When did a bull market last end with commentators correctly calling the top? It just does not happen that way. The top comes when the last bear has thrown in the towel and is silent, having been proven wrong for too long.
That was the case with UK housing last summer. And look what has happened since then.
So the extent of the sudden bearishness among commentators about gold and silver should be no cause for concern, although the short term impact can be painful, particularly for those who ignore the cardinal rule and insist on buying precious metals with borrowed money.
Only when the mass media and great unwashed public are roaring gold bulls will this bull market come to an end. That will mean that few buyers are left and exhaustion is setting into the market.
With hindsight that was the condition of UK housing last summer with the first-time buyer market having crashed and mortgage finance stretched to the limit. But did anybody call the end of the housing boom then? Roger Bootle, for example, had been doing so for two years and had shut up.
Clearly precious metals are nowhere near this point, although in increasingly nervous times they are getting more media attention. Yet the idea that because the dollar rallies and precious metals fall means that all is now well with the US economy is just lunacy.
Today we have a former IMF chief economist warning a major US bank is likely to go bankrupt within three months, and the bail out of Fannie Mae and Freddie Mac is likely to prove so expensive that the US national debt will double. Meanwhile, geopolitics from Pakistan to Georgia are a reminder of the flash points in the world that could ignite oil prices which remain very high.
So I will be sitting out this market madness while opportunists will be piling into gold and silver for the next round of the bull run. Even the US dollar rally is bad for exporters who have been the only thing keeping the US out of recession. This downturn has much further to go and systemic failure will be the catalyst for very much higher precious metal prices.
20 August 2008
18 August 2008
Chinese demand remains strong
During past decade this Asian giant has emerged as the workshop of the world, manufacturing everything from ear-buds to steel castings to light aircrafts and ships. This demand has been huge. As more ships leave the Chinese ports laden with manufactured goods, many more ships filled with raw commodities take berth.
Remarkably, this demand continues to be there. China, in spite of all the talk about its manufacturing sector facing tough challenges due to the global slowdown, rising production costs, tight credit conditions, power shortages and currency appreciation, continues to produce massive quantities of finished goods. Millions of small and big, low and high value consumables continue to be produced there for supermarkets in every nook and corner of the world. The recent numbers show that this Asian economic powerhouse is producing and trading finished goods with the same zest as has been seen during past half a decade. According to the latest statistics, during the first half of this year the output of steel has gone up to 299.96 million tonnes (up 12.51 percent year-on-year) and cement production has risen to 648.05 million tonnes (up 8.7 percent year-on-year). Output of large power plants has risen to 1.68 trillion kw/hr, up 12.9 percent year-on-year. Autos imports have risen to $16.333 billion, up 39.64 percent year-on-year, while exports have grown to $24.776 billion, up 39.45 percent. Machinery output has gone up 21.6 percent year-on-year by value. Coal imports have gone up to 24.94 million tons in spite of the average price jumping by 51.9 percent to $70 per tonne. Soybean imports have hit 20.73 million tons even as the average price going up 78 percent to $591.70 per ton. These numbers are likely to grow bigger during the coming years as China continues to build and expand new capacity. The current host of Olympic games has year to date approved the establishment of 16,891 overseas-funded enterprises, soaking up $60.724 billion U.S. dollars (up 44.54 percent y-o-y) of new FDI money.
The same period has also seen the construction of 3.695 billion square meters of floor space. And unlike the United States where the inventories are piling up and new construction slowing down thus resulting in diminishing value, the prices are climbing in China. The latest reports from Beijing show that the housing prices went up 7% in major Chinese cities during July 08. According to the National Development and Reform Commission (NDRC) and the National Bureau of Statistics, the prices of real estate in 70 major Chinese cities rose 7.0 percent in July on the same month of last year. (The price rise was 11.3 percent in January, 10.9 percent in February, 10.7 percent in March, 10.1 percent in April, 9.2 percent in May and 8.2 in June.) Simultaneously, the prices of second-hand houses gained 6.0 percent year on year. I don't need to emphasize that the rising housing prices are an indication of the feel good factor among the people, which automatically translates in construction of more houses and offices and development of infrastructure - all of which leads to extra consumption of commodities.
Of course the Chinese are not just buying the houses, they are also buying things to fill them. No wonder, China's domestic retail sales leaped a brisk 23.3 percent to 862.9 billion yuan ( 125.8 billion U.S. dollars) in July this year. According to the National Bureau of Statistics, this brought China's retail sales of consumer goods in the first seven months of this year to 5.9672 trillion yuan, up 21.7 percent, compared with 15.5 percent growth rate recorded over the same period of last year. Here I must pause and inform that unlike India where the growth in rural and urban regions is poles apart, the Chinese growth is more evenly distributed; as a result, while the urban consumption is up 24 percent year-on-year, the rural consumption is only a whisker behind at 21.8 percent up - a very bullish sign, given the size of the rural Chinese population.
Goes without saying, there is little likelihood of Chinese consumption waning to a level where it will contribute to a meltdown in commodity prices. It is true that there may be a miniscule reduction in its commodity consumption arising out of the fall in GDP growth from about 11% to about 10% (as is being widely expected), but that may not be sufficient to bring the prices down to a level that would make the commodity bears rejoice.
Remarkably, this demand continues to be there. China, in spite of all the talk about its manufacturing sector facing tough challenges due to the global slowdown, rising production costs, tight credit conditions, power shortages and currency appreciation, continues to produce massive quantities of finished goods. Millions of small and big, low and high value consumables continue to be produced there for supermarkets in every nook and corner of the world. The recent numbers show that this Asian economic powerhouse is producing and trading finished goods with the same zest as has been seen during past half a decade. According to the latest statistics, during the first half of this year the output of steel has gone up to 299.96 million tonnes (up 12.51 percent year-on-year) and cement production has risen to 648.05 million tonnes (up 8.7 percent year-on-year). Output of large power plants has risen to 1.68 trillion kw/hr, up 12.9 percent year-on-year. Autos imports have risen to $16.333 billion, up 39.64 percent year-on-year, while exports have grown to $24.776 billion, up 39.45 percent. Machinery output has gone up 21.6 percent year-on-year by value. Coal imports have gone up to 24.94 million tons in spite of the average price jumping by 51.9 percent to $70 per tonne. Soybean imports have hit 20.73 million tons even as the average price going up 78 percent to $591.70 per ton. These numbers are likely to grow bigger during the coming years as China continues to build and expand new capacity. The current host of Olympic games has year to date approved the establishment of 16,891 overseas-funded enterprises, soaking up $60.724 billion U.S. dollars (up 44.54 percent y-o-y) of new FDI money.
The same period has also seen the construction of 3.695 billion square meters of floor space. And unlike the United States where the inventories are piling up and new construction slowing down thus resulting in diminishing value, the prices are climbing in China. The latest reports from Beijing show that the housing prices went up 7% in major Chinese cities during July 08. According to the National Development and Reform Commission (NDRC) and the National Bureau of Statistics, the prices of real estate in 70 major Chinese cities rose 7.0 percent in July on the same month of last year. (The price rise was 11.3 percent in January, 10.9 percent in February, 10.7 percent in March, 10.1 percent in April, 9.2 percent in May and 8.2 in June.) Simultaneously, the prices of second-hand houses gained 6.0 percent year on year. I don't need to emphasize that the rising housing prices are an indication of the feel good factor among the people, which automatically translates in construction of more houses and offices and development of infrastructure - all of which leads to extra consumption of commodities.
Of course the Chinese are not just buying the houses, they are also buying things to fill them. No wonder, China's domestic retail sales leaped a brisk 23.3 percent to 862.9 billion yuan ( 125.8 billion U.S. dollars) in July this year. According to the National Bureau of Statistics, this brought China's retail sales of consumer goods in the first seven months of this year to 5.9672 trillion yuan, up 21.7 percent, compared with 15.5 percent growth rate recorded over the same period of last year. Here I must pause and inform that unlike India where the growth in rural and urban regions is poles apart, the Chinese growth is more evenly distributed; as a result, while the urban consumption is up 24 percent year-on-year, the rural consumption is only a whisker behind at 21.8 percent up - a very bullish sign, given the size of the rural Chinese population.
Goes without saying, there is little likelihood of Chinese consumption waning to a level where it will contribute to a meltdown in commodity prices. It is true that there may be a miniscule reduction in its commodity consumption arising out of the fall in GDP growth from about 11% to about 10% (as is being widely expected), but that may not be sufficient to bring the prices down to a level that would make the commodity bears rejoice.
13 August 2008
Whats with Gold going down
With gold pushing down toward $800 an ounce, and perhaps only days from testing that level, a lot of the discussion can be found on the internet discussion groups that goes to the idea that there is some mysterious group of ultra-rich who manipulate the price of this thing, or that, in order to screw the vast majority of folks out of their retirements and small life savings. But, is this a credible view, or is there an alternative explanation; one that's every bit as real - and achieving the same thing, but more in keeping with the notion of a rational marketplace?
As luck would have it, a few weeks back a friend of mine for many years sent me a draft of his new book which is an insider's account of what is really going on in the market from the professional standpoint.
Now, when I say professional, I really mean it. Although I can't use his 'name, my friend Mr. X. actually invented some of the types of debt instruments that are in the process of either blowing or, or just being 'repriced', depending on how much you know. He was one of the players who brought PC's to Wall Street and used them early on to get a leg up on bond trading. And yes, he knows a lot of the players mentioned in "Liar's Poker". Most would know his name, too.
His book explains in great detail how things work in financial markets. I don't mean how things kinda work, I mean how things really work right down to which hedge fund managers hang out at which bars in Greenwich, which as it turns out, is more the center of the financial world lately because it's mostly from there that the US-run private fundsoperate without transparency from offshore places like the Cayman Islands.
We were talking this weekend about how low this commodity, or that, might go, and my friend was explained how the real world worked and I made some comment, which was interrupted with a stern admonition: "Will you stop thinking about fundamentals?" Not wanting to appear an idiot, I shut up and listened.
---
"There are two chapters in my book that explain exactly what's going on in the financial markets today and it has almost nothing to do with fundaments," he began. "You really need to read the two chapters called "The Great De-Levering" and "Invisible Leverage". You can even paraphrase some of it on your site, but I'm still looking for a literary agent for the book, so no exact quotes because I'm still working."
Fair enough.
Let me sketch out where we are at the moment. We're in a world awash with excessive leverage and the world has to "de-lever" in order to get things back in balance in the world of high finance. Think of it this way: When times are good, a high quality securitized bond can be had for as little as 2-cents on the dollar. That's 49 to 1 leverage. More typical was the slightly lower rated securitized assets where leverage was a more modest 19 to 1, but still, that means putting 5% in to control the position.
What is happening with The Great De-levering" underway is actually a double whammy. First, the value of the securitized assets is dropping, so instead of a tranche being valued at 100-cents on the dollar, it might drop to perhaps 92-cents on the dollar. And then, to make matters worse, the lenders were (and are) demanding the hedge funds have more 'skin in the game'.
So say you had a MBS (mortgage backed security) that was valued at $1.00 and held with 49 to 1 leverage. Your hedge fund puts up two-cents for each $1.00 controlled. Just add zero's to the concept and you're there.
