (Minsky, 1993)
I am even more convinced today than some six years ago that a whole new financial structure has evolved – and that it is definitely “retrograde.” The title “Financial Arbitrage Capitalism” is fitting for a Credit system and economy now dominated by an expansive “leveraged speculating community” seeking profits from variations and permutations of “borrowing cheap and lending dear”; by bond and investment fund managers whose entire focus is beating some indexed return; by rapidly expanding Wall Street balance sheets and influence; and by the entire wave of new Credit instruments, derivatives, and sophisticated models and strategies used for the paramount purpose of capturing “above-market” returns and resulting huge financial rewards.
The current system has experienced a broad transformation to a Credit mechanism dominated by market-based instruments, in contrast to the traditional predominant position held by the banking system all the way through Minsky’s “Money Manager” era. Today, the financial apparatus is “beholden” – not to a coherent banking system but instead - to an ambiguous thing called “marketplace liquidity” and the unwavering confidence such a mechanism requires. Importantly, momentous changes to the prevailing incentive system are also consistent with designating a new phase of Minskian Capitalism. Late in Minsky’s life, he expounded upon the role rising stock and corporate debt prices were playing in dictating various behaviors in the Credit system, markets and real economy. With “Financial Arbitrage Capitalism,” the bounty of seemingly limitless (until recently) speculative profits has created a reward system encouraging unprecedented debt creation, leveraging, and myriad forms and layers of financial intermediation.
I have labeled this current stage with the Minsky term “retrograde” specifically because only through the expansion of all facets of this Credit Bubble – debt creation, leveraging, and risk intermediation – will adequate new “profits” and debt service capacities validate and sustain the ever-increasing layers of debt and financial “arbitrage.” Minsky noted a fundamental weakness of Money Manager Capitalism: “Unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits.” Financial Arbitrage Capitalism takes these defects to an entirely new level. Today, the major financial incentives dictating behavior are largely disengaged from the process of “capital development” and, furthermore, operate completely divorced from real economic profits overall. Or, more simply stated, current rewards spur the over-expansion of non-productive Credit – specifically debt instruments not supported by underlying wealth-creating assets (think subprime and high-yielding mortgages generally).
Mortgage Credit is the bedrock of “Financial Arbitrage Capitalism.” The Mortgage Finance Bubble provided – and continues offering to this day - the greatest bounty of speculative profits the financial world has known. It comes as no surprise that Pimco and Wall Street are these days fixated on home values and the pricing of mortgage-backed and mortgage-related securities and derivatives. That Trillions of real and financial resources were so badly misallocated through the Mortgage Finance Bubble years will definitely not dissuade the argument that Trillions more will be necessary to avert the scourge of “deflation”. Apparently, the more egregious the misallocation and resulting impairment to the Financial and Economic Structures the more imperative it is to throw more non-productive Credit Inflation at the problem – the mandatory fight to avert “deflation”.
For some time now, it has been my view that “Financial Arbitrage Capitalism” was sowing the seeds of its own destruction. The incentive structures were so deeply flawed; the analyses of the inner workings of this system were critically flawed; and policymaking was devastatingly flawed. The combination of rampant non-productive Credit growth, unprecedented system leveraging and speculative excesses, and resulting economic maladjustment ensured untenable system fragility. Still, the more apparent the underlying fragility becomes the greater the impetus to sustain the existing Financial and Economic Order. And the more conspicuous previous analytical and policy mistakes appear the greater the tendency to see no other alternative than to compound them. Mistakes beget ever-bigger mistakes. There is a desperate need to step back and come to grips with how dysfunctional this has all become.
Some seven or so weeks ago the existing Financial and Economic Order was in perilous jeopardy. Wall Street-backed finance was collapsing, and this implosion was about to invalidate our system’s underlying debt structure as well as the structure of the underlying Bubble Economy. But the Federal Reserve and Washington policymakers stepped in with radical measures. These included the Federal Reserve’s guarantee of ample liquidity for the Wall Street firms and virtually limitless “marketplace liquidity” throughout, as well as explicit and implicit federal backing for much of our mortgage Credit system. It may not have appeared momentous to most, but it basically placed Federal Reserve and federal government backing on trillions of securities and market liquidity risk more generally. In Minsky terminology, these measures at least temporarily “validated” the existing structure of “Financial Arbitrage Capitalism.”
Will policymaking succeed over the intermediate- and long-term? Not a chance. Policymakers do today retain capacity to convince the marketplace of their power to inflate the value of debt securities and asset prices more generally. But reflationary polices and other assurances will not rescue the system, specifically because there is today nothing to stem the ongoing distortions to the underlying real economy. Validating the current structure of Financial Arbitrage Capitalism simply perpetuates the same dysfunctional incentives that got us into this mess. It may in the short-term spur the necessary Credit growth to buoy household incomes, corporate cash-flows and profits, government revenues, and securities and asset prices – but it will add relatively little in the way of real economic wealth creating capacity. And, in the end, it’s only real economy fundamentals that will determine the soundness and sustainability of a system’s Credit and Financial Structure.
Additional non-productive debt growth will definitely not alleviate the Acute Fragility associated with “Ponzi Finance” Credit system dynamics. Additional non-productive debt growth will also not stabilize dollar devaluation, nor will it help in stabilizing myriad problems at home and abroad associated with our monstrous Current Account Deficits. Instead, any extension of this period of Financial Arbitrage Capitalism will ensure the prolonging of borrowing and consuming excess, the gross misallocation of resources, massive trade deficits, a ballooning international pool of unwieldy speculative finance, and even wilder Global Monetary Disorder.
Indeed, Washington’s validation of the current dysfunctional Credit system structure could very well lay the groundwork for extreme global price distortions, volatility, and social/political unrest. On the current course of things, it’s difficult for me to not think in terms of NASDAQ 1999 or subprime 2006. Throw additional liquidity on overheated Credit, inflationary, and speculative “biases” and be prepared for the spectacular. When Financial Arbitrage Capitalism’s excesses were spurring acute U.S. securities market inflation, the system enjoyed a period of perceived rising wealth to go with a boom in Wall Street securities issuance (to help offset inflated demand). When this Structure’s excesses were directed at the Mortgage Finance Bubble, the upshots were inflating home prices along with attendant construction and consumption booms. Now, however, with acute inflationary effects prevailing throughout global markets for food, energy, and commodities, one should be prepared for the likes of problematic supply bottlenecks and shocks, hoarding, trade frictions and interruptions, and generally heightened geopolitical instability.
I argued back in 2002 that the overriding systemic issue was not “deflation” but rather myriad risks associated with an unfolding U.S. Credit Bubble. Now, some years later, these risks have expanded alarmingly, as runaway Credit Bubbles have ballooned both at home and abroad.
Pimco is – here we go again - the most vocal Wall Street proponent for strong reflationary policy measures and government interventions to battle so-called “deflation” risk. Back in 2002, they were the head cheerleader for reflationary measures that historians will surely view as a Monetary Policy Blunder for the Ages. Then, the deflation threat was said to reside with downside risk to the general price level; today it’s with sinking home prices. Overwhelming force is again prescribed to fight the latest symptoms, while sidestepping diagnosis of the underlying ailment.
Furthermore, as someone who incorporates Minskian analysis deep into my analytical framework, I view their (and others’) application of Minsky’s work as largely superficial - and rather self-serving at that. For one, the often referred Minskian concept of “stability is destabilizing” simply hasn’t been relevant to the U.S. Credit system in several decades. More importantly, implementing the Keynesian/Minskian policy toolkit to perpetuate Bubbles and existing malignant structures and processes – in contrast to instruments that would help buttress the system through arduous post-Bubble adjustment periods – has been a momentous analytical and policymaking failure over recent years.
I believe strongly that if Hyman Minsky were alive today he would see the huge investment fund managers, the hedge fund community, and Wall Street firms as the fundamental force behind today’s Acute Financial and Economic Fragility. He would surely see the current financial order as dysfunctional and unsustainable. And I am quite confident he would view the current trajectory of financial system and policy development as laying the groundwork for the next crash and depression.
Back in late-2001, I titled a Bulletin “Financial Arbitrage Capitalism.” I coined this term in what I referred to at the time as “updating” Minsky’s stages of financial Capitalism. Minsky theorized that a troubling stage of “Money Manager Capitalism” had evolved from the earlier manifestations of Manager Capitalism, Financial Capitalism, and Commercial Capitalism.