Next, because of foreclosures and jitters, you get "the call" (a telephone call that's a margin call) from your banker who's been putting up the 98-cents as a loan. The call goes something like this:
"Hi, George? That $1.00 MBS is no longer going to be marked to model. Instead, we are marking to street price and that's now 87.5-cents. And, because capital is getting more dear, we're also going to increase your margin requirement to 5% from the current 2%."
Look at what this has done to my hedge fund P&L: I used to show $1.00 of assets on the strength of my MBS but since it has been repriced, This asset just dropped 12½%/ And now, to stay in the game, I will need to put up 5% of the 87.5-cent asset or 4.375-cents instead of the two-cents I had in earlier. My hedge fund sudden looks like a poor lending risk - and that would trigger more margin calls in itself. Yikes!
Now, you need to ask this simple question: "How many hedge funds can lose 12½% and more than double their actual cash in the game to hold that position? Answer: Effectively None.
---
Placed in this position, the hedge fund, which has been enjoying great profits from this trade before repricing, now finds that they are upset down, so the only way to get out of the trade is to sell the repriced assets into the market to liquidate the position, but that sale will happen at the new lower price. And then, if there's any kind of gap left, they will have to sell off other assets, too. Things become self-reinforcing on the downside.
You can see what happens now, right? One asset class going toes up means that assets that were maybe just fine (and fairly priced) have to be sold off to balance the books. And because that asset is sold at a discount (like gold contracts, or silver, just as a hypothetical) those prices begin to move down.
My friend's book explains how on March 16th of this year, one of the lenders, Bear Stearns, got into trouble because so many hedge funds were trying to get so many dollars out. Being crafty folks, some of the smart folks involved noticed the Bear was bleeding and decided to lay on some serious put options betting that Bear shares would go down.
---
Although there are lots of headlines around this morning asking "Who bought $1.7 million "Lottery Ticket" on Bear Streans collapse?" like it was some kind of 'inside" job, there were ots of people on the Street who sensed what was happening and could have placed off-setting bets. And this one happened to pay off - BIG. To the tune of $270-million.
The reason the bankers and government (Fed/Treasury) had to bail out Bear was that as one of the largest market makers of Credit Default Swaps (CDS) if Bear hadn't been saved with your $30-billion of taxpayer bailout, we would be in the midst of the Second Depression right now today. As it is, the slower unwinding may be a little more easy to deal with and it will keep at least most of the 'blood' off the hands of the oil party. We're years from this being over.
---
Most taxpayers aren't going to 'get it' and will be quick to adjudge that if someone who's smart can make a quick $270 million, how come we're getting stiffed for $30-billion? Ignorance has its price.
The really knowledgeable players already knew who the key fund lenders were - and because of Bear's key role, the funds were watching and knew when the withdraw money, so I'm not inclined to think criminal conspiracy so much as think it's a more or less natural outcome of "The Great De-Levering." Smart folks make money, dumb folks lose and sheep get sheared.
---
So how far is down? My friend, who's background in finance qualifies him to answer the question better than 99.9% experts, isn't sure. He's looking for it to continue on for probably a couple of more years and in that time, we'll go through episodes of relative quiet (like now) or we will hit another downdraft, by my reckoning perhaps this fall.
"We've got about $500-trillion in synthetics to de-lever, but some of that is double-counted, and some is counted four times, but it's still lot of money," he explains. "And the hedge funds only have about a trillion to play with. So you can see there's a lot of downside potential."
As good as my confidant is at running numbers out, there's no way to tell when it will all stop. But if you're looking for a wild-*ss guess, try this observation: "There are about 9,000 hedge funds out there right now. I wouldn't think the de-levering is over until maybe 6,000 of them have gone broke...and the 3,000 that remain will be a mix of winners and those barely hanging on..." That's only a guess. No one knows for sure.
What's going on right now in the markets - and it's spreading across all kinds of commodity markets and resulting in massive price deflation -- is also pushed along as the result of what my source calls "Invisible Leverage."
Here's why it's going on even as we speak. If I give you $200 to invest in stocks, and you put $100 on each of two stocks and one doubles, while the other falls to half its value, how does your return look?
The answer is the first $100 goes to $200, while the other goes down to $50, so at the end of the day, your stock picks are worth $250 - or a hefty 25% return, even if you get only 50% right. Sweet, huh?
Since stocks can make a great return with 50/50 odds on the upside, the hedge traders make their long side bets in the stocks, but because the odds of success run more like 25-1 against you on the long side of bonds, they make their bearish bets in bonds... they couldn't do this until the CDS (Credit Default Swap) market developed, which allowed traders to "go short" in the credit markets.
What was developed to be a hedging product turned out to have such a good risk/return profile for bears that we now have the weird situation where the short-side bets against some bonds can be 10 to 50 times the size of the bond issues themselves. It is the limited capital needed to enter the CDS that gives the market its "invisible leverage" -- the cash market is only allowing 1-1 or maybe 3-1 leverage (look at CDO sale to Lone Star with financing by Merrill), but CDS protection buyers (the bears) can still get 19-1 leverage . JP Morgan got a nice 29-1 leverage from the taxpayers on Bear Stearns' mortgage portfolio, but that's another story...
---
There's a lot of 'pile on' in play, too. The lemming-like behavior of the retail customers is apparently nothing when compared to the lock-step behavior of hedge funds. All it takes is a word here or there at those particular places in Greenwich, and 'poof!' A whole asset class gets whacked, and thanks to the circular nature of the game, everything else de-levers to some extent as margin calls come in for the players 'caught out'. A failure here, means pressure there, kind of thing.
You won't get to see all this working out in real-time, though, because the offshore funds don't have to report like the regulated players in the US, even though many of the plays are phoned in from Connecticut.
---
Right now, I'm trying to bottom fish a few $17.50 December commodity call options for my personal account. I think the predictive linguistics have laid out a pretty good scenario for what may happen, and if they're right, a quick flight to hard assets might come about before Thanksgiving due to Middle East events to come. But, if it doesn't, I wouldn't be surprised by that outcome, either. I think of it as a $1,500 scratch ticket.
As my friend's book points out, there's nothing wrong with leverage at modest levels, like the 20% down conventional loans to buy a home - that's still a great use of leverage. But 2% (and less) to control huge financial abstractions? That's coming to an end. Painfully.
----
What's hard for people to conceptualize is that a sell off of one commodity (or stock) generates margin calls in others, which in turn drives selling in non-related markets, and those in turn cascade in slow motion which might more properly be called a "Crashcade" although I haven't spied that term (or "Debtberg" in my friends book, yet.
But, before the Second Depression becomes apparent, I'm betting the Oil Party will start another international distraction going and we'll all be blaming some group in another country and getting all whipped up into a frenzy to carpet bomb there. Late October, maybe?
The distractions to come may serve to blame-shift, but I think you can see now that the "PowersThatBe" might readily be described as hedge fund managers reacting to market forces at work.
As luck would have it, a few weeks back a friend of mine for many years sent me a draft of his new book which is an insider's account of what is really going on in the market from the professional standpoint.
Now, when I say professional, I really mean it. Although I can't use his 'name, my friend Mr. X. actually invented some of the types of debt instruments that are in the process of either blowing or, or just being 'repriced', depending on how much you know. He was one of the players who brought PC's to Wall Street and used them early on to get a leg up on bond trading. And yes, he knows a lot of the players mentioned in "Liar's Poker". Most would know his name, too.
His book explains in great detail how things work in financial markets. I don't mean how things kinda work, I mean how things really work right down to which hedge fund managers hang out at which bars in Greenwich, which as it turns out, is more the center of the financial world lately because it's mostly from there that the US-run private fundsoperate without transparency from offshore places like the Cayman Islands.
We were talking this weekend about how low this commodity, or that, might go, and my friend was explained how the real world worked and I made some comment, which was interrupted with a stern admonition: "Will you stop thinking about fundamentals?" Not wanting to appear an idiot, I shut up and listened.
---
"There are two chapters in my book that explain exactly what's going on in the financial markets today and it has almost nothing to do with fundaments," he began. "You really need to read the two chapters called "The Great De-Levering" and "Invisible Leverage". You can even paraphrase some of it on your site, but I'm still looking for a literary agent for the book, so no exact quotes because I'm still working."
Fair enough.
Let me sketch out where we are at the moment. We're in a world awash with excessive leverage and the world has to "de-lever" in order to get things back in balance in the world of high finance. Think of it this way: When times are good, a high quality securitized bond can be had for as little as 2-cents on the dollar. That's 49 to 1 leverage. More typical was the slightly lower rated securitized assets where leverage was a more modest 19 to 1, but still, that means putting 5% in to control the position.
What is happening with The Great De-levering" underway is actually a double whammy. First, the value of the securitized assets is dropping, so instead of a tranche being valued at 100-cents on the dollar, it might drop to perhaps 92-cents on the dollar. And then, to make matters worse, the lenders were (and are) demanding the hedge funds have more 'skin in the game'.
So say you had a MBS (mortgage backed security) that was valued at $1.00 and held with 49 to 1 leverage. Your hedge fund puts up two-cents for each $1.00 controlled. Just add zero's to the concept and you're there.
Next, because of foreclosures and jitters, you get "the call" (a telephone call that's a margin call) from your banker who's been putting up the 98-cents as a loan. The call goes something like this:
"Hi, George? That $1.00 MBS is no longer going to be marked to model. Instead, we are marking to street price and that's now 87.5-cents. And, because capital is getting more dear, we're also going to increase your margin requirement to 5% from the current 2%."
Look at what this has done to my hedge fund P&L: I used to show $1.00 of assets on the strength of my MBS but since it has been repriced, This asset just dropped 12½%/ And now, to stay in the game, I will need to put up 5% of the 87.5-cent asset or 4.375-cents instead of the two-cents I had in earlier. My hedge fund sudden looks like a poor lending risk - and that would trigger more margin calls in itself. Yikes!
Now, you need to ask this simple question: "How many hedge funds can lose 12½% and more than double their actual cash in the game to hold that position? Answer: Effectively None.
---
Placed in this position, the hedge fund, which has been enjoying great profits from this trade before repricing, now finds that they are upset down, so the only way to get out of the trade is to sell the repriced assets into the market to liquidate the position, but that sale will happen at the new lower price. And then, if there's any kind of gap left, they will have to sell off other assets, too. Things become self-reinforcing on the downside.
You can see what happens now, right? One asset class going toes up means that assets that were maybe just fine (and fairly priced) have to be sold off to balance the books. And because that asset is sold at a discount (like gold contracts, or silver, just as a hypothetical) those prices begin to move down.
My friend's book explains how on March 16th of this year, one of the lenders, Bear Stearns, got into trouble because so many hedge funds were trying to get so many dollars out. Being crafty folks, some of the smart folks involved noticed the Bear was bleeding and decided to lay on some serious put options betting that Bear shares would go down.
---
Although there are lots of headlines around this morning asking "Who bought $1.7 million "Lottery Ticket" on Bear Streans collapse?" like it was some kind of 'inside" job, there were ots of people on the Street who sensed what was happening and could have placed off-setting bets. And this one happened to pay off - BIG. To the tune of $270-million.