Minksy on “Money Manager Capitalism:” “The emergence of return and capital-gains-oriented block of managed money resulted in financial markets once again being a major influence in determining the performance of the economy. However, unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits… As managed money grew in relative importance, more and more of the market for financial instruments was characterized by position-taking by financial intermediaries. These positions were bank-financed. The main financial houses became highly-leveraged dealers in securities, beholden to banks for continued refinancing. A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilities of the corporations were fully priced in the financial market...The question of whether a financial structure that commits a large part of cash flows to debt validation leads to a debacle such as took place between 1929 and 1933 is now an open question…
“In the present stage of development the financiers are not acting as the ephors of the economy, editing the financing that takes place so that the capital development of the economy is promoted. Today’s managers of money are but little concerned with the development of the capital asset of an economy. Today’s narrowly-focused financiers do not conform to Schumpeter’s vision of bankers as the ephors of capitalism who assure that finance serves progress. Today’s financial structure is more akin to Keynes’ characterization of the financial arrangements of advanced capitalism as a casino. The Schumpeter-Keynes vision of the economy as evolving under the stimulus of perceived profit possibilities remains valid. However, we must recognize that evolution is not necessarily a progressive process: the financing evolution of the past decade may well have been retrograde.” (Minsky, 1993)
I am even more convinced today than some six years ago that a whole new financial structure has evolved – and that it is definitely “retrograde.” The title “Financial Arbitrage Capitalism” is fitting for a Credit system and economy now dominated by an expansive “leveraged speculating community” seeking profits from variations and permutations of “borrowing cheap and lending dear”; by bond and investment fund managers whose entire focus is beating some indexed return; by rapidly expanding Wall Street balance sheets and influence; and by the entire wave of new Credit instruments, derivatives, and sophisticated models and strategies used for the paramount purpose of capturing “above-market” returns and resulting huge financial rewards.
The current system has experienced a broad transformation to a Credit mechanism dominated by market-based instruments, in contrast to the traditional predominant position held by the banking system all the way through Minsky’s “Money Manager” era. Today, the financial apparatus is “beholden” – not to a coherent banking system but instead - to an ambiguous thing called “marketplace liquidity” and the unwavering confidence such a mechanism requires. Importantly, momentous changes to the prevailing incentive system are also consistent with designating a new phase of Minskian Capitalism. Late in Minsky’s life, he expounded upon the role rising stock and corporate debt prices were playing in dictating various behaviors in the Credit system, markets and real economy. With “Financial Arbitrage Capitalism,” the bounty of seemingly limitless (until recently) speculative profits has created a reward system encouraging unprecedented debt creation, leveraging, and myriad forms and layers of financial intermediation.
I have labeled this current stage with the Minsky term “retrograde” specifically because only through the expansion of all facets of this Credit Bubble – debt creation, leveraging, and risk intermediation – will adequate new “profits” and debt service capacities validate and sustain the ever-increasing layers of debt and financial “arbitrage.” Minsky noted a fundamental weakness of Money Manager Capitalism: “Unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits.” Financial Arbitrage Capitalism takes these defects to an entirely new level. Today, the major financial incentives dictating behavior are largely disengaged from the process of “capital development” and, furthermore, operate completely divorced from real economic profits overall. Or, more simply stated, current rewards spur the over-expansion of non-productive Credit – specifically debt instruments not supported by underlying wealth-creating assets (think subprime and high-yielding mortgages generally).
Mortgage Credit is the bedrock of “Financial Arbitrage Capitalism.” The Mortgage Finance Bubble provided – and continues offering to this day - the greatest bounty of speculative profits the financial world has known. It comes as no surprise that Pimco and Wall Street are these days fixated on home values and the pricing of mortgage-backed and mortgage-related securities and derivatives. That Trillions of real and financial resources were so badly misallocated through the Mortgage Finance Bubble years will definitely not dissuade the argument that Trillions more will be necessary to avert the scourge of “deflation”. Apparently, the more egregious the misallocation and resulting impairment to the Financial and Economic Structures the more imperative it is to throw more non-productive Credit Inflation at the problem – the mandatory fight to avert “deflation”.
For some time now, it has been my view that “Financial Arbitrage Capitalism” was sowing the seeds of its own destruction. The incentive structures were so deeply flawed; the analyses of the inner workings of this system were critically flawed; and policymaking was devastatingly flawed. The combination of rampant non-productive Credit growth, unprecedented system leveraging and speculative excesses, and resulting economic maladjustment ensured untenable system fragility. Still, the more apparent the underlying fragility becomes the greater the impetus to sustain the existing Financial and Economic Order. And the more conspicuous previous analytical and policy mistakes appear the greater the tendency to see no other alternative than to compound them. Mistakes beget ever-bigger mistakes. There is a desperate need to step back and come to grips with how dysfunctional this has all become.
Some seven or so weeks ago the existing Financial and Economic Order was in perilous jeopardy. Wall Street-backed finance was collapsing, and this implosion was about to invalidate our system’s underlying debt structure as well as the structure of the underlying Bubble Economy. But the Federal Reserve and Washington policymakers stepped in with radical measures. These included the Federal Reserve’s guarantee of ample liquidity for the Wall Street firms and virtually limitless “marketplace liquidity” throughout, as well as explicit and implicit federal backing for much of our mortgage Credit system. It may not have appeared momentous to most, but it basically placed Federal Reserve and federal government backing on trillions of securities and market liquidity risk more generally. In Minsky terminology, these measures at least temporarily “validated” the existing structure of “Financial Arbitrage Capitalism.”
Will policymaking succeed over the intermediate- and long-term? Not a chance. Policymakers do today retain capacity to convince the marketplace of their power to inflate the value of debt securities and asset prices more generally. But reflationary polices and other assurances will not rescue the system, specifically because there is today nothing to stem the ongoing distortions to the underlying real economy. Validating the current structure of Financial Arbitrage Capitalism simply perpetuates the same dysfunctional incentives that got us into this mess. It may in the short-term spur the necessary Credit growth to buoy household incomes, corporate cash-flows and profits, government revenues, and securities and asset prices – but it will add relatively little in the way of real economic wealth creating capacity. And, in the end, it’s only real economy fundamentals that will determine the soundness and sustainability of a system’s Credit and Financial Structure.
Additional non-productive debt growth will definitely not alleviate the Acute Fragility associated with “Ponzi Finance” Credit system dynamics. Additional non-productive debt growth will also not stabilize dollar devaluation, nor will it help in stabilizing myriad problems at home and abroad associated with our monstrous Current Account Deficits. Instead, any extension of this period of Financial Arbitrage Capitalism will ensure the prolonging of borrowing and consuming excess, the gross misallocation of resources, massive trade deficits, a ballooning international pool of unwieldy speculative finance, and even wilder Global Monetary Disorder.
Indeed, Washington’s validation of the current dysfunctional Credit system structure could very well lay the groundwork for extreme global price distortions, volatility, and social/political unrest. On the current course of things, it’s difficult for me to not think in terms of NASDAQ 1999 or subprime 2006. Throw additional liquidity on overheated Credit, inflationary, and speculative “biases” and be prepared for the spectacular. When Financial Arbitrage Capitalism’s excesses were spurring acute U.S. securities market inflation, the system enjoyed a period of perceived rising wealth to go with a boom in Wall Street securities issuance (to help offset inflated demand). When this Structure’s excesses were directed at the Mortgage Finance Bubble, the upshots were inflating home prices along with attendant construction and consumption booms. Now, however, with acute inflationary effects prevailing throughout global markets for food, energy, and commodities, one should be prepared for the likes of problematic supply bottlenecks and shocks, hoarding, trade frictions and interruptions, and generally heightened geopolitical instability.
I argued back in 2002 that the overriding systemic issue was not “deflation” but rather myriad risks associated with an unfolding U.S. Credit Bubble. Now, some years later, these risks have expanded alarmingly, as runaway Credit Bubbles have ballooned both at home and abroad.
3 May 2008
Credit crisis far from over: expert
Geoffrey Newman | May 02, 2008
A DERIVATIVES expert who two years ago warned of a potential meltdown in global credit markets has cautioned that the crisis is far from over, and has endorsed recent calls to relax controls on inflation and allow higher prices to help markets trade their way out of their problems.
Longtime critic of derivatives markets, Satyajit Das, says those who believe the US sub-prime loans crisis, and the drought in credit markets it triggered, are nearly over are wrong.
"I think the cycle has some way to run yet," he told a Financial Services Institute of Australasia function in Sydney yesterday. "It's a matter of years, not a matter of months."
In particular, investors in the US stock market, which has climbed off its lows amid a growing mood that the worst of the crunch was over, were being too optimistic, he said.
The author of Traders, Guns & Money warned that many of the problem financial instruments were still hidden and the total amount of debt attached to them largely unknown.
Losses incurred by US banks were certain to rise as $US1 trillion ($1.06 trillion) in sub-prime housing loans was due to reset to higher interest rates in the next two years.
The use of credit card debt -- now totalling $US915 billion -- was cushioning US home owners. But, in an ominous sign, card issuers were rapidly increasing their provisions for bad debts, by as much as 500 per cent in the case of one bank.
The use of sub-prime debt structures was also a feature of other markets, such as private equity, where $US300 billion in loans were due to be refinanced in the next two years.
Mr Das said another $US1-$US5 trillion of assets would have to come back on to US bank balance sheets as a result of defaults on housing and other debts, and it was unclear how the banks could fund them -- issuance of preference shares by US banks was already at a record high. He said losses at financial institutions from the credit crunch were likely to almost double to $US400 billion.
There were also second-round effects to come as the damage done to the real economy from financial sector losses fed back into further bank losses.
Mr Das said there needed to be a massive reduction in debt levels globally or a "nuclear deleveraging" before the crisis could be said to be over. That could be achieved through an economic crash "on the scale of 1929" but allowing inflation to rise would help to avoid that scenario. Higher inflation was a legitimate policy option since it reduced the real value of debt and gave companies and individuals breathing space to reduce their leverage by helping to put a floor under asset prices.
His comments come as some economists urge Australia's Reserve Bank to relax its inflation targeting policy to help avoid a severe economic downturn.
He acknowledged that as inflation rose higher it was more difficult to control it, but noted the global economy was moving into a period of higher inflation anyway. "It could be the lesser of two evils," he said.
A DERIVATIVES expert who two years ago warned of a potential meltdown in global credit markets has cautioned that the crisis is far from over, and has endorsed recent calls to relax controls on inflation and allow higher prices to help markets trade their way out of their problems.
Longtime critic of derivatives markets, Satyajit Das, says those who believe the US sub-prime loans crisis, and the drought in credit markets it triggered, are nearly over are wrong.
"I think the cycle has some way to run yet," he told a Financial Services Institute of Australasia function in Sydney yesterday. "It's a matter of years, not a matter of months."
In particular, investors in the US stock market, which has climbed off its lows amid a growing mood that the worst of the crunch was over, were being too optimistic, he said.
The author of Traders, Guns & Money warned that many of the problem financial instruments were still hidden and the total amount of debt attached to them largely unknown.
Losses incurred by US banks were certain to rise as $US1 trillion ($1.06 trillion) in sub-prime housing loans was due to reset to higher interest rates in the next two years.
The use of credit card debt -- now totalling $US915 billion -- was cushioning US home owners. But, in an ominous sign, card issuers were rapidly increasing their provisions for bad debts, by as much as 500 per cent in the case of one bank.
The use of sub-prime debt structures was also a feature of other markets, such as private equity, where $US300 billion in loans were due to be refinanced in the next two years.
Mr Das said another $US1-$US5 trillion of assets would have to come back on to US bank balance sheets as a result of defaults on housing and other debts, and it was unclear how the banks could fund them -- issuance of preference shares by US banks was already at a record high. He said losses at financial institutions from the credit crunch were likely to almost double to $US400 billion.
There were also second-round effects to come as the damage done to the real economy from financial sector losses fed back into further bank losses.
Mr Das said there needed to be a massive reduction in debt levels globally or a "nuclear deleveraging" before the crisis could be said to be over. That could be achieved through an economic crash "on the scale of 1929" but allowing inflation to rise would help to avoid that scenario. Higher inflation was a legitimate policy option since it reduced the real value of debt and gave companies and individuals breathing space to reduce their leverage by helping to put a floor under asset prices.
His comments come as some economists urge Australia's Reserve Bank to relax its inflation targeting policy to help avoid a severe economic downturn.
He acknowledged that as inflation rose higher it was more difficult to control it, but noted the global economy was moving into a period of higher inflation anyway. "It could be the lesser of two evils," he said.
Abandoning the USS Titanic
By Chan Akya
Yes, I know that the Titanic was not registered as a United States ship. The title though refers to the startling comparisons that can be made to the ill-fated vessel after it hit the iceberg in 1912, and the US today after it has hit the twin icebergs of the idiotic George W Bush presidency and the subprime mess in the economy. I am not suggesting that the two were linked, only that an ineffectual government frequently makes a cyclical problem much worse by its own actions.
US Federal Reserve head Ben Bernanke has taken on the role of the second in command whose job it is to scream "full steam ahead", even as it becomes wildly apparent that it is a structural problem in the economy, not a mere cyclical downturn. As a number of other commentators have written in Asia Times Online, including Julian Delasantellis and The Mogambo Guru, the problem with the US is that of excessive borrowing that has fed a consumption boom. Almost three-quarters of the US economy is consumption, compared with the more usual 50-50 mix considered "normal" in Economics 101 textbooks.
This excess of consumption creates the massive borrowing needs of the US, which are immediately supplied by a bunch of supplicants, be they Middle Eastern dictators or imagination-free Asian central banks. What many of us on this website have been writing about is that this edifice is cracking and quite likely to fall over.
Kuwait strikes
On Thursday (May 1), the finance minister of Kuwait, Mustafa al-Shiwali, suggested that Gulf Cooperation Council (GCC) countries were considering an idea to abandon their long-standing US dollar pegs. This is a minor news item to be tucked away in page 20 of the financial press, which it has been – but rather emblematic of a systemic shift.
For years, Gulf countries have held US dollars as an article of faith, with an almost religious fervor. These were the same countries that considered the same action in the 1970s, and indeed it was the Kuwaiti finance minister of that time who famously asked, "Why should we sell our black gold in exchange for unguaranteed currency notes [US dollars]"?
The aftermath of the crisis in the 1970s was greater US meddling in the region, propping up friendly dictators around the region and stoking the flames of war in Iran-Iraq that culminated in Saddam Hussein marching his forces into Kuwait in 1990. Perhaps that was America's idea of punishing the Kuwaitis, but we would never know that for sure.
Despite owing a debt of gratitude for getting their country back, it is interesting that Kuwait today is concerned more about domestic inflation that has run away to absurd levels, and less about kicking the US when it is down. Call that the new world, if you will.
The story though is complicated, because on the same day, the Kuwait Sovereign Fund announced it would increase its stakes in US financial firms Citigroup and Merrill Lynch, in effect continuing the trend for the rest of the world propping up the US financial system's malcontents.
The likely consequences of Gulf countries abandoning their US dollar pegs will be twofold. Firstly, their overall holdings of US financial assets, such as government bonds and shares, will have to fall dramatically. Financial analysts around the world assume that this will take the form of such investors in future buying fewer US dollar assets. I however think that it is more likely we will see actual selling of such assets, particularly the really dumb US Treasury bonds that offer yields roughly in line with official inflation and less than half of unofficial inflation figures.
The second consequence of Gulf states abandoning their dollar pegs is that they will increase the price of oil commensurately to ensure that their "local" income does not suffer. For example, if you pegged your currency at 100 to the US dollar and so were getting 1,200 in your currency for oil; and after de-pegging let us say that it rises to 75 on the dollar, you would need to bump up prices to ensure that you still get 1,200 in your local currency for oil. That means oil prices denominated in US dollars would have to go up some 30% to compensate.
The immediate impact of this on Asia would be quite nefarious, particularly for oil-importing countries ranging from Japan to India. Every one of them with an ability to allow their currencies to appreciate (and here I include only Japan, China, South Korea and India) will do so, in turn triggering the same first- and second-level reaction as suggested above from Gulf states' de-pegging, that is to sell US financial assets and raise prices of their exports accordingly.
It gets worse for weaker Asian states such as the Philippines and Indonesia, which don't really have the ability to push up their currencies. They will struggle to control inflation and failing that, embark on new rounds of government borrowings. This is the scenario I painted earlier in the year, which highlighted increased problems for smaller countries against the bigger ones in Asia.
The final consequence of the decline of US power is global in nature, namely a search for an absolute value reserve. That would be physical commodities including oil, copper and whatever have you. The easiest though would be gold.
Yes, I know that the Titanic was not registered as a United States ship. The title though refers to the startling comparisons that can be made to the ill-fated vessel after it hit the iceberg in 1912, and the US today after it has hit the twin icebergs of the idiotic George W Bush presidency and the subprime mess in the economy. I am not suggesting that the two were linked, only that an ineffectual government frequently makes a cyclical problem much worse by its own actions.
US Federal Reserve head Ben Bernanke has taken on the role of the second in command whose job it is to scream "full steam ahead", even as it becomes wildly apparent that it is a structural problem in the economy, not a mere cyclical downturn. As a number of other commentators have written in Asia Times Online, including Julian Delasantellis and The Mogambo Guru, the problem with the US is that of excessive borrowing that has fed a consumption boom. Almost three-quarters of the US economy is consumption, compared with the more usual 50-50 mix considered "normal" in Economics 101 textbooks.
This excess of consumption creates the massive borrowing needs of the US, which are immediately supplied by a bunch of supplicants, be they Middle Eastern dictators or imagination-free Asian central banks. What many of us on this website have been writing about is that this edifice is cracking and quite likely to fall over.
Kuwait strikes
On Thursday (May 1), the finance minister of Kuwait, Mustafa al-Shiwali, suggested that Gulf Cooperation Council (GCC) countries were considering an idea to abandon their long-standing US dollar pegs. This is a minor news item to be tucked away in page 20 of the financial press, which it has been – but rather emblematic of a systemic shift.
For years, Gulf countries have held US dollars as an article of faith, with an almost religious fervor. These were the same countries that considered the same action in the 1970s, and indeed it was the Kuwaiti finance minister of that time who famously asked, "Why should we sell our black gold in exchange for unguaranteed currency notes [US dollars]"?
The aftermath of the crisis in the 1970s was greater US meddling in the region, propping up friendly dictators around the region and stoking the flames of war in Iran-Iraq that culminated in Saddam Hussein marching his forces into Kuwait in 1990. Perhaps that was America's idea of punishing the Kuwaitis, but we would never know that for sure.