The reason the bankers and government (Fed/Treasury) had to bail out Bear was that as one of the largest market makers of Credit Default Swaps (CDS) if Bear hadn't been saved with your $30-billion of taxpayer bailout, we would be in the midst of the Second Depression right now today. As it is, the slower unwinding may be a little more easy to deal with and it will keep at least most of the 'blood' off the hands of the oil party. We're years from this being over.
---
Most taxpayers aren't going to 'get it' and will be quick to adjudge that if someone who's smart can make a quick $270 million, how come we're getting stiffed for $30-billion? Ignorance has its price.
The really knowledgeable players already knew who the key fund lenders were - and because of Bear's key role, the funds were watching and knew when the withdraw money, so I'm not inclined to think criminal conspiracy so much as think it's a more or less natural outcome of "The Great De-Levering." Smart folks make money, dumb folks lose and sheep get sheared.
---
So how far is down? My friend, who's background in finance qualifies him to answer the question better than 99.9% experts, isn't sure. He's looking for it to continue on for probably a couple of more years and in that time, we'll go through episodes of relative quiet (like now) or we will hit another downdraft, by my reckoning perhaps this fall.
"We've got about $500-trillion in synthetics to de-lever, but some of that is double-counted, and some is counted four times, but it's still lot of money," he explains. "And the hedge funds only have about a trillion to play with. So you can see there's a lot of downside potential."
As good as my confidant is at running numbers out, there's no way to tell when it will all stop. But if you're looking for a wild-*ss guess, try this observation: "There are about 9,000 hedge funds out there right now. I wouldn't think the de-levering is over until maybe 6,000 of them have gone broke...and the 3,000 that remain will be a mix of winners and those barely hanging on..." That's only a guess. No one knows for sure.
What's going on right now in the markets - and it's spreading across all kinds of commodity markets and resulting in massive price deflation -- is also pushed along as the result of what my source calls "Invisible Leverage."
Here's why it's going on even as we speak. If I give you $200 to invest in stocks, and you put $100 on each of two stocks and one doubles, while the other falls to half its value, how does your return look?
The answer is the first $100 goes to $200, while the other goes down to $50, so at the end of the day, your stock picks are worth $250 - or a hefty 25% return, even if you get only 50% right. Sweet, huh?
Since stocks can make a great return with 50/50 odds on the upside, the hedge traders make their long side bets in the stocks, but because the odds of success run more like 25-1 against you on the long side of bonds, they make their bearish bets in bonds... they couldn't do this until the CDS (Credit Default Swap) market developed, which allowed traders to "go short" in the credit markets.
What was developed to be a hedging product turned out to have such a good risk/return profile for bears that we now have the weird situation where the short-side bets against some bonds can be 10 to 50 times the size of the bond issues themselves. It is the limited capital needed to enter the CDS that gives the market its "invisible leverage" -- the cash market is only allowing 1-1 or maybe 3-1 leverage (look at CDO sale to Lone Star with financing by Merrill), but CDS protection buyers (the bears) can still get 19-1 leverage . JP Morgan got a nice 29-1 leverage from the taxpayers on Bear Stearns' mortgage portfolio, but that's another story...
---
There's a lot of 'pile on' in play, too. The lemming-like behavior of the retail customers is apparently nothing when compared to the lock-step behavior of hedge funds. All it takes is a word here or there at those particular places in Greenwich, and 'poof!' A whole asset class gets whacked, and thanks to the circular nature of the game, everything else de-levers to some extent as margin calls come in for the players 'caught out'. A failure here, means pressure there, kind of thing.
You won't get to see all this working out in real-time, though, because the offshore funds don't have to report like the regulated players in the US, even though many of the plays are phoned in from Connecticut.
---
Right now, I'm trying to bottom fish a few $17.50 December commodity call options for my personal account. I think the predictive linguistics have laid out a pretty good scenario for what may happen, and if they're right, a quick flight to hard assets might come about before Thanksgiving due to Middle East events to come. But, if it doesn't, I wouldn't be surprised by that outcome, either. I think of it as a $1,500 scratch ticket.
As my friend's book points out, there's nothing wrong with leverage at modest levels, like the 20% down conventional loans to buy a home - that's still a great use of leverage. But 2% (and less) to control huge financial abstractions? That's coming to an end. Painfully.
----
What's hard for people to conceptualize is that a sell off of one commodity (or stock) generates margin calls in others, which in turn drives selling in non-related markets, and those in turn cascade in slow motion which might more properly be called a "Crashcade" although I haven't spied that term (or "Debtberg" in my friends book, yet.
But, before the Second Depression becomes apparent, I'm betting the Oil Party will start another international distraction going and we'll all be blaming some group in another country and getting all whipped up into a frenzy to carpet bomb there. Late October, maybe?
The distractions to come may serve to blame-shift, but I think you can see now that the "PowersThatBe" might readily be described as hedge fund managers reacting to market forces at work.
Can they print like China?
Last week, Congress passed a housing bill that gave the Treasury Department a blank check to inject billions of U.S. taxpayer dollars into mortgage giants Fannie Mae and Freddie Mac, snatching them from insolvency. To accommodate this blank check, Congress obligingly raised its debt ceiling by $800 billion. Ouch! That’s nearly a trillion dollars. Why was it necessary to incur this potentially crippling public debt to bail out two completely private, for-profit behemoths, which have run themselves into bankruptcy with their own risky investment schemes? Policymakers said it was essential to maintain the country’s creditworthiness with foreign lenders, which today hold about one-fifth of Fannie and Freddie securities. According to a July 21 report by Heather Timmons in The New York Times:
One out of 10 American mortgages is, in effect, in the hands of institutions and governments outside the United States.1
Ten percent of American mortgages are now owned by foreigners? Doesn’t that defeat the whole purpose of Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Mortgage Corporation)? They were supposedly set up to fund “the American dream” – home ownership by Americans. Today, American homes are owned by anonymous pools of private investors, many of whom are foreign governments and foreign central banks. How did we manage to give away the farm? And why are we bowing to the interests of foreign investors to the point of driving our own government into bankruptcy? The federal debt is already nearly ten trillion dollars, more than the government can ever possibly repay with taxes.
According to analysts, the bailout of the two mortgage giants is necessary “because America’s relations with a host of countries are intricately tied to Fannie and Freddie,” and because we need to assure “Americans’ future ability to gain access to credit. If foreign companies and governments abandon United States investments, home, auto and credit card loans will be much more difficult to come by.”2
The same sort of argument was once made by U.S. banks to get Third World countries to pay up on their foreign loans. The U.S., it seems, has finally achieved Third World debtor-nation status. For the last half century, the push for “free trade” has been all about preserving profitable opportunities for investment, finding ways to “make money” without actually making anything, exploiting the work of others by buying up corporations around the world and drawing profits off the top. But now the tables have turned. We have gone from being the world’s largest creditor to the world’s largest debtor. We spent our dollars abroad and now they are coming back to shop for our own real estate and corporate assets. Timmons observes:
Asian institutions and investors hold some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376 billion and Japan $228 billion as of June 2007 . . . . Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.
Sovereign wealth funds (investment funds of sovereign nations and their central banks) are now busily buying up U.S. assets, in what Bill Bonner has called “the biggest transfer of wealth in history.” Writing in The Daily Reckoning on July 11, he observed:
[T]he balance sheet of the U.S. Fed shows $2.3 trillion of US treasury debt held in custody for foreign central banks. The harder the Fed fights the [economic] correction . . . the more money and credit it puts out. This monetary inflation causes prices for oil and imports to rise . . . and more money goes into foreign reserves and Sovereign Wealth Funds in the East, to be used to buy more assets in the West. Thanks to America’s mad monetary policy, these private assets are being taken into public ownership. Some of America’s most important properties are being nationalized . . . but by other nations.3
The ultimate irony is that these other nations may be buying our federal bonds and mortgage-backed securities with money they simply created on a printing press. John Succo is a hedge fund manager who writes on the Internet as “Mr. Practical.” He estimates that as much as 90 percent of foreign money used to buy U.S. securities comes from foreign central banks, which print their own local currencies, buy U.S. dollars with them, and then use the dollars to buy U.S. securities.4 These nations are doing what Congress itself has declined to do: exercising the sovereign right of governments to print their own money.
Unlike the U.S. Federal Reserve, which is wholly owned by a consortium of private banks, the People’s Bank of China (PBoC) is actually owned by the Chinese government. When Chinese merchants, awash with U.S. dollars, cash them in for local currency to pay their workers, the PBoC obliges by swapping dollars for government-issued renminbi. The workers get paid in local currency, and the PBoC gets the dollars for the cost of printing the renminbi. The PBoC then uses the dollars to buy either U.S. interest-bearing bonds or Fannie and Freddie securities, which have conveniently opened up U.S. real estate to foreign investment. In effect, American citizens are paying a foreign government to turn U.S. debt into money, using currency the foreign government issued by fiat (Latin for “let it be” or “so be it” – money simply ordered into existence by the sovereign).
Why doesn’t the U.S. government just issue its own fiat money? That solution may seem radical now, but it could start to look better if Congress has to do what President Roosevelt did in 1933 – declare national bankruptcy and call for a plan of reorganization. There is simply not enough money in the public till to bail out Bear Stearns, IndyMac, and now the private mortgage giants Fannie Mae and Freddie Mac, as well as pay $500 billion annually to service a gargantuan federal debt, and still have enough money left over to repair our failing infrastructure, develop sustainable energy systems, and generally provide for the Common Wealth. The cookie jar is empty, and it is empty because private profiteers have been helping themselves to the cookies.
If the Federal Reserve were made a truly “federal” agency, Federal Reserve Notes (dollar bills) could simply be issued by the U.S. government, instead of being borrowed from a private banking system that creates them with accounting entries and charges interest for the privilege. (See E. Brown, “Putting the ‘Federal’ Back in the Federal Reserve,” www.webofdebt.com/articles, July 26, 2008.) Rather than scrambling to find foreign investors to roll over a $10 trillion debt, Congress could just pay off the debt as the bonds came due, using the same sort of money that foreign central banks used to purchase the bonds in the first place – government-issued national currency. Congress would just be giving them their fiat money back.
As for Fannie and Freddie, they are too big to fail; but they aren’t too big to be nationalized. If we the people are paying the bills, we should get the stock. Fannie Mae began in the 1930s as a truly federal agency, funded by a wholly government-owned bank. The Reconstruction Finance Corporation (RFC) advanced its own federal credit, which was used to fund not only the New Deal but the rapid industrialization that led to victory in World War II.5 The result was to make America the world leader in industry and productivity for most of the rest of the century. It may be time to try that experiment again. The RFC had some flaws, but they could be worked out. That is another subject, to be covered in another article. The bottom line here is that the deed to the farm needs to remain on these shores, and so does the sovereign power to issue money and credit. The existing system of banking and credit creation is teetering on the brink of a collapse brought about by its own internal contradictions and corruption. The system has long since failed in its primary mission of channeling this country’s resources towards investment in a sustainable future. As it stumbles from crisis to crisis, we have neither the time nor the resources to give it yet another chance to do the job. The time has come to clear the boards and begin a new game with new rules.