Despite owing a debt of gratitude for getting their country back, it is interesting that Kuwait today is concerned more about domestic inflation that has run away to absurd levels, and less about kicking the US when it is down. Call that the new world, if you will.
The story though is complicated, because on the same day, the Kuwait Sovereign Fund announced it would increase its stakes in US financial firms Citigroup and Merrill Lynch, in effect continuing the trend for the rest of the world propping up the US financial system's malcontents.
The likely consequences of Gulf countries abandoning their US dollar pegs will be twofold. Firstly, their overall holdings of US financial assets, such as government bonds and shares, will have to fall dramatically. Financial analysts around the world assume that this will take the form of such investors in future buying fewer US dollar assets. I however think that it is more likely we will see actual selling of such assets, particularly the really dumb US Treasury bonds that offer yields roughly in line with official inflation and less than half of unofficial inflation figures.
The second consequence of Gulf states abandoning their dollar pegs is that they will increase the price of oil commensurately to ensure that their "local" income does not suffer. For example, if you pegged your currency at 100 to the US dollar and so were getting 1,200 in your currency for oil; and after de-pegging let us say that it rises to 75 on the dollar, you would need to bump up prices to ensure that you still get 1,200 in your local currency for oil. That means oil prices denominated in US dollars would have to go up some 30% to compensate.
The immediate impact of this on Asia would be quite nefarious, particularly for oil-importing countries ranging from Japan to India. Every one of them with an ability to allow their currencies to appreciate (and here I include only Japan, China, South Korea and India) will do so, in turn triggering the same first- and second-level reaction as suggested above from Gulf states' de-pegging, that is to sell US financial assets and raise prices of their exports accordingly.
It gets worse for weaker Asian states such as the Philippines and Indonesia, which don't really have the ability to push up their currencies. They will struggle to control inflation and failing that, embark on new rounds of government borrowings. This is the scenario I painted earlier in the year, which highlighted increased problems for smaller countries against the bigger ones in Asia.
The final consequence of the decline of US power is global in nature, namely a search for an absolute value reserve. That would be physical commodities including oil, copper and whatever have you. The easiest though would be gold.
GDP and Jobs Data Appear Rigged
FLASH UPDATE
May 2, 2008
__________
Chances of Economic Rebound Now Are Nil
GDP and Jobs Data Appear Rigged
Other Numbers Confirm Intensifying Inflationary Recession
__________
Please Note: The SGS-Alternate GDP and Unemployment graphs and tables have been updated and posted for the latest reporting. They are available on the Alternate Data tab at www.shadowstats.com. The monthly SGS Financial-Weighted U.S. Dollar will be updated over the weekend.
– Best wishes to all, John Williams
Despite Manipulated Data, the Recession Deepens
Apparently the Administration and the Fed have moved to a rig-the-data mode, in order to avoid appearances of the economy falling into recession. Such games traditionally do not fool Main Street, U.S.A., which has a pretty good sense of what is going on without the help of government statisticians and White House/Fed/Wall Street propagandists. Separately, the reported results literally are meaningless. Based on reporting confidence intervals, both the GDP (0.6% +/- 3.0%) and the payroll results (20,000 +/- 129,000) were statistically indistinguishable from a major contraction or expansion.
GDP. In line with the analysis in the April 29th SGS Newsletter, rather than report a fairly obvious contraction in first-quarter Gross Domestic Product (GDP) growth, the Bureau of Economic Analysis came up with a 0.58% (+/- 3%) annualized real (inflation-adjusted) quarterly growth rate, slightly above consensus forecasts, and identical to the growth rate reported in the fourth quarter. Thank goodness for an inventory build-up, surging defense spending, consumer purchases of services, and an improved trade deficit that ran counter to other official reporting. An artificially low-inflation rate (2.6% in the first quarter versus 2.4% in the fourth quarter) also helped to mask an otherwise significant quarterly economic contraction.
Year-to-year real GDP held at 2.46% in the first quarter, versus the fourth quarter, while the SGS-Alternate GDP annual growth was estimated to have contracted at a 2.7% in the first quarter versus a 2.3% decline in the fourth quarter.
Employment. The reported fourth consecutive decline in monthly payrolls, as of April, was not as weak as consensus forecasts, but it likely was rigged, too. As has become the standard pattern — with fairly predictable gimmicks — the weakness in the jobs report was understated. Without the monthly seasonal-adjustment restatement ploy (see below), for example, the jobs decline would have been about 62,000, fairly close to the consensus outlook. Without the monthly bias factor, the jobs decline would have been about 277,000.
Even so, the data show continued sharp deterioration in annual growth, and continued to give the National Bureau of Economic Research (NBER) — official arbiter of U.S. recessions — a timing mark for calling the current recession.
Payroll Survey. The Bureau of Labor Statistics (BLS) reported a seasonally-adjusted jobs loss of 20,000 (loss of 28,000 net of revisions) +/- 129,000 for April 2008, following a revised 81,000 (previously 80,000) jobs loss in March. Annual growth in total nonfarm payrolls slowed further to a recessionary 0.28% in April from 0.36% in March.
Bias Adjustment. One element continuing to add upside pressure to the numbers was the monthly bias factor (birth-death model), which was a net addition of 257,000 jobs in April, following a net addition of 142,000 jobs in March. The April add- or bias-factor mindlessly inflated construction jobs by 45,000 and financial activities jobs by 8,000, irrespective of ongoing anecdotal evidence of trouble in those areas. While the biases are added into the not-seasonally-adjusted data, the net changes flow through to the adjusted numbers with limited variation.
Seasonal-Factor Gimmicks. Year-to-year growth should be virtually identical in both the seasonally-adjusted and unadjusted series, and applying the unadjusted annual change to the seasonally-adjusted year-ago numbers for March and April suggested that the seasonally-adjusted month-to-month change should have been a contraction of 62,000, instead of 20,000. This reporting gimmick is made possible by the "recalculation" each month of the monthly seasonal factors. If the process were honest, the suggested differences would go in both directions. Instead, the differences almost always show that the seasonal factors are being used to overstate the current month's relative payroll level, as seen last month, and the month before, and for most other months going back in time.
Household Survey. The usually statistically-sounder household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs (including those of multiple job holders), showed household employment rose by 362,000 in April, after a 24,000 decline in March.
The April 2008 seasonally-adjusted U.3 unemployment rate showed a statistically-insignificant decline to 4.95% +/- 0.23% from 5.08% in March. Unadjusted U.3 fell to 4.8% in April versus 5.2% in March. The broader U.6 unemployment rate rose to an adjusted 9.2% (fell to 8.9% unadjusted) in April, versus 9.1% (9.3% unadjusted) in March. Adjusted for the "discouraged workers" defined away during the Clinton Administration, actual unemployment, as estimated by the SGS-Alternate Unemployment measure, rose to 13.1% in April, up from 13.0% in March.
Employment Environment. The milder employment deterioration and unemployment improvement in April ran counter to the trends shown in some of the better-quality employment-environment indicators: March help-wanted advertising hit an historic low, new claims for unemployment insurance continued to surge, and recession-level employment readings were seen again for both March purchasing managers surveys and the April manufacturing survey (non-manufacturing has not been reported yet).
Other Reporting Shows Deepening Downturn. The April 30th benchmark revision to retail sales showed significantly weaker activity than previously reported in late-2006 and early-2007, consistent with the recession staring in late 2006. The March 2008 level was revised lower by 0.6%.
Also confirming an intensifying inflationary recession were two private reports. The Conference Board's April consumer confidence measure dropped 5.5% for the month, following a 13.7% decline in March, and it was down by 41.4% year-to-year, versus a 39.9% annual loss in March. Consumer confidence tends to be a lagging indicator.
The Institute for Supply Management (ISM) April purchasing managers survey (manufacturing) composite index held at 48.6 (a reading below 50.0 on the ISM diffusion indices means contraction) against March. The new orders index for April held at 46.5, while the employment index fell to 45.4 in April from 49.2 in March. On the inflation front, the prices paid component rose to 84.5 in April from 83.5 in March.
Fed Signals Deepening Banking System Solvency Crisis. There was no clear signal in Wednesday's FOMC statement that Fed easing was finished. Keep in mind that the Fed's overriding concern at the moment remains maintaining the viability of the U.S. banking system. Concerns for the economy and inflation (the Pabulum stories fed to investors on FOMC policy) both are secondary issues, at the moment, for the U.S. central banks.
With that in mind, recent press on large U.S. banks raising still further capital, and this morning's Fed announcement of significantly expanded liquidity accommodations, suggest the worst part of the crisis is far from over. The slower pace of annual growth that is shaping up for April M3 (very roughly 16.6% versus a record 17.4% in March) may have a parallel in the systemic-crises effects in slowing M3 growth in December, when the system last moved into meltdown mode.