One out of 10 American mortgages is, in effect, in the hands of institutions and governments outside the United States.1
Ten percent of American mortgages are now owned by foreigners? Doesn’t that defeat the whole purpose of Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Mortgage Corporation)? They were supposedly set up to fund “the American dream” – home ownership by Americans. Today, American homes are owned by anonymous pools of private investors, many of whom are foreign governments and foreign central banks. How did we manage to give away the farm? And why are we bowing to the interests of foreign investors to the point of driving our own government into bankruptcy? The federal debt is already nearly ten trillion dollars, more than the government can ever possibly repay with taxes.
According to analysts, the bailout of the two mortgage giants is necessary “because America’s relations with a host of countries are intricately tied to Fannie and Freddie,” and because we need to assure “Americans’ future ability to gain access to credit. If foreign companies and governments abandon United States investments, home, auto and credit card loans will be much more difficult to come by.”2
The same sort of argument was once made by U.S. banks to get Third World countries to pay up on their foreign loans. The U.S., it seems, has finally achieved Third World debtor-nation status. For the last half century, the push for “free trade” has been all about preserving profitable opportunities for investment, finding ways to “make money” without actually making anything, exploiting the work of others by buying up corporations around the world and drawing profits off the top. But now the tables have turned. We have gone from being the world’s largest creditor to the world’s largest debtor. We spent our dollars abroad and now they are coming back to shop for our own real estate and corporate assets. Timmons observes:
Asian institutions and investors hold some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376 billion and Japan $228 billion as of June 2007 . . . . Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.
Sovereign wealth funds (investment funds of sovereign nations and their central banks) are now busily buying up U.S. assets, in what Bill Bonner has called “the biggest transfer of wealth in history.” Writing in The Daily Reckoning on July 11, he observed:
[T]he balance sheet of the U.S. Fed shows $2.3 trillion of US treasury debt held in custody for foreign central banks. The harder the Fed fights the [economic] correction . . . the more money and credit it puts out. This monetary inflation causes prices for oil and imports to rise . . . and more money goes into foreign reserves and Sovereign Wealth Funds in the East, to be used to buy more assets in the West. Thanks to America’s mad monetary policy, these private assets are being taken into public ownership. Some of America’s most important properties are being nationalized . . . but by other nations.3
The ultimate irony is that these other nations may be buying our federal bonds and mortgage-backed securities with money they simply created on a printing press. John Succo is a hedge fund manager who writes on the Internet as “Mr. Practical.” He estimates that as much as 90 percent of foreign money used to buy U.S. securities comes from foreign central banks, which print their own local currencies, buy U.S. dollars with them, and then use the dollars to buy U.S. securities.4 These nations are doing what Congress itself has declined to do: exercising the sovereign right of governments to print their own money.
Unlike the U.S. Federal Reserve, which is wholly owned by a consortium of private banks, the People’s Bank of China (PBoC) is actually owned by the Chinese government. When Chinese merchants, awash with U.S. dollars, cash them in for local currency to pay their workers, the PBoC obliges by swapping dollars for government-issued renminbi. The workers get paid in local currency, and the PBoC gets the dollars for the cost of printing the renminbi. The PBoC then uses the dollars to buy either U.S. interest-bearing bonds or Fannie and Freddie securities, which have conveniently opened up U.S. real estate to foreign investment. In effect, American citizens are paying a foreign government to turn U.S. debt into money, using currency the foreign government issued by fiat (Latin for “let it be” or “so be it” – money simply ordered into existence by the sovereign).
Why doesn’t the U.S. government just issue its own fiat money? That solution may seem radical now, but it could start to look better if Congress has to do what President Roosevelt did in 1933 – declare national bankruptcy and call for a plan of reorganization. There is simply not enough money in the public till to bail out Bear Stearns, IndyMac, and now the private mortgage giants Fannie Mae and Freddie Mac, as well as pay $500 billion annually to service a gargantuan federal debt, and still have enough money left over to repair our failing infrastructure, develop sustainable energy systems, and generally provide for the Common Wealth. The cookie jar is empty, and it is empty because private profiteers have been helping themselves to the cookies.
If the Federal Reserve were made a truly “federal” agency, Federal Reserve Notes (dollar bills) could simply be issued by the U.S. government, instead of being borrowed from a private banking system that creates them with accounting entries and charges interest for the privilege. (See E. Brown, “Putting the ‘Federal’ Back in the Federal Reserve,” www.webofdebt.com/articles, July 26, 2008.) Rather than scrambling to find foreign investors to roll over a $10 trillion debt, Congress could just pay off the debt as the bonds came due, using the same sort of money that foreign central banks used to purchase the bonds in the first place – government-issued national currency. Congress would just be giving them their fiat money back.
As for Fannie and Freddie, they are too big to fail; but they aren’t too big to be nationalized. If we the people are paying the bills, we should get the stock. Fannie Mae began in the 1930s as a truly federal agency, funded by a wholly government-owned bank. The Reconstruction Finance Corporation (RFC) advanced its own federal credit, which was used to fund not only the New Deal but the rapid industrialization that led to victory in World War II.5 The result was to make America the world leader in industry and productivity for most of the rest of the century. It may be time to try that experiment again. The RFC had some flaws, but they could be worked out. That is another subject, to be covered in another article. The bottom line here is that the deed to the farm needs to remain on these shores, and so does the sovereign power to issue money and credit. The existing system of banking and credit creation is teetering on the brink of a collapse brought about by its own internal contradictions and corruption. The system has long since failed in its primary mission of channeling this country’s resources towards investment in a sustainable future. As it stumbles from crisis to crisis, we have neither the time nor the resources to give it yet another chance to do the job. The time has come to clear the boards and begin a new game with new rules.
11 August 2008
Dox Coxe
Investment Recommendations
1. This is not the end of the commodity bull market. Bear
Stearns, F&F and other crises will one day seem trivial. The
new global middle class that is repricing commodities never
will.
2. Remain underweight the banks and financial stocks that
invested heavily in the asset classes that collectively created
a global financial crisis. Despite the frantic efforts of the
Fed and Treasury, new challenges appear each week. The
deleveraging process is accelerating. Those peddling bank
paper perversely insist that these writedowns and bailouts
are now so gigantic that a turning point is near. We think
serious investors should compare this sordid story to the
SARS epidemic: When the number of infected people was
rising sharply and rapidly, cautious flyers asked themselves,
“Is this trip necessary?”
3. We recommend that clients begin taking preliminary
positions in companies which stand to benefit most from the
possible onset of realism in US energy policies. When—not
if—offshore drilling finally gets the nod, the majors and
service companies should benefit enormously. Arctic drilling
could be next, from which some important Canadian
companies would benefit, although the technological
problems are formidable, and the pipeline issues are not fully
resolved.
4. As for corn ethanol, the producers have been lucky: they
benefited from $125 oil, which has largely offset $5.50
corn. They have also benefited from the plunge in natural
gas prices. As if those weren’t enough to save an industry
whose fundamentals had become so controversial, they
also benefited from the collapse of Doha, because the
embarrassing tariff against Brazilian sugar ethanol
survived.
5. Natural gas supplies have exceeded expectations because of
the Barnett Shale and coal bed methane booms, and because
this summer has not been as hot as had been feared. We
recommend the natural gas-oriented producers with aboveaverage
reserve life indices.
6. The fertilizer companies have delivered the most impressive
earnings gains of any commodity group. Nevertheless, their
share prices have fallen in recent weeks along with other
commodity groups on days when traders have been buying
banks and dumping commodities. They probably have
the most predictable earnings of all the major commodity
sectors, and should be cornerstones of any resource portfolio.
As for the bricks, they are the farm equipment companies.
The roof and windows are the logistic companies and seed
manufacturers.
7. The continuation of the wide spread between Libor and
the fed funds rate, despite the best efforts of Messrs.
Bernanke and Paulson, suggests that the real US economy
will begin to show serious strain because banks are cutting
back on making traditional loans—they have squandered
their resources in untraditional products they never really
understood. Hoarding liquidity is like hoarding corn or
wheat: it triggers shortages and punishes the weakest
consumers.
8. Gold remains the asset that offers unique risk reduction
features in equity and balanced portfolios. As to investment
strategies, the ETF outperforms during gold bullion selloffs,
but the stocks outperform when bullion rallies. We believe
investors should have exposure to both kinds of asset, but
leave the weighting to be resolved on individual portfolio
risk/reward considerations.
9. We keep reading forecasts predicting falling inflation and
gold prices because of a US recession, but insisting that the
recession will be neither deep nor long. Recession actually
proved to be an aphrodisiac for gold lovers in the Seventies:
Each of the recessions back then was accompanied by
higher inflation rates than almost any prominent economist
predicted. We do not expect a recession so deep that it will
stop the march to higher inflation, with the band music and
drum beats coming from the major emerging economies. We
remain negative on longer-term dollar-denominated nominal
bonds. We prefer mid-term, inflation-protected bonds in
strong currencies
1. This is not the end of the commodity bull market. Bear
Stearns, F&F and other crises will one day seem trivial. The
new global middle class that is repricing commodities never
will.
2. Remain underweight the banks and financial stocks that
invested heavily in the asset classes that collectively created
a global financial crisis. Despite the frantic efforts of the
Fed and Treasury, new challenges appear each week. The
deleveraging process is accelerating. Those peddling bank
paper perversely insist that these writedowns and bailouts
are now so gigantic that a turning point is near. We think
serious investors should compare this sordid story to the
SARS epidemic: When the number of infected people was
rising sharply and rapidly, cautious flyers asked themselves,
“Is this trip necessary?”
3. We recommend that clients begin taking preliminary
positions in companies which stand to benefit most from the
possible onset of realism in US energy policies. When—not
if—offshore drilling finally gets the nod, the majors and
service companies should benefit enormously. Arctic drilling
could be next, from which some important Canadian
companies would benefit, although the technological
problems are formidable, and the pipeline issues are not fully
resolved.
4. As for corn ethanol, the producers have been lucky: they
benefited from $125 oil, which has largely offset $5.50
corn. They have also benefited from the plunge in natural
gas prices. As if those weren’t enough to save an industry
whose fundamentals had become so controversial, they
also benefited from the collapse of Doha, because the
embarrassing tariff against Brazilian sugar ethanol
survived.
5. Natural gas supplies have exceeded expectations because of
the Barnett Shale and coal bed methane booms, and because
this summer has not been as hot as had been feared. We
recommend the natural gas-oriented producers with aboveaverage
reserve life indices.
6. The fertilizer companies have delivered the most impressive
earnings gains of any commodity group. Nevertheless, their
share prices have fallen in recent weeks along with other
commodity groups on days when traders have been buying
banks and dumping commodities. They probably have
the most predictable earnings of all the major commodity
sectors, and should be cornerstones of any resource portfolio.
As for the bricks, they are the farm equipment companies.
The roof and windows are the logistic companies and seed
manufacturers.
7. The continuation of the wide spread between Libor and
the fed funds rate, despite the best efforts of Messrs.
Bernanke and Paulson, suggests that the real US economy
will begin to show serious strain because banks are cutting
back on making traditional loans—they have squandered
their resources in untraditional products they never really
understood. Hoarding liquidity is like hoarding corn or
wheat: it triggers shortages and punishes the weakest
consumers.