May 2, 2008
__________
Chances of Economic Rebound Now Are Nil
GDP and Jobs Data Appear Rigged
Other Numbers Confirm Intensifying Inflationary Recession
__________
Please Note: The SGS-Alternate GDP and Unemployment graphs and tables have been updated and posted for the latest reporting. They are available on the Alternate Data tab at www.shadowstats.com. The monthly SGS Financial-Weighted U.S. Dollar will be updated over the weekend.
– Best wishes to all, John Williams
Despite Manipulated Data, the Recession Deepens
Apparently the Administration and the Fed have moved to a rig-the-data mode, in order to avoid appearances of the economy falling into recession. Such games traditionally do not fool Main Street, U.S.A., which has a pretty good sense of what is going on without the help of government statisticians and White House/Fed/Wall Street propagandists. Separately, the reported results literally are meaningless. Based on reporting confidence intervals, both the GDP (0.6% +/- 3.0%) and the payroll results (20,000 +/- 129,000) were statistically indistinguishable from a major contraction or expansion.
GDP. In line with the analysis in the April 29th SGS Newsletter, rather than report a fairly obvious contraction in first-quarter Gross Domestic Product (GDP) growth, the Bureau of Economic Analysis came up with a 0.58% (+/- 3%) annualized real (inflation-adjusted) quarterly growth rate, slightly above consensus forecasts, and identical to the growth rate reported in the fourth quarter. Thank goodness for an inventory build-up, surging defense spending, consumer purchases of services, and an improved trade deficit that ran counter to other official reporting. An artificially low-inflation rate (2.6% in the first quarter versus 2.4% in the fourth quarter) also helped to mask an otherwise significant quarterly economic contraction.
Year-to-year real GDP held at 2.46% in the first quarter, versus the fourth quarter, while the SGS-Alternate GDP annual growth was estimated to have contracted at a 2.7% in the first quarter versus a 2.3% decline in the fourth quarter.
Employment. The reported fourth consecutive decline in monthly payrolls, as of April, was not as weak as consensus forecasts, but it likely was rigged, too. As has become the standard pattern — with fairly predictable gimmicks — the weakness in the jobs report was understated. Without the monthly seasonal-adjustment restatement ploy (see below), for example, the jobs decline would have been about 62,000, fairly close to the consensus outlook. Without the monthly bias factor, the jobs decline would have been about 277,000.
Even so, the data show continued sharp deterioration in annual growth, and continued to give the National Bureau of Economic Research (NBER) — official arbiter of U.S. recessions — a timing mark for calling the current recession.
Payroll Survey. The Bureau of Labor Statistics (BLS) reported a seasonally-adjusted jobs loss of 20,000 (loss of 28,000 net of revisions) +/- 129,000 for April 2008, following a revised 81,000 (previously 80,000) jobs loss in March. Annual growth in total nonfarm payrolls slowed further to a recessionary 0.28% in April from 0.36% in March.
Bias Adjustment. One element continuing to add upside pressure to the numbers was the monthly bias factor (birth-death model), which was a net addition of 257,000 jobs in April, following a net addition of 142,000 jobs in March. The April add- or bias-factor mindlessly inflated construction jobs by 45,000 and financial activities jobs by 8,000, irrespective of ongoing anecdotal evidence of trouble in those areas. While the biases are added into the not-seasonally-adjusted data, the net changes flow through to the adjusted numbers with limited variation.
Seasonal-Factor Gimmicks. Year-to-year growth should be virtually identical in both the seasonally-adjusted and unadjusted series, and applying the unadjusted annual change to the seasonally-adjusted year-ago numbers for March and April suggested that the seasonally-adjusted month-to-month change should have been a contraction of 62,000, instead of 20,000. This reporting gimmick is made possible by the "recalculation" each month of the monthly seasonal factors. If the process were honest, the suggested differences would go in both directions. Instead, the differences almost always show that the seasonal factors are being used to overstate the current month's relative payroll level, as seen last month, and the month before, and for most other months going back in time.
Household Survey. The usually statistically-sounder household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs (including those of multiple job holders), showed household employment rose by 362,000 in April, after a 24,000 decline in March.
The April 2008 seasonally-adjusted U.3 unemployment rate showed a statistically-insignificant decline to 4.95% +/- 0.23% from 5.08% in March. Unadjusted U.3 fell to 4.8% in April versus 5.2% in March. The broader U.6 unemployment rate rose to an adjusted 9.2% (fell to 8.9% unadjusted) in April, versus 9.1% (9.3% unadjusted) in March. Adjusted for the "discouraged workers" defined away during the Clinton Administration, actual unemployment, as estimated by the SGS-Alternate Unemployment measure, rose to 13.1% in April, up from 13.0% in March.
Employment Environment. The milder employment deterioration and unemployment improvement in April ran counter to the trends shown in some of the better-quality employment-environment indicators: March help-wanted advertising hit an historic low, new claims for unemployment insurance continued to surge, and recession-level employment readings were seen again for both March purchasing managers surveys and the April manufacturing survey (non-manufacturing has not been reported yet).
Other Reporting Shows Deepening Downturn. The April 30th benchmark revision to retail sales showed significantly weaker activity than previously reported in late-2006 and early-2007, consistent with the recession staring in late 2006. The March 2008 level was revised lower by 0.6%.
Also confirming an intensifying inflationary recession were two private reports. The Conference Board's April consumer confidence measure dropped 5.5% for the month, following a 13.7% decline in March, and it was down by 41.4% year-to-year, versus a 39.9% annual loss in March. Consumer confidence tends to be a lagging indicator.
The Institute for Supply Management (ISM) April purchasing managers survey (manufacturing) composite index held at 48.6 (a reading below 50.0 on the ISM diffusion indices means contraction) against March. The new orders index for April held at 46.5, while the employment index fell to 45.4 in April from 49.2 in March. On the inflation front, the prices paid component rose to 84.5 in April from 83.5 in March.
Fed Signals Deepening Banking System Solvency Crisis. There was no clear signal in Wednesday's FOMC statement that Fed easing was finished. Keep in mind that the Fed's overriding concern at the moment remains maintaining the viability of the U.S. banking system. Concerns for the economy and inflation (the Pabulum stories fed to investors on FOMC policy) both are secondary issues, at the moment, for the U.S. central banks.
With that in mind, recent press on large U.S. banks raising still further capital, and this morning's Fed announcement of significantly expanded liquidity accommodations, suggest the worst part of the crisis is far from over. The slower pace of annual growth that is shaping up for April M3 (very roughly 16.6% versus a record 17.4% in March) may have a parallel in the systemic-crises effects in slowing M3 growth in December, when the system last moved into meltdown mode.
2 May 2008
Search only for the very best opportunities
THURSDAY, MAY 01, 2008
Trading Lessons From Nicolas Darvas
Nicolas Darvas has inspired traders for many generations. His book, "How I Made 2,000,000 in the Stock Market" is one that you'll find on many recommended reading lists including my own. While some have argued that much of Darvas' success had to do with good timing, his books are still widely read and for good reason.
A lot of traders can identify easily with Darvas because he went through the process of learning how to trade much like most people do today. Darvas began by first looking for the "secret" to the market. And, just like all of us have found, after finding no success from trading on the stock tips of others including brokers and expensive newsletters, Darvas figured out that he ultimately had to develop a trading system on his own. He accomplished that feat by committing himself to years of study of the market and from learning from his own mistakes. His determination, perseverance, and constant self-evaluation offers an excellent model for all traders to follow.
In continuing a series of posts where I share my notes I've taken (and refer to from time to time) after reading the books and methods of others, here are some things you may find of interest about Nicolas Darvas and his approach:
Trading Lessons From Nicolas Darvas:
There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace
"You can never go broke taking a profit" is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times
There is a "follow-the-leader" style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader
The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle
It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. "You have to find out what the public wants and go along with it. You can't fight the tape, or the public."
One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!
Losses are tuition on Wall Street. Learn from them.
You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. "I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn't you call that good odds?"
Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful
The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time
The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it
Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price
It is difficult to be profitable on the short side of the market versus the long side - trading in rising or bull markets will give you the best chance for success
Most, if not all stocks, will follow the general trend of the market
To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes
Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time
Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is "no other reason worth considering."
Darvas used his "box theory" to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box). For more info on using Darvas boxes, visit these two websites: GerryCo & Sethi
For new trades, Darvas used "pilot buys" which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position
He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. "I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality."
Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. "I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride."
Trade only when the environment is in your favor. Darvas' strategy kept him out of poor and bear markets because he wouldn't trade stocks that didn't fit his requirements which were only found in raging bull markets
Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock
While his trading approach was very technical, after studying the market's winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important
Be a student of the market. Darvas learned by reading more than 200 books about speculators and the market and devoted studying the market for many hours a day. In fact, Gerald Loeb's books & approach served as key inspiration
No one can completely master the market. After millions of dollars and best selling books, Darvas was still learning and tweaking his system until he passed away
Trading Lessons From Nicolas Darvas
Nicolas Darvas has inspired traders for many generations. His book, "How I Made 2,000,000 in the Stock Market" is one that you'll find on many recommended reading lists including my own. While some have argued that much of Darvas' success had to do with good timing, his books are still widely read and for good reason.
A lot of traders can identify easily with Darvas because he went through the process of learning how to trade much like most people do today. Darvas began by first looking for the "secret" to the market. And, just like all of us have found, after finding no success from trading on the stock tips of others including brokers and expensive newsletters, Darvas figured out that he ultimately had to develop a trading system on his own. He accomplished that feat by committing himself to years of study of the market and from learning from his own mistakes. His determination, perseverance, and constant self-evaluation offers an excellent model for all traders to follow.
In continuing a series of posts where I share my notes I've taken (and refer to from time to time) after reading the books and methods of others, here are some things you may find of interest about Nicolas Darvas and his approach:
Trading Lessons From Nicolas Darvas:
There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace
"You can never go broke taking a profit" is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times
There is a "follow-the-leader" style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader
The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle
It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. "You have to find out what the public wants and go along with it. You can't fight the tape, or the public."
One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!
Losses are tuition on Wall Street. Learn from them.
You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. "I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn't you call that good odds?"
Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful
The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time
The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it
Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price
It is difficult to be profitable on the short side of the market versus the long side - trading in rising or bull markets will give you the best chance for success
Most, if not all stocks, will follow the general trend of the market
To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes
Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time
Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is "no other reason worth considering."
Darvas used his "box theory" to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box). For more info on using Darvas boxes, visit these two websites: GerryCo & Sethi
For new trades, Darvas used "pilot buys" which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position
He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. "I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality."
Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. "I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride."
Trade only when the environment is in your favor. Darvas' strategy kept him out of poor and bear markets because he wouldn't trade stocks that didn't fit his requirements which were only found in raging bull markets
Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock
While his trading approach was very technical, after studying the market's winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important
Be a student of the market. Darvas learned by reading more than 200 books about speculators and the market and devoted studying the market for many hours a day. In fact, Gerald Loeb's books & approach served as key inspiration
No one can completely master the market. After millions of dollars and best selling books, Darvas was still learning and tweaking his system until he passed away
Irreparable Cracks in the Financial System
A well-respected independent economist and strategist with a bearish trait told me recently that he wished he could be bearish, but that he couldn't find anything that he thought would disturb the asset markets and the global economy in the foreseeable future. Looking at the "real" global economy and at what people produce in terms of manufactured goods and services (ex-financial services), I would have to agree.
Comparing the current global economic expansion, which began in the US in November 2001, with previous economic expansions, it seems to me that the "real economy" isn't showing any signs of the overheating that, in the past, led to aggressive central bank monetary tightening. So, I am, like my strategist friend with the bearish trait, also impressed by the prospects for the global economy. However, I am increasingly concerned about the inflated asset markets around the world, and about the almost unanimous belief that nothing will ever come between the "Goldilocks" economic conditions and the Fed, in conjunction with the US Treasury standing ready to support markets should they decline meaningfully and disturb the current heavenly asset market conditions.
Let us examine the differences between the "real economy" and the "asset inflation economy" more closely. The real economy is typical of people's daily lives, their income, and their spending. If there is a boom in the real economy, wages and prices will tend to increase and the increased demand will be met by corporations' increased capital spending. The overheated economy eventually brings about a slowdown or a recession, because money becomes tight irrespective of the central bank's monetary policies. The recession then cleans up the system and allows the next expansion to get under way. Put very simplistically, this is the typical business cycle.
In the asset inflation economy, we are dealing with a totally different phenomenon. The higher the asset markets move, the more the increased asset prices can create liquidity. Let us assume an investor owns a real estate or stock portfolio worth 100 and that his borrowings are 50. For whatever reason (usually easy monetary conditions), the value of the portfolio now doubles to 200. Obviously, this allows the investor, if he wants to maintain his leverage at 50% of the asset value, to double his borrowings to 100. With the additional 50 in buying power, the investor can then either spend the money for consumption (as the US consumer has done in the last few years) or acquire more assets.
If he acquires more assets, the investor will drive the asset markets – ceteris paribus – even higher, which will allow him to increase his borrowings further. Now, I am aware of some economists who will dispute the fact that rising asset markets create liquidity. They argue that the seller of a portfolio or real estate or stocks at an inflated price will have to be met by a buyer at the inflated price. So, the increased liquidity of the seller is offset by a diminished liquidity of the buyer. However, the situation isn't quite that simple. Let us assume we are dealing with the market for Van Gogh's paintings, and let's assume that with the exception of just three works, Van Gogh's paintings are all in the hands of museums, foundations, or dedicated art lovers who wouldn't consider selling them except under the most unusual circumstances. Now enter the Russian oligarch who wishes to acquire a Van Gogh at any price. He might pay double the previous price paid for a Van Gogh, for one of the three paintings still available on the market. As a result of this one buyer, every Van Gogh work will now need to be revalued, and, in theory, all the owners of Van Gogh paintings could now increase their borrowings against the value of those works.
Two works by Van Gogh now remain on the market, one of which a hedge fund manager and an oil sheik from the Middle East both wish to acquire. In a bidding war, they push the price of that painting up another 100% above the previously paid price. Again, all of Van Gogh's works will need to be revalued and their owners can increase their borrowings against them. In other words, the buyers on the margin can move asset markets sharply higher in the absence of ready sellers and thus increase, through the additional borrowing power of the works' present owners, the overall liquidity in the system.
Under normal circumstances, the increased borrowings by the present owners would drive up interest rates. However, in a world of rapidly expanding money supply, this may not be the case. Moreover, which owner of a Van Gogh wouldn't mind paying 6% instead of 4.5% interest on his loans if Van Gogh's paintings were appreciating by 30%, or even 100%, per annum? (This is one reason why the Fed doesn't believe it can control spiralling asset prices with monetary policies.) In the real world, we are not dealing with just one Van Gogh market, but with many asset markets, but the point is that the marginal buyers set the price for assets. It should also be clear that not every owner of a Van Gogh will use his borrowing power and leverage his works of art or other assets.
But if an asset bull market has been in existence for a while, more and more investors will become convinced that the up-trend in asset prices will never end and, therefore, they will increasingly use leverage to maximize their gains. But not only that: lenders will also become convinced that asset prices will rise in perpetuity at a higher rate than the lending rate, and they will therefore relax their lending standards. This certainly seems to have occurred in the sub-prime lending industry.
There is one more point to consider. Liquidity isn't evenly distributed. Let's say that on an island there are two tribes. Ninety-nine percent of the population are the "Bushes" and 1% are the "Smartos." The two tribes arrived on the island at about the same time and had little capital at the time. So, initially, both tribes worked very hard in industry and in commerce to acquire wealth. But because of the Smartos' superior education and skills, their frugality, and also partly because of their greed and immorality, they soon acquired significantly more wealth than the Bushes, who, for the most part, were likeable but quite inept. After 50 years, most of the island's businesses were therefore in the hands of the Smartos, who make up just 1% of the population. Being clever, the Smartos generously gave some of their wealth to the tribal leaders of the Bushes, who controlled the entire government apparatus, the military establishment, and much of the land.
For a while this system functioned perfectly well. Among the Bushes there were also some smart people, and they were encouraged to accumulate wealth as well. However, they had to pay an increasingly high price to acquire assets, since most of the island's assets were owned by the Smartos and by the elite of the Bushes who, because of their wealth, never really had to sell any assets. Cracks in the system began to appear because more and more of the wealth began to be increasingly concentrated in fewer and fewer hands. (According to the Financial Times, the concentration of wealth is extremely high in the United States, with 10% of the population currently holding 70% of the country's wealth, compared to 61% in France, 56% in the UK, 44% in Germany, and 39% in Japan.)
However, the Smartos then stumbled upon another avenue to wealth: globalization. The island was opened to foreign trade and investments, which allowed the business owners to shift their production to low-cost foreign countries and, at the same time, to keep the masses among the Bush tribe happy through the imports of price-deflating consumer goods. In the same way that, in the 18th and 19th centuries, the European settlers of America had exchanged with the Indians worthless beads and booze for land, now the Smartos and the elite of the Bushes exchanged cheap imported goods, whose supply they controlled and from which they earned handsome margins, for assets. As a result, the majority of the population of the Bushes experienced a relative wealth decline compared to the wealth of the Smartos.
Again, this worked perfectly well for a while: the populace was happy to buy deflating consumer goods (like Mr. Faber's wife who, whenever a favorite shoe store holds a sale, immediately buys three pairs instead of one), but it overlooked the fact that its wages and salaries were decreasing in real terms because manufacturing jobs and tradable services were increasingly shifting overseas. For some time this wasn't a problem, because the Smartos had bought the island's central bank. They made sure that sufficient money was made available to the system to sustain the consumption binge, which was largely driven by inflating asset prices. Plenty of liquidity and rising asset prices created among the Bushes the "illusion of wealth." Naturally, the island's trade and current account deficit began to worsen as it consumed significantly more than it produced, but initially that wasn't a problem, for the Smartos had encouraged the Bushes to engage – in the name of all kinds of good, just, and well-meant causes, and without any self-interest whatsoever – in overseas military expeditions, which led foreign creditors to believe in the island's economic and military might, and social stability.