8. Gold remains the asset that offers unique risk reduction
features in equity and balanced portfolios. As to investment
strategies, the ETF outperforms during gold bullion selloffs,
but the stocks outperform when bullion rallies. We believe
investors should have exposure to both kinds of asset, but
leave the weighting to be resolved on individual portfolio
risk/reward considerations.
9. We keep reading forecasts predicting falling inflation and
gold prices because of a US recession, but insisting that the
recession will be neither deep nor long. Recession actually
proved to be an aphrodisiac for gold lovers in the Seventies:
Each of the recessions back then was accompanied by
higher inflation rates than almost any prominent economist
predicted. We do not expect a recession so deep that it will
stop the march to higher inflation, with the band music and
drum beats coming from the major emerging economies. We
remain negative on longer-term dollar-denominated nominal
bonds. We prefer mid-term, inflation-protected bonds in
strong currencies
10 August 2008
Supkis -- idiots in charge
The dollar is going up again based on the notion that the banking crisis is over and all is well
This foolish idea keeps popping up every three weeks. Then the depressionary forces suck down more funny money. This is why all charts for depressions show huge rises (money supply/credit) based on the hopes that central banks and bankrupt governments can bail out a collapsing speculative bubble.
All I see is more and more bad news! But then, are the people buying stocks sane? Indeed, what I see is them thinking the central banks will save everyone...so they can plunge into the 'good old times' again. Unfortunately, history tells us all these schemes are doomed to failure. Excess money won't vanish if it is replaced as fast as it vanishes. Ergo: inflation will rise in retaliation.
But even as the central bankers of the G7 nations drop interest rates and offer sweetheart loans to the misbegotten investment banks, it is never enough
The black holes that have opened on all these bottom lines on the ledgers...of these banks can't be so easily filled. The problem (for example) with a SWF rescue is simple: the interest rates they want in return for a rescue are fairly stiff. As more and more future wealth vanishes, investors pull their funds and go elsewhere, seeking to beat inflation. So they (the banks) need more and more money from someone to keep afloat.
The central bankers would dearly love to simply make up money on the spot using their nifty computers that can go to infinity in no time flat. But they see the example of Zimbabwe.
Zimbabwe, with their attempt to outdo the Germans after WWI with the Weimar Republik, tried to make money grow faster than it was disappearing. Any central banker tempted to go to infinity has a shining example today. Inflation in Zimbabwe is 400,000%, and showing no signs of stopping. Of course, when inflation hits multi-trillion% then money vanishes totally. Right now, the place has been reduced to barter trade.
Rising commodity prices kills manufacturing in the form of higher costs...which they fix in the same way Japan fixed higher material and energy costs: ruthless slashing of wages of workers. The US is very heavily involved in this process. Workers who can't buy things and who are seeing growing inflation for the things they need to stay alive go deeper into debt in order to keep up. This is a deflationary cycle. Instead of growing, everything burns up. Increased spending due to food and energy shooting up isn't a good thing...our rulers celebrate the rise in spending as if this signaled a healthy economy rather than a forest fire raging out of control.
When inflation rages AND CENTRAL BANKS DROP INTEREST RATES, savings drops through the floor and vanishes
Banks struggling to continue without savings soon find themselves in the fix UBS and Lehman finds themselves today. When global inflation eats up the ordinary savings of the masses of humanity, we see a full collapse of the banking system. So far, the biggest bankers are hoping the commodity wealth nations will bail everyone out.
They are giving up on the Chinese bailing them out. China is busy at home. China is furious about global inflation. All of the commodity selling nations are, too. They want to have prices go up in sales outside but the flood of funny money is causing inflation at home. This feeds the commodity inflationary cycle as they raise prices to deal with the collapsing dollar. Or they use euros instead, increasingly. Which destabilizes Europe's trade.
Trade in manufactured goods is stumbling, world wide. The frantic search for cheaper labor to make up for rising commodity prices is running out of stable governments to protect manufacturers. Vietnam is one of the last destinations of such labor. Hardy peasants willing to slave for hours for pennies are getting harder and harder to find. There are such people in lands that are undergoing ethnic/tribal warfare...they are not useful in this regard.
UBS in Switzerland and Lehman Brothers in the US: both have been rapidly sinking ever since 7/17/7
(Image shows a chart of) how the stock market and UBS and Lehman all were tracking together just fine but suddenly, right when the Japanese carry trade began its long collapse in mid-July (2007), the biggest banks began their sudden, shocking decline! When the yen rose to beyond the 100 yen to 1 dollar floor, these banks nearly totally collapsed. Both were saved by various schemes that are doomed in the long run. Unless that pesky carry trade in Asia is restarted.
The central banks have been diluting the value of their currencies by making it easier for them to lend money to the investment bankers. And in turn, these guys are diluting the value of their existing stocks by printing up more pieces of paper that say, 'This is a SHARE in the value of the company.' Doing this while a company is declining in value is what we call 'inflation'. Inflation is when money loses value and more is made to cover costs so it loses value, a vicious cycle once it is launched and let to run out of control.
A company that dilutes its stocks as it declines in profit usually ends with that organization going under
There are many people who are betting both UBS and Lehman will go under. Issuing stocks backed by declining profits certainly is a bad sign, not a good sign. If all companies in trouble simply...issue more stocks, we would never see any bankruptcies! But of course, they can't do this for obvious reasons.
But the news has to sound good so this dire news has been greeted by the investment community as a wonderful thing! Note how this offering isn't a share, actually. It is an attempt to get loans for less than 10%, I guess. To attract the SWF, they need to offer shares that will pay back 7%? That is well above the Fed's emergency window rates...for ordinary banks and JP Morgan. OLD JP MORGAN IS ONE OF THE FOUNDERS AND OWNERS OF THE FEDERAL RESERVE LLP. So of course, they can hand over a fistful of 30% of value SIVs and CDOs and get 95% value with their own central bank! But this is very incestuous and extremely inflationary. They then are turning around and trying to profit from all this by investing this ill-gotten gains in...guess where? The commodities markets!
The Japanese are absolutely hysterically desperate to get the yen to collapse in value
The Nikkei, as always, shot up when the yen fell down. They desperately want one way trade with the US. It is very queer, watching the dollar rise and fall against other currencies. The US trade deficit has barely improved at all.
The unbalanced flow of trade and finances has not ended at all. What we are seeing is an attempt at restarting the old status quo that collapsed. And it collapsed because there is no realm where endless red ink doesn't cause a total collapse! The rank attempts at getting things back to 'normal' will all fail! Utterly! If they get restarted for a while, this means the US will continue its industrial/financial decline and the pit of bankruptcy simply is dug deeper and deeper. Eventually, it will swallow up the entire US economy and everything will plummet down this fiduciary sinkhole.
If the yen is falling on news that they can't ship even more Toyotas to the US, this means they will have cheaper Toyotas thanks to the falling yen and then can resume flooding our markets. This will then cause the yen to rise in value. This riddle upsets the Japanese who are desperate for some solution that allows the floods of exports to come into the US while keeping the yen weak. They will arrive at some sort of trick. And of course, the carry trade: this has to restart, too! This is why UBS, Lehman and the other pirate banks are desperate for the yen/dollar status quo they need which happens to be 130 yen to the dollar. Then the flood of 'free funny money' they tapped for 7 years can resume!
But this is why we have global inflation! Which is hammering them and everyone, especially workers who can't buy the products of mass industrial production thanks to inflation. The Horns of Dilemma are obvious here.
So long as our biggest banking houses act like little children or inmates in psycho wards, nothing will be fixed and the collapse will continue
When reality bites, acting like an infant is stupid. But then, look at the governments involved here! 'Infantile' is being generous. 'Fetal' is more like it.
A UBS news release mentions the replacement of 'money' with pieces of paper that are basically IOUs drawn against future earnings of UBS. Instead of being able to take money out of UBS, the unlucky saps who invested in it can only get shares that are automatically diminishing the value of all other shares. Aren't they lucky? Then, they may take THESE and sell them on the stock market! And of course, this drives the price of ALL the stocks lower! And so they are in a trap: sell and everyone takes a big hair cut or hold and pray this banking collapse doesn't go all the way to zero.
As usual, all the indicators of financial health are headed downwards. Note the bond failures are not only continuing but getting worse, not better. The bidders on these things have vanished. Hedge funds, badly burned by their own gambling debts, can't run off to Japan and get armloads of more money to play this game.
The eternal, endless window through which money poured into these guys pockets is gone.
And the world will deal with this by having temporary inflation. But since this mess was created by the gamblers, the deflation cycle will replace all this and the central bankers said, they will not allow this to clean up the mess, they want this previous inflation to hang out here...FOREVER. Naturally, they also want to fix things by resurrecting the Japanese carry trade which caused this in the first place. Since they still refuse to talk about or analyze the dire effects of the Japanese carry trade, we won't see anything fixed in the foreseeable future.
All we know is, UBS and Lehman and everyone in the system won't attract any savers so long as they offer negative returns on investments. And the positive flow has to be more than inflation. Which is impossible right now. Let's look at some slightly older news from the beginning of this collapse.
Back when they were all struggling with the downdrafts from the collapse of the Dot Com frenzy, these regal investment houses were playing stupid games. Like not letting anyone know up to date information concerning the finances of these groups! Like naughty children, they hid the report card from mommy! Despite this, people went back to these dishonest houses of finance for more wealth once daddy Warbucks, Greenspan, started handing out the candy...
If Lehman Brothers think they can get out of the present mess by diluting the value of their stocks and getting 7% or greater loans, they are NUTS
Look at the numbers! The % change goes from 20% losses all the way to 60% losses! OUCH. Would anyone sane park their money in this loser? I seriously doubt it. The fact that Lehman is limping along is a miracle worthy of Lourdes. But not much longer, I would dare suggest. Will JP Morgan devour them, too? Probably. Though Goldman Sachs may be alarmed by all this. After all, JP is getting a free ride in all this! So Goldman might throw caution to the winds and demand their own cut of the carcass.
I have no idea how much Federal Reserve stocks Goldman Sachs holds. We can't tell thanks to the damn SECRECY that enfolds this particular Cave of Death. If so, it will be easy for GS. But if not, then they must depend on Paulson to do the dirty work. Which he will.
How the frozen Auction Rate Securities (ARS) market will burn Merrill
Here's a new reason that the brokerage firms are in trouble. The customers who hold Auction Rate Securities (ARS) accounts will take their entire portfolios away from the firms who are currently denying them access to their money. I am not sure which brokers will benefit from this, but I can suggest one that will suffer -- Merrill Lynch & Co.
Since I started writing about the $330 billion ARS market last month, my initial post has accumulated 764 comments. Investors were persuaded to put their spare cash in these ARS accounts by brokers who touted their relatively high yields and low risk.
But now those ARS accounts are frozen due to the failure of the auctions. One person about whom I posted earlier this week, has $1.4 million frozen in ARSs and needs to come up with another way to pay the $350,000 he owes in taxes from the sale of the business that generated those proceeds. Today, I read a comment from a person who claims that her account at Merrill is frozen and she plans to take her entire seven figure portfolio away from Merrill as soon as she gets her ARS account unfrozen.
Merrill Lynch will be hung out to dry by the investors as soon as they can unpark their funds. Note how this investment house is acting in a draconian fashion to prevent a bank run: they shut the doors.
This is what all bankers and investment houses do when things go bad: they close the doors and hoard other people's money. They tell everyone to go away. And then they want more money? Only an insane person will give it to them! This is why gold shot up in value these last 7 years. Suspicious people decided to hide their money from the banking system. People who trusted the greatest banking/investment houses on earth are being burned.
This refusal to pay back funds can't last more than a few months. Lawsuits are already flying out of lawyer's offices! The fury of savers and investors is rising. This has political as well as economical repercussions.
Here is an example:
3-28-2008 @ 5:24PM
john m. said...
”We're stuck with $600,000 of ARS. Merril started cramming them into our account in October. Everytime we sold stock they put it in ARS. When I finally noticed a big purchase in January in our February statement I told them to sell. The broker was away for a couple of days including a Valentine dinner. No doubt he was avoiding us. We were looking for a good money market rate and now we're stock holders in a hedge fund!!! Yes hedge fund, who do you think these ARS companies are? We've already pulled our money out and are seeking legal counsel.”
Brokers who hide from their own investors! Again, the picture of the 'bad boy' hiding from mommy when he has to give her his report card comes to mind.
I am including a chart to show who has been the most risky here: JP Morgan. And HSBC, another investment bank that is sailing off the same cliff. The overexposure to risk is tremendous.
Here is an attempt at cracking the nuts that are screwing the investors:
ATTENTION MERRILL LYNCH BROKERS
I'll pay top dollar (4 digits) for the alleged Merrill Lynch handbook or memo which purportedly urged brokers to sell ARS as alternatives to money market funds. My contact information is above.
Full Confidentiality Assured.
Citibank is getting sued Lead Plaintiff is Lisa Swanson
"The collapse of the auction rate securities market ... was a direct result of defendants' unilateral decision to no longer artificially support the auction rate securities market," plaintiff Lisa Swanson, who purchased auction rate securities in 2006, claimed in one suit.
excerpt from Money Matters blog. Dated, April of 2008, but note the prescience.
Securities and Exchange Comission response with follow up phone call.
Massachusetts Securities Division Opens investigation in UBS business practices.
Boston Nick wrote...
I received a call from Attorney Gombar at the MA Securities Division this morning.
They are opening up a UBS investigation and are issuing a comprehensive document subpoena today.
I was assured that this is a high priority for the MA Securities Division and can expect regular follow-up.
Cat's out of the bag...its only a matter of time before all of the broker dealers start sweating this big time - could be criminal implications. Regulators are working for us and I think there is healthy competition amongst each State's Securities Enforcement divisions to be the first to press charges.
Thanks to the internet, accumulating information is a lot easier for the lawyers. UBS hopes to hide as much as possible from them. But if investment houses are pirates, lawyers are like crocodiles seeking to eat Captain Hook. They keep on ticking. If investment banks are whales, lawyers are killer whales.
This foolish idea keeps popping up every three weeks. Then the depressionary forces suck down more funny money. This is why all charts for depressions show huge rises (money supply/credit) based on the hopes that central banks and bankrupt governments can bail out a collapsing speculative bubble.
All I see is more and more bad news! But then, are the people buying stocks sane? Indeed, what I see is them thinking the central banks will save everyone...so they can plunge into the 'good old times' again. Unfortunately, history tells us all these schemes are doomed to failure. Excess money won't vanish if it is replaced as fast as it vanishes. Ergo: inflation will rise in retaliation.
But even as the central bankers of the G7 nations drop interest rates and offer sweetheart loans to the misbegotten investment banks, it is never enough
The black holes that have opened on all these bottom lines on the ledgers...of these banks can't be so easily filled. The problem (for example) with a SWF rescue is simple: the interest rates they want in return for a rescue are fairly stiff. As more and more future wealth vanishes, investors pull their funds and go elsewhere, seeking to beat inflation. So they (the banks) need more and more money from someone to keep afloat.
The central bankers would dearly love to simply make up money on the spot using their nifty computers that can go to infinity in no time flat. But they see the example of Zimbabwe.
Zimbabwe, with their attempt to outdo the Germans after WWI with the Weimar Republik, tried to make money grow faster than it was disappearing. Any central banker tempted to go to infinity has a shining example today. Inflation in Zimbabwe is 400,000%, and showing no signs of stopping. Of course, when inflation hits multi-trillion% then money vanishes totally. Right now, the place has been reduced to barter trade.
Rising commodity prices kills manufacturing in the form of higher costs...which they fix in the same way Japan fixed higher material and energy costs: ruthless slashing of wages of workers. The US is very heavily involved in this process. Workers who can't buy things and who are seeing growing inflation for the things they need to stay alive go deeper into debt in order to keep up. This is a deflationary cycle. Instead of growing, everything burns up. Increased spending due to food and energy shooting up isn't a good thing...our rulers celebrate the rise in spending as if this signaled a healthy economy rather than a forest fire raging out of control.
When inflation rages AND CENTRAL BANKS DROP INTEREST RATES, savings drops through the floor and vanishes
Banks struggling to continue without savings soon find themselves in the fix UBS and Lehman finds themselves today. When global inflation eats up the ordinary savings of the masses of humanity, we see a full collapse of the banking system. So far, the biggest bankers are hoping the commodity wealth nations will bail everyone out.
They are giving up on the Chinese bailing them out. China is busy at home. China is furious about global inflation. All of the commodity selling nations are, too. They want to have prices go up in sales outside but the flood of funny money is causing inflation at home. This feeds the commodity inflationary cycle as they raise prices to deal with the collapsing dollar. Or they use euros instead, increasingly. Which destabilizes Europe's trade.
Trade in manufactured goods is stumbling, world wide. The frantic search for cheaper labor to make up for rising commodity prices is running out of stable governments to protect manufacturers. Vietnam is one of the last destinations of such labor. Hardy peasants willing to slave for hours for pennies are getting harder and harder to find. There are such people in lands that are undergoing ethnic/tribal warfare...they are not useful in this regard.
UBS in Switzerland and Lehman Brothers in the US: both have been rapidly sinking ever since 7/17/7
(Image shows a chart of) how the stock market and UBS and Lehman all were tracking together just fine but suddenly, right when the Japanese carry trade began its long collapse in mid-July (2007), the biggest banks began their sudden, shocking decline! When the yen rose to beyond the 100 yen to 1 dollar floor, these banks nearly totally collapsed. Both were saved by various schemes that are doomed in the long run. Unless that pesky carry trade in Asia is restarted.
The central banks have been diluting the value of their currencies by making it easier for them to lend money to the investment bankers. And in turn, these guys are diluting the value of their existing stocks by printing up more pieces of paper that say, 'This is a SHARE in the value of the company.' Doing this while a company is declining in value is what we call 'inflation'. Inflation is when money loses value and more is made to cover costs so it loses value, a vicious cycle once it is launched and let to run out of control.
A company that dilutes its stocks as it declines in profit usually ends with that organization going under
There are many people who are betting both UBS and Lehman will go under. Issuing stocks backed by declining profits certainly is a bad sign, not a good sign. If all companies in trouble simply...issue more stocks, we would never see any bankruptcies! But of course, they can't do this for obvious reasons.
But the news has to sound good so this dire news has been greeted by the investment community as a wonderful thing! Note how this offering isn't a share, actually. It is an attempt to get loans for less than 10%, I guess. To attract the SWF, they need to offer shares that will pay back 7%? That is well above the Fed's emergency window rates...for ordinary banks and JP Morgan. OLD JP MORGAN IS ONE OF THE FOUNDERS AND OWNERS OF THE FEDERAL RESERVE LLP. So of course, they can hand over a fistful of 30% of value SIVs and CDOs and get 95% value with their own central bank! But this is very incestuous and extremely inflationary. They then are turning around and trying to profit from all this by investing this ill-gotten gains in...guess where? The commodities markets!
The Japanese are absolutely hysterically desperate to get the yen to collapse in value
The Nikkei, as always, shot up when the yen fell down. They desperately want one way trade with the US. It is very queer, watching the dollar rise and fall against other currencies. The US trade deficit has barely improved at all.
The unbalanced flow of trade and finances has not ended at all. What we are seeing is an attempt at restarting the old status quo that collapsed. And it collapsed because there is no realm where endless red ink doesn't cause a total collapse! The rank attempts at getting things back to 'normal' will all fail! Utterly! If they get restarted for a while, this means the US will continue its industrial/financial decline and the pit of bankruptcy simply is dug deeper and deeper. Eventually, it will swallow up the entire US economy and everything will plummet down this fiduciary sinkhole.
If the yen is falling on news that they can't ship even more Toyotas to the US, this means they will have cheaper Toyotas thanks to the falling yen and then can resume flooding our markets. This will then cause the yen to rise in value. This riddle upsets the Japanese who are desperate for some solution that allows the floods of exports to come into the US while keeping the yen weak. They will arrive at some sort of trick. And of course, the carry trade: this has to restart, too! This is why UBS, Lehman and the other pirate banks are desperate for the yen/dollar status quo they need which happens to be 130 yen to the dollar. Then the flood of 'free funny money' they tapped for 7 years can resume!
But this is why we have global inflation! Which is hammering them and everyone, especially workers who can't buy the products of mass industrial production thanks to inflation. The Horns of Dilemma are obvious here.
So long as our biggest banking houses act like little children or inmates in psycho wards, nothing will be fixed and the collapse will continue
When reality bites, acting like an infant is stupid. But then, look at the governments involved here! 'Infantile' is being generous. 'Fetal' is more like it.
A UBS news release mentions the replacement of 'money' with pieces of paper that are basically IOUs drawn against future earnings of UBS. Instead of being able to take money out of UBS, the unlucky saps who invested in it can only get shares that are automatically diminishing the value of all other shares. Aren't they lucky? Then, they may take THESE and sell them on the stock market! And of course, this drives the price of ALL the stocks lower! And so they are in a trap: sell and everyone takes a big hair cut or hold and pray this banking collapse doesn't go all the way to zero.
As usual, all the indicators of financial health are headed downwards. Note the bond failures are not only continuing but getting worse, not better. The bidders on these things have vanished. Hedge funds, badly burned by their own gambling debts, can't run off to Japan and get armloads of more money to play this game.
The eternal, endless window through which money poured into these guys pockets is gone.
And the world will deal with this by having temporary inflation. But since this mess was created by the gamblers, the deflation cycle will replace all this and the central bankers said, they will not allow this to clean up the mess, they want this previous inflation to hang out here...FOREVER. Naturally, they also want to fix things by resurrecting the Japanese carry trade which caused this in the first place. Since they still refuse to talk about or analyze the dire effects of the Japanese carry trade, we won't see anything fixed in the foreseeable future.
All we know is, UBS and Lehman and everyone in the system won't attract any savers so long as they offer negative returns on investments. And the positive flow has to be more than inflation. Which is impossible right now. Let's look at some slightly older news from the beginning of this collapse.
Back when they were all struggling with the downdrafts from the collapse of the Dot Com frenzy, these regal investment houses were playing stupid games. Like not letting anyone know up to date information concerning the finances of these groups! Like naughty children, they hid the report card from mommy! Despite this, people went back to these dishonest houses of finance for more wealth once daddy Warbucks, Greenspan, started handing out the candy...