For a time, they were, therefore, perfectly happy to finance the island's growing current account deficits. At the same time, the increase in defense spending shifted wealth from the masses to the elite of the Bushes, who largely controlled the military hardware and procurement industries. As a result, wealth and income inequity widened further as the masses became largely illiquid and had difficulty in maintaining their elevated consumption, while the Smartos and the elite of the Bushes accumulated an ever-increasing share of the national wealth. But never at a loss when it came to creating additional wealth, the Smartos devised another scheme to enrich themselves even further: lending to illiquid households (read sub-prime lending). Not that the Smartos would have lent their own money to these uncreditworthy individuals (they were far too clever for that); for a fat fee, they arranged and encouraged this novel type of financing. Credit card, consumer, and mortgage debts were all securitized and sold to pension funds and asset management companies whose beneficiaries were the majority of Bushes, who accounted, as indicated above, for 99% of the population.
In addition, these securitized products were sold to some credulous foreign investors. By doing so, the Smartos achieved three objectives. They earned large fees, and unloaded the risks indirectly onto the very people who borrowed the money, and onto foreigners. But most importantly, they provided the Bush tribe with a powerful incentive to support their expansionary monetary policies, which ensured continuous asset inflation. After all, any breakdown in the value of assets would have hurt the Bushes the most, since they carried most of the risks by having purchased all the securitized lower-quality financial instruments. But not only that! The Smartos knew that as asset prices increased, their prospective returns would diminish.
But this wasn't an immediate problem, as they promoted increased leverage to boost returns to the investors and at the same time their own fees. This strategy worked, of course, for as long as asset prices appreciated more than the interest that needed to be paid on the loans. On first sight, the debt- and, consequently, asset inflation-driven society of the island seems to work ad infinitum. But in the real world this isn't the case. Sooner or later, the system becomes totally unbalanced and entirely dependent on further asset inflation to sustain the imbalances. It is at that point that even a minor event can act as a catalyst to bring down asset prices and produce either "total," or at least "relative," illiquidity in the system, because a large number of assets whose value has declined no longer cover the loans against which they were acquired. "Total illiquidity" occurs when the central bank, faced with declining asset prices, doesn't take extraordinary measures to support asset prices.
"Relative illiquidity" follows when the central bank implements, in concert with the Treasury, extraordinary monetary and fiscal policies (cutting short-term interest rates to zero, and the aggressive purchase of bonds and stocks) in a desperate effort to support asset prices. In both cases, a degree of illiquidity occurs and depresses asset prices, but in different ways. In the case of "total illiquidity" (1929–1932 and Japan in the 1990s), asset prices tumble across the board in nominal and real terms with the exception of the highest-quality bonds and, possibly, precious metals (flight to safety). In the case of the island's central bank taking extraordinary monetary measures, asset prices don't necessarily decline in nominal terms, and in fact can even continue to appreciate.
However, they collapse in real terms, and against foreign currencies and precious metals. How so? Above, we have seen that the island's asset inflation led to excessive consumption and to growing trade and current account deficits because the Smartos and the elite of the Bushes were quick to understand that much larger capital gains could be obtained by playing the asset inflation game and by manufacturing overseas, than by investing in new production facilities and producing goods on the island.
The growing trade and current account deficits of the island were not immediately a problem, because they were offset by external surpluses in other parts of the world, which were frequently and erroneously labeled as "surplus savings" or a "savings glut." But whatever one wishes to call these surpluses or reserves, it is interesting to note that where they accumulated (mostly in China, Japan, Taiwan, Singapore, and Switzerland), they led to an interest rate structure that was lower than on the island. For the Smartos, this was an extremely fortuitous condition. For one, it was easy to convince the recipients and holders of these rapidly accumulating reserves to invest them in higher yielding assets on the island. In addition, it was for a while extremely profitable to borrow in low-yielding foreign currencies and to invest in relatively high-yielding assets on the island.
Obviously, this all changed when asset prices began to decline and the island's central bank had to take extraordinary measures by aggressively cutting short-term interest rates and supporting asset markets through bond and stock purchases. The interest rate cuts immediately narrowed the spread between the interest rate on the island and foreign currencies and led to a run on the island's currency, not only by foreigners but also by the Smartos, who had known all along that the asset inflation game would one day come to a bitter end. The deleveraging of this carry trade led to "relative illiquidity," which the island's central bank had to offset with even more liquidity injections, which while stabilizing asset prices led to even greater loss of confidence in the soundness of the island's currency, and in its bond market, which by then was mostly owned by foreign creditors.
As Mao Tse Tung had observed much earlier, there was by then "great disorder," but the situation was "excellent" for the Smartos. On the short end, interest rates had been cut so much that they were in no position to compensate for the continuous depreciation of the island's currency. So, the Smartos and the Bush tribe's elite began increasingly to borrow in the island's currency and to invest in foreign assets and precious metals. In fact, the island's central bank, by its market-supporting interventions, encouraged this process. Stocks and bonds were dumped on to the central bank and the Treasury's plunge protection team at still high prices, and the proceeds were immediately transferred to foreign assets and precious metals, which appreciated at an increasing speed compared to the island's assets, which suffered from the continuous depreciation of the currency.
And in order to facilitate this trade, the Smartos, who controlled both the Fed and the Treasury, continued to make positive comments about "a strong currency being in the best interest of the island." Sure, it would have been in the best interest of the island to have a strong currency, but it was certainly not in the best interest of the Smartos, who had devised their last grand plan: shift assets overseas and into precious metals, let the currency of the island collapse, and then repatriate the funds and buy up the remaining assets of the Bush tribe's middle and lower classes at bargain prices since they had never understood that their currency had collapsed against foreign currencies and against gold.
Comparing the current global economic expansion, which began in the US in November 2001, with previous economic expansions, it seems to me that the "real economy" isn't showing any signs of the overheating that, in the past, led to aggressive central bank monetary tightening. So, I am, like my strategist friend with the bearish trait, also impressed by the prospects for the global economy. However, I am increasingly concerned about the inflated asset markets around the world, and about the almost unanimous belief that nothing will ever come between the "Goldilocks" economic conditions and the Fed, in conjunction with the US Treasury standing ready to support markets should they decline meaningfully and disturb the current heavenly asset market conditions.
Let us examine the differences between the "real economy" and the "asset inflation economy" more closely. The real economy is typical of people's daily lives, their income, and their spending. If there is a boom in the real economy, wages and prices will tend to increase and the increased demand will be met by corporations' increased capital spending. The overheated economy eventually brings about a slowdown or a recession, because money becomes tight irrespective of the central bank's monetary policies. The recession then cleans up the system and allows the next expansion to get under way. Put very simplistically, this is the typical business cycle.
In the asset inflation economy, we are dealing with a totally different phenomenon. The higher the asset markets move, the more the increased asset prices can create liquidity. Let us assume an investor owns a real estate or stock portfolio worth 100 and that his borrowings are 50. For whatever reason (usually easy monetary conditions), the value of the portfolio now doubles to 200. Obviously, this allows the investor, if he wants to maintain his leverage at 50% of the asset value, to double his borrowings to 100. With the additional 50 in buying power, the investor can then either spend the money for consumption (as the US consumer has done in the last few years) or acquire more assets.
If he acquires more assets, the investor will drive the asset markets – ceteris paribus – even higher, which will allow him to increase his borrowings further. Now, I am aware of some economists who will dispute the fact that rising asset markets create liquidity. They argue that the seller of a portfolio or real estate or stocks at an inflated price will have to be met by a buyer at the inflated price. So, the increased liquidity of the seller is offset by a diminished liquidity of the buyer. However, the situation isn't quite that simple. Let us assume we are dealing with the market for Van Gogh's paintings, and let's assume that with the exception of just three works, Van Gogh's paintings are all in the hands of museums, foundations, or dedicated art lovers who wouldn't consider selling them except under the most unusual circumstances. Now enter the Russian oligarch who wishes to acquire a Van Gogh at any price. He might pay double the previous price paid for a Van Gogh, for one of the three paintings still available on the market. As a result of this one buyer, every Van Gogh work will now need to be revalued, and, in theory, all the owners of Van Gogh paintings could now increase their borrowings against the value of those works.
Two works by Van Gogh now remain on the market, one of which a hedge fund manager and an oil sheik from the Middle East both wish to acquire. In a bidding war, they push the price of that painting up another 100% above the previously paid price. Again, all of Van Gogh's works will need to be revalued and their owners can increase their borrowings against them. In other words, the buyers on the margin can move asset markets sharply higher in the absence of ready sellers and thus increase, through the additional borrowing power of the works' present owners, the overall liquidity in the system.
Under normal circumstances, the increased borrowings by the present owners would drive up interest rates. However, in a world of rapidly expanding money supply, this may not be the case. Moreover, which owner of a Van Gogh wouldn't mind paying 6% instead of 4.5% interest on his loans if Van Gogh's paintings were appreciating by 30%, or even 100%, per annum? (This is one reason why the Fed doesn't believe it can control spiralling asset prices with monetary policies.) In the real world, we are not dealing with just one Van Gogh market, but with many asset markets, but the point is that the marginal buyers set the price for assets. It should also be clear that not every owner of a Van Gogh will use his borrowing power and leverage his works of art or other assets.