If Lehman Brothers think they can get out of the present mess by diluting the value of their stocks and getting 7% or greater loans, they are NUTS
Look at the numbers! The % change goes from 20% losses all the way to 60% losses! OUCH. Would anyone sane park their money in this loser? I seriously doubt it. The fact that Lehman is limping along is a miracle worthy of Lourdes. But not much longer, I would dare suggest. Will JP Morgan devour them, too? Probably. Though Goldman Sachs may be alarmed by all this. After all, JP is getting a free ride in all this! So Goldman might throw caution to the winds and demand their own cut of the carcass.
I have no idea how much Federal Reserve stocks Goldman Sachs holds. We can't tell thanks to the damn SECRECY that enfolds this particular Cave of Death. If so, it will be easy for GS. But if not, then they must depend on Paulson to do the dirty work. Which he will.
How the frozen Auction Rate Securities (ARS) market will burn Merrill
Here's a new reason that the brokerage firms are in trouble. The customers who hold Auction Rate Securities (ARS) accounts will take their entire portfolios away from the firms who are currently denying them access to their money. I am not sure which brokers will benefit from this, but I can suggest one that will suffer -- Merrill Lynch & Co.
Since I started writing about the $330 billion ARS market last month, my initial post has accumulated 764 comments. Investors were persuaded to put their spare cash in these ARS accounts by brokers who touted their relatively high yields and low risk.
But now those ARS accounts are frozen due to the failure of the auctions. One person about whom I posted earlier this week, has $1.4 million frozen in ARSs and needs to come up with another way to pay the $350,000 he owes in taxes from the sale of the business that generated those proceeds. Today, I read a comment from a person who claims that her account at Merrill is frozen and she plans to take her entire seven figure portfolio away from Merrill as soon as she gets her ARS account unfrozen.
Merrill Lynch will be hung out to dry by the investors as soon as they can unpark their funds. Note how this investment house is acting in a draconian fashion to prevent a bank run: they shut the doors.
This is what all bankers and investment houses do when things go bad: they close the doors and hoard other people's money. They tell everyone to go away. And then they want more money? Only an insane person will give it to them! This is why gold shot up in value these last 7 years. Suspicious people decided to hide their money from the banking system. People who trusted the greatest banking/investment houses on earth are being burned.
This refusal to pay back funds can't last more than a few months. Lawsuits are already flying out of lawyer's offices! The fury of savers and investors is rising. This has political as well as economical repercussions.
Here is an example:
3-28-2008 @ 5:24PM
john m. said...
”We're stuck with $600,000 of ARS. Merril started cramming them into our account in October. Everytime we sold stock they put it in ARS. When I finally noticed a big purchase in January in our February statement I told them to sell. The broker was away for a couple of days including a Valentine dinner. No doubt he was avoiding us. We were looking for a good money market rate and now we're stock holders in a hedge fund!!! Yes hedge fund, who do you think these ARS companies are? We've already pulled our money out and are seeking legal counsel.”
Brokers who hide from their own investors! Again, the picture of the 'bad boy' hiding from mommy when he has to give her his report card comes to mind.
I am including a chart to show who has been the most risky here: JP Morgan. And HSBC, another investment bank that is sailing off the same cliff. The overexposure to risk is tremendous.
Here is an attempt at cracking the nuts that are screwing the investors:
ATTENTION MERRILL LYNCH BROKERS
I'll pay top dollar (4 digits) for the alleged Merrill Lynch handbook or memo which purportedly urged brokers to sell ARS as alternatives to money market funds. My contact information is above.
Full Confidentiality Assured.
Citibank is getting sued Lead Plaintiff is Lisa Swanson
"The collapse of the auction rate securities market ... was a direct result of defendants' unilateral decision to no longer artificially support the auction rate securities market," plaintiff Lisa Swanson, who purchased auction rate securities in 2006, claimed in one suit.
excerpt from Money Matters blog. Dated, April of 2008, but note the prescience.
Securities and Exchange Comission response with follow up phone call.
Massachusetts Securities Division Opens investigation in UBS business practices.
Boston Nick wrote...
I received a call from Attorney Gombar at the MA Securities Division this morning.
They are opening up a UBS investigation and are issuing a comprehensive document subpoena today.
I was assured that this is a high priority for the MA Securities Division and can expect regular follow-up.
Cat's out of the bag...its only a matter of time before all of the broker dealers start sweating this big time - could be criminal implications. Regulators are working for us and I think there is healthy competition amongst each State's Securities Enforcement divisions to be the first to press charges.
Thanks to the internet, accumulating information is a lot easier for the lawyers. UBS hopes to hide as much as possible from them. But if investment houses are pirates, lawyers are like crocodiles seeking to eat Captain Hook. They keep on ticking. If investment banks are whales, lawyers are killer whales.
Coffee is good for you!
When Howard D. Schultz in 1985 founded the company that would become the wildly successful Starbucks chain, no financial adviser had to tell him that coffee was America’s leading beverage and caffeine its most widely used drug. The millions of customers who flock to Starbucks to order a double espresso, latte or coffee grande attest daily to his assessment of American passions.
Although the company might have overestimated consumer willingness to spend up to $4 for a cup of coffee — it recently announced that it would close hundreds of underperforming stores — scores of imitators that now sell coffee, tea and other products laced with caffeine reflect a society determined to run hard on as little sleep as possible.
But as with any product used to excess, consumers often wonder about the health consequences. And researchers readily oblige. Hardly a month goes by without a report that hails coffee, tea or caffeine as healthful or damns them as potential killers.
Can all these often contradictory reports be right? Yes. Coffee and tea, after all, are complex mixtures of chemicals, several of which may independently affect health.
Caffeine Myths
Through the years, the public has been buffeted by much misguided information about caffeine and its most common source, coffee. In March the Center for Science in the Public Interest published a comprehensive appraisal of scientific reports in its Nutrition Action Healthletter. Its findings and those of other research reports follow.
Hydration. It was long thought that caffeinated beverages were diuretics, but studies reviewed last year found that people who consumed drinks with up to 550 milligrams of caffeine produced no more urine than when drinking fluids free of caffeine. Above 575 milligrams, the drug was a diuretic.
So even a Starbucks grande, with 330 milligrams of caffeine, will not send you to a bathroom any sooner than if you drank 16 ounces of pure water. Drinks containing usual doses of caffeine are hydrating and, like water, contribute to the body’s daily water needs.
Heart disease. Heart patients, especially those with high blood pressure, are often told to avoid caffeine, a known stimulant. But an analysis of 10 studies of more than 400,000 people found no increase in heart disease among daily coffee drinkers, whether their coffee came with caffeine or not.
“Contrary to common belief,” concluded cardiologists at the University of California, San Francisco, there is “little evidence that coffee and/or caffeine in typical dosages increases the risk” of heart attack, sudden death or abnormal heart rhythms.
In fact, among 27,000 women followed for 15 years in the Iowa Women’s Health Study, those who drank one to three cups a day reduced their risk of cardiovascular disease by 24 percent, although this benefit diminished as the quantity of coffee rose.
Hypertension. Caffeine induces a small, temporary rise in blood pressure. But in a study of 155,000 nurses, women who drank coffee with or without caffeine for a decade were no more likely to develop hypertension than noncoffee drinkers. However, a higher risk of hypertension was found from drinking colas. A Johns Hopkins study that followed more than 1,000 men for 33 years found that coffee drinking played little overall role in the development of hypertension.
Cancer. Panic swept this coffee-dependent nation in 1981 when a Harvard study tied the drink to a higher risk of pancreatic cancer. Coffee consumption temporarily plummeted, and the researchers later concluded that perhaps smoking, not coffee, was the culprit.
In an international review of 66 studies last year, scientists found coffee drinking had little if any effect on the risk of developing pancreatic or kidney cancer. In fact, another review suggested that compared with people who do not drink coffee, those who do have half the risk of developing liver cancer.
And a study of 59,000 women in Sweden found no connection between coffee, tea or caffeine consumption and breast cancer.
Bone loss. Though some observational studies have linked caffeinated beverages to bone loss and fractures, human physiological studies have found only a slight reduction in calcium absorption and no effect on calcium excretion, suggesting the observations may reflect a diminished intake of milk-based beverages among coffee and tea drinkers.
Dr. Robert Heaney of Creighton University says that caffeine’s negative effect on calcium can be offset by as little as one or two tablespoons of milk. He advised that coffee and tea drinkers who consume the currently recommended amount of calcium need not worry about caffeine’s effect on their bones.
Weight loss. Here’s a bummer. Although caffeine speeds up metabolism, with 100 milligrams burning an extra 75 to 100 calories a day, no long-term benefit to weight control has been demonstrated. In fact, in a study of more than 58,000 health professionals followed for 12 years, both men and women who increased their caffeine consumption gained more weight than those who didn’t.
Health Benefits
Probably the most important effects of caffeine are its ability to enhance mood and mental and physical performance. At consumption levels up to 200 milligrams (the amount in about 16 ounces of ordinary brewed coffee), consumers report an improved sense of well-being, happiness, energy, alertness and sociability, Roland Griffiths of the Johns Hopkins School of Medicine reported, although higher amounts sometimes cause anxiety and stomach upset.
Millions of sleep-deprived Americans depend on caffeine to help them make it through their day and drive safely. The drug improves alertness and reaction time. In the sleep-deprived, it improves memory and the ability to perform complex tasks.
For the active, caffeine enhances endurance in aerobic activities and performance in anaerobic ones, perhaps because it blunts the perception of pain and aids the ability to burn fat for fuel instead of its carbohydrates.
Recent disease-related findings can only add to coffee’s popularity. A review of 13 studies found that people who drank caffeinated coffee, but not decaf, had a 30 percent lower risk of Parkinson’s disease.
Another review found that compared with noncoffee drinkers, people who drank four to six cups of coffee a day, with or without caffeine, had a 28 percent lower risk of Type 2 diabetes. This benefit probably comes from coffee’s antioxidants and chlorogenic acid.
Although the company might have overestimated consumer willingness to spend up to $4 for a cup of coffee — it recently announced that it would close hundreds of underperforming stores — scores of imitators that now sell coffee, tea and other products laced with caffeine reflect a society determined to run hard on as little sleep as possible.
But as with any product used to excess, consumers often wonder about the health consequences. And researchers readily oblige. Hardly a month goes by without a report that hails coffee, tea or caffeine as healthful or damns them as potential killers.
Can all these often contradictory reports be right? Yes. Coffee and tea, after all, are complex mixtures of chemicals, several of which may independently affect health.
Caffeine Myths
Through the years, the public has been buffeted by much misguided information about caffeine and its most common source, coffee. In March the Center for Science in the Public Interest published a comprehensive appraisal of scientific reports in its Nutrition Action Healthletter. Its findings and those of other research reports follow.
Hydration. It was long thought that caffeinated beverages were diuretics, but studies reviewed last year found that people who consumed drinks with up to 550 milligrams of caffeine produced no more urine than when drinking fluids free of caffeine. Above 575 milligrams, the drug was a diuretic.
So even a Starbucks grande, with 330 milligrams of caffeine, will not send you to a bathroom any sooner than if you drank 16 ounces of pure water. Drinks containing usual doses of caffeine are hydrating and, like water, contribute to the body’s daily water needs.
Heart disease. Heart patients, especially those with high blood pressure, are often told to avoid caffeine, a known stimulant. But an analysis of 10 studies of more than 400,000 people found no increase in heart disease among daily coffee drinkers, whether their coffee came with caffeine or not.
“Contrary to common belief,” concluded cardiologists at the University of California, San Francisco, there is “little evidence that coffee and/or caffeine in typical dosages increases the risk” of heart attack, sudden death or abnormal heart rhythms.
In fact, among 27,000 women followed for 15 years in the Iowa Women’s Health Study, those who drank one to three cups a day reduced their risk of cardiovascular disease by 24 percent, although this benefit diminished as the quantity of coffee rose.
Hypertension. Caffeine induces a small, temporary rise in blood pressure. But in a study of 155,000 nurses, women who drank coffee with or without caffeine for a decade were no more likely to develop hypertension than noncoffee drinkers. However, a higher risk of hypertension was found from drinking colas. A Johns Hopkins study that followed more than 1,000 men for 33 years found that coffee drinking played little overall role in the development of hypertension.
Cancer. Panic swept this coffee-dependent nation in 1981 when a Harvard study tied the drink to a higher risk of pancreatic cancer. Coffee consumption temporarily plummeted, and the researchers later concluded that perhaps smoking, not coffee, was the culprit.
In an international review of 66 studies last year, scientists found coffee drinking had little if any effect on the risk of developing pancreatic or kidney cancer. In fact, another review suggested that compared with people who do not drink coffee, those who do have half the risk of developing liver cancer.
And a study of 59,000 women in Sweden found no connection between coffee, tea or caffeine consumption and breast cancer.
Bone loss. Though some observational studies have linked caffeinated beverages to bone loss and fractures, human physiological studies have found only a slight reduction in calcium absorption and no effect on calcium excretion, suggesting the observations may reflect a diminished intake of milk-based beverages among coffee and tea drinkers.
Dr. Robert Heaney of Creighton University says that caffeine’s negative effect on calcium can be offset by as little as one or two tablespoons of milk. He advised that coffee and tea drinkers who consume the currently recommended amount of calcium need not worry about caffeine’s effect on their bones.
Weight loss. Here’s a bummer. Although caffeine speeds up metabolism, with 100 milligrams burning an extra 75 to 100 calories a day, no long-term benefit to weight control has been demonstrated. In fact, in a study of more than 58,000 health professionals followed for 12 years, both men and women who increased their caffeine consumption gained more weight than those who didn’t.
Health Benefits
Probably the most important effects of caffeine are its ability to enhance mood and mental and physical performance. At consumption levels up to 200 milligrams (the amount in about 16 ounces of ordinary brewed coffee), consumers report an improved sense of well-being, happiness, energy, alertness and sociability, Roland Griffiths of the Johns Hopkins School of Medicine reported, although higher amounts sometimes cause anxiety and stomach upset.
Millions of sleep-deprived Americans depend on caffeine to help them make it through their day and drive safely. The drug improves alertness and reaction time. In the sleep-deprived, it improves memory and the ability to perform complex tasks.
For the active, caffeine enhances endurance in aerobic activities and performance in anaerobic ones, perhaps because it blunts the perception of pain and aids the ability to burn fat for fuel instead of its carbohydrates.
Recent disease-related findings can only add to coffee’s popularity. A review of 13 studies found that people who drank caffeinated coffee, but not decaf, had a 30 percent lower risk of Parkinson’s disease.
Another review found that compared with noncoffee drinkers, people who drank four to six cups of coffee a day, with or without caffeine, had a 28 percent lower risk of Type 2 diabetes. This benefit probably comes from coffee’s antioxidants and chlorogenic acid.
Stay with gold!
Think: the core of the world's financial engine since 1985 has just been exposed as a couple of dead chipmunks on a fly wheel...there are no new chipmunks to replace the old and, if there were, it wouldn't restore any confidence now that the world has seen the inner trappings. The world's financial engine is DEAD...even if most of the world hasn't noticed just yet. And now the paper (MUCH less important than the financial shenanigans pretending to support it) is supposed to gain value? Hahahahahahaahaha!!!! How stupid does one have to be to believe that?
Confessions of a risk manager
Why did banks become so overexposed in the run-up to the credit crunch? A risk manager at a large global bank—someone whose job it was to make sure that the firm did not take unnecessary risks—explains in his own words.
IN JANUARY 2007 the world looked almost riskless. At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.
As risk managers we were responsible for approving credit requests and transactions submitted to us by the bankers and traders in the front-line. We also monitored and reported the level of risk across the bank’s portfolio and set limits for overall credit and market-risk positions.
The possibility that liquidity could suddenly dry up was always a topic high on our list but we could only see more liquidity coming into the market—not going out of it. Institutional investors, hedge funds, private-equity firms and sovereign-wealth funds were all looking to invest in assets. This was why credit spreads were narrowing, especially in emerging markets, and debt-to-earnings ratios on private-equity financings were increasing. “Where is the liquidity crisis supposed to come from?” somebody asked in the meeting. No one could give a good answer.
Looking back on it now we should of course have paid more attention to the first signs of trouble. No crisis comes completely out of the blue; there are always clues and advance warnings if you can only interpret them correctly. It was the hiccup in the structured-credit market in May 2005 which gave the strongest indication of what was to come. In that month bonds of General Motors were marked down by the rating agencies from investment grade to non-investment grade, or “junk”. Because the American carmaker’s bonds were widely held in structured-credit portfolios, the downgrades caused a big dislocation in the market.
Like most banks we owned a portfolio of different tranches of collateralised-debt obligations (CDOs), which are packages of asset-backed securities. Our business and risk strategy was to buy pools of assets, mainly bonds; warehouse them on our own balance-sheet and structure them into CDOs; and finally distribute them to end investors. We were most eager to sell the non-investment-grade tranches, and our risk approvals were conditional on reducing these to zero. We would allow positions of the top-rated AAA and super-senior (even better than AAA) tranches to be held on our own balance-sheet as the default risk was deemed to be well protected by all the lower tranches, which would have to absorb any prior losses.
In May 2005 we held AAA tranches, expecting them to rise in value, and sold non-investment-grade tranches, expecting them to go down. From a risk-management point of view, this was perfect: have a long position in the low-risk asset, and a short one in the higher-risk one. But the reverse happened of what we had expected: AAA tranches went down in price and non-investment-grade tranches went up, resulting in losses as we marked the positions to market.
This was entirely counter-intuitive. Explanations of why this had happened were confusing and focused on complicated cross-correlations between tranches. In essence it turned out that there had been a short squeeze in non-investment-grade tranches, driving their prices up, and a general selling of all more senior structured tranches, even the very best AAA ones.
That mini-liquidity crisis was to be replayed on a very big scale in the summer of 2007. But we had failed to draw the correct conclusions. As risk managers we should have insisted that all structured tranches, not just the non-investment-grade ones, be sold. But we did not believe that prices on AAA assets could fall by more than about 1% in price. A 20% drop on assets with virtually no default risk seemed inconceivable—though this did eventually occur. Liquidity risk was in effect not priced well enough; the market always allowed for it, but at only very small margins prior to the credit crisis.
So how did we get ourselves into a situation where we built up such large trading positions? There were a number of factors. As is often the case, it happened so gradually that it was barely perceptible.
Fighting the last war
The focus of our risk management was on the loan portfolio and classic market risk. Loans were illiquid and accounted for on an accrual basis in the “banking book” rather than on a mark-to-market basis in the “trading book”. Rigorous credit analysis to ensure minimum loan-loss provisions was important. Loan risks and classic market risks were generally well understood and regularly reviewed. Equities, government bonds and foreign exchange, and their derivatives, were well managed in the trading book and monitored on a daily basis.
The gap in our risk management only opened up gradually over the years with the growth of traded credit products such as CDO tranches and other asset-backed securities. These sat uncomfortably between market and credit risk. The market-risk department never really took ownership of them, believing them to be primarily credit-risk instruments, and the credit-risk department thought of them as market risk as they sat in the trading book.
The explosive growth and profitability of the structured-credit market made this an ever greater problem. Our risk-management response was half-hearted. We set portfolio limits on each rating category but otherwise left the trading desks to their own devices. We made two assumptions which would cost us dearly. First, we thought that all mark-to-market positions in the trading book would receive immediate attention when losses occurred, because their profits and losses were published daily. Second, we assumed that, if the market ran into difficulties, we could easily adjust and liquidate our positions, especially on securities rated AAA and AA. Our focus was always on the non-investment-grade part of the portfolio, especially the emerging-markets paper. The previous crises in Russia and Latin America had left a deeply ingrained fear of sudden liquidity shocks and widening credit spreads. Ironically, of course, in the credit crunch the emerging-market bonds have outperformed the Western credit assets.
We also trusted the rating agencies. It is hard to imagine now but the reputation of outside bond ratings was so high that if the risk department had ever assigned a lower rating, our judgment would have been immediately questioned. It was assumed that the rating agencies simply knew best.
We were thus comfortable with investment-grade assets and were struggling with the huge volume of business. We were too slow to sell these better-rated assets. We needed little capital to support them; there was no liquidity charge, very little default risk and a small positive margin, or “carry”, between holding the assets and their financing in the liquid interbank and repo markets. Gradually the structures became more complicated. Since they were held in the trading book, many avoided the rigorous credit process applied to the banking-book assets which might have identified some of the weaknesses.
The pressure on the risk department to keep up and approve transactions was immense. Psychology played a big part. The risk department had a separate reporting line to the board to preserve its independence. This had been reinforced by the regulators who believed it was essential for objective risk analysis and assessment. However, this separation hurt our relationship with the bankers and traders we were supposed to monitor.
Spoilsports
In their eyes, we were not earning money for the bank. Worse, we had the power to say no and therefore prevent business from being done. Traders saw us as obstructive and a hindrance to their ability to earn higher bonuses. They did not take kindly to this. Sometimes the relationship between the risk department and the business lines ended in arguments. I often had calls from my own risk managers forewarning me that a senior trader was about to call me to complain about a declined transaction. Most of the time the business line would simply not take no for an answer, especially if the profits were big enough. We, of course, were suspicious, because bigger margins usually meant higher risk. Criticisms that we were being “non-commercial”, “unconstructive” and “obstinate” were not uncommon. It has to be said that the risk department did not always help its cause. Our risk managers, although they had strong analytical skills, were not necessarily good communicators and salesmen. Tactfully explaining why we said no was not our forte. Traders were often exasperated as much by how they were told as by what they were told.
At the root of it all, however, was—and still is—a deeply ingrained flaw in the decision-making process. In contrast to the law, where two sides make an equal-and-opposite argument that is fairly judged, in banks there is always a bias towards one side of the argument. The business line was more focused on getting a transaction approved than on identifying the risks in what it was proposing. The risk factors were a small part of the presentation and always “mitigated”. This made it hard to discourage transactions. If a risk manager said no, he was immediately on a collision course with the business line. The risk thinking