But if an asset bull market has been in existence for a while, more and more investors will become convinced that the up-trend in asset prices will never end and, therefore, they will increasingly use leverage to maximize their gains. But not only that: lenders will also become convinced that asset prices will rise in perpetuity at a higher rate than the lending rate, and they will therefore relax their lending standards. This certainly seems to have occurred in the sub-prime lending industry.
There is one more point to consider. Liquidity isn't evenly distributed. Let's say that on an island there are two tribes. Ninety-nine percent of the population are the "Bushes" and 1% are the "Smartos." The two tribes arrived on the island at about the same time and had little capital at the time. So, initially, both tribes worked very hard in industry and in commerce to acquire wealth. But because of the Smartos' superior education and skills, their frugality, and also partly because of their greed and immorality, they soon acquired significantly more wealth than the Bushes, who, for the most part, were likeable but quite inept. After 50 years, most of the island's businesses were therefore in the hands of the Smartos, who make up just 1% of the population. Being clever, the Smartos generously gave some of their wealth to the tribal leaders of the Bushes, who controlled the entire government apparatus, the military establishment, and much of the land.
For a while this system functioned perfectly well. Among the Bushes there were also some smart people, and they were encouraged to accumulate wealth as well. However, they had to pay an increasingly high price to acquire assets, since most of the island's assets were owned by the Smartos and by the elite of the Bushes who, because of their wealth, never really had to sell any assets. Cracks in the system began to appear because more and more of the wealth began to be increasingly concentrated in fewer and fewer hands. (According to the Financial Times, the concentration of wealth is extremely high in the United States, with 10% of the population currently holding 70% of the country's wealth, compared to 61% in France, 56% in the UK, 44% in Germany, and 39% in Japan.)
However, the Smartos then stumbled upon another avenue to wealth: globalization. The island was opened to foreign trade and investments, which allowed the business owners to shift their production to low-cost foreign countries and, at the same time, to keep the masses among the Bush tribe happy through the imports of price-deflating consumer goods. In the same way that, in the 18th and 19th centuries, the European settlers of America had exchanged with the Indians worthless beads and booze for land, now the Smartos and the elite of the Bushes exchanged cheap imported goods, whose supply they controlled and from which they earned handsome margins, for assets. As a result, the majority of the population of the Bushes experienced a relative wealth decline compared to the wealth of the Smartos.
Again, this worked perfectly well for a while: the populace was happy to buy deflating consumer goods (like Mr. Faber's wife who, whenever a favorite shoe store holds a sale, immediately buys three pairs instead of one), but it overlooked the fact that its wages and salaries were decreasing in real terms because manufacturing jobs and tradable services were increasingly shifting overseas. For some time this wasn't a problem, because the Smartos had bought the island's central bank. They made sure that sufficient money was made available to the system to sustain the consumption binge, which was largely driven by inflating asset prices. Plenty of liquidity and rising asset prices created among the Bushes the "illusion of wealth." Naturally, the island's trade and current account deficit began to worsen as it consumed significantly more than it produced, but initially that wasn't a problem, for the Smartos had encouraged the Bushes to engage – in the name of all kinds of good, just, and well-meant causes, and without any self-interest whatsoever – in overseas military expeditions, which led foreign creditors to believe in the island's economic and military might, and social stability.
For a time, they were, therefore, perfectly happy to finance the island's growing current account deficits. At the same time, the increase in defense spending shifted wealth from the masses to the elite of the Bushes, who largely controlled the military hardware and procurement industries. As a result, wealth and income inequity widened further as the masses became largely illiquid and had difficulty in maintaining their elevated consumption, while the Smartos and the elite of the Bushes accumulated an ever-increasing share of the national wealth. But never at a loss when it came to creating additional wealth, the Smartos devised another scheme to enrich themselves even further: lending to illiquid households (read sub-prime lending). Not that the Smartos would have lent their own money to these uncreditworthy individuals (they were far too clever for that); for a fat fee, they arranged and encouraged this novel type of financing. Credit card, consumer, and mortgage debts were all securitized and sold to pension funds and asset management companies whose beneficiaries were the majority of Bushes, who accounted, as indicated above, for 99% of the population.
In addition, these securitized products were sold to some credulous foreign investors. By doing so, the Smartos achieved three objectives. They earned large fees, and unloaded the risks indirectly onto the very people who borrowed the money, and onto foreigners. But most importantly, they provided the Bush tribe with a powerful incentive to support their expansionary monetary policies, which ensured continuous asset inflation. After all, any breakdown in the value of assets would have hurt the Bushes the most, since they carried most of the risks by having purchased all the securitized lower-quality financial instruments. But not only that! The Smartos knew that as asset prices increased, their prospective returns would diminish.
But this wasn't an immediate problem, as they promoted increased leverage to boost returns to the investors and at the same time their own fees. This strategy worked, of course, for as long as asset prices appreciated more than the interest that needed to be paid on the loans. On first sight, the debt- and, consequently, asset inflation-driven society of the island seems to work ad infinitum. But in the real world this isn't the case. Sooner or later, the system becomes totally unbalanced and entirely dependent on further asset inflation to sustain the imbalances. It is at that point that even a minor event can act as a catalyst to bring down asset prices and produce either "total," or at least "relative," illiquidity in the system, because a large number of assets whose value has declined no longer cover the loans against which they were acquired. "Total illiquidity" occurs when the central bank, faced with declining asset prices, doesn't take extraordinary measures to support asset prices.
"Relative illiquidity" follows when the central bank implements, in concert with the Treasury, extraordinary monetary and fiscal policies (cutting short-term interest rates to zero, and the aggressive purchase of bonds and stocks) in a desperate effort to support asset prices. In both cases, a degree of illiquidity occurs and depresses asset prices, but in different ways. In the case of "total illiquidity" (1929–1932 and Japan in the 1990s), asset prices tumble across the board in nominal and real terms with the exception of the highest-quality bonds and, possibly, precious metals (flight to safety). In the case of the island's central bank taking extraordinary monetary measures, asset prices don't necessarily decline in nominal terms, and in fact can even continue to appreciate.
However, they collapse in real terms, and against foreign currencies and precious metals. How so? Above, we have seen that the island's asset inflation led to excessive consumption and to growing trade and current account deficits because the Smartos and the elite of the Bushes were quick to understand that much larger capital gains could be obtained by playing the asset inflation game and by manufacturing overseas, than by investing in new production facilities and producing goods on the island.
The growing trade and current account deficits of the island were not immediately a problem, because they were offset by external surpluses in other parts of the world, which were frequently and erroneously labeled as "surplus savings" or a "savings glut." But whatever one wishes to call these surpluses or reserves, it is interesting to note that where they accumulated (mostly in China, Japan, Taiwan, Singapore, and Switzerland), they led to an interest rate structure that was lower than on the island. For the Smartos, this was an extremely fortuitous condition. For one, it was easy to convince the recipients and holders of these rapidly accumulating reserves to invest them in higher yielding assets on the island. In addition, it was for a while extremely profitable to borrow in low-yielding foreign currencies and to invest in relatively high-yielding assets on the island.
Obviously, this all changed when asset prices began to decline and the island's central bank had to take extraordinary measures by aggressively cutting short-term interest rates and supporting asset markets through bond and stock purchases. The interest rate cuts immediately narrowed the spread between the interest rate on the island and foreign currencies and led to a run on the island's currency, not only by foreigners but also by the Smartos, who had known all along that the asset inflation game would one day come to a bitter end. The deleveraging of this carry trade led to "relative illiquidity," which the island's central bank had to offset with even more liquidity injections, which while stabilizing asset prices led to even greater loss of confidence in the soundness of the island's currency, and in its bond market, which by then was mostly owned by foreign creditors.
As Mao Tse Tung had observed much earlier, there was by then "great disorder," but the situation was "excellent" for the Smartos. On the short end, interest rates had been cut so much that they were in no position to compensate for the continuous depreciation of the island's currency. So, the Smartos and the Bush tribe's elite began increasingly to borrow in the island's currency and to invest in foreign assets and precious metals. In fact, the island's central bank, by its market-supporting interventions, encouraged this process. Stocks and bonds were dumped on to the central bank and the Treasury's plunge protection team at still high prices, and the proceeds were immediately transferred to foreign assets and precious metals, which appreciated at an increasing speed compared to the island's assets, which suffered from the continuous depreciation of the currency.
And in order to facilitate this trade, the Smartos, who controlled both the Fed and the Treasury, continued to make positive comments about "a strong currency being in the best interest of the island." Sure, it would have been in the best interest of the island to have a strong currency, but it was certainly not in the best interest of the Smartos, who had devised their last grand plan: shift assets overseas and into precious metals, let the currency of the island collapse, and then repatriate the funds and buy up the remaining assets of the Bush tribe's middle and lower classes at bargain prices since they had never understood that their currency had collapsed against foreign currencies and against gold.
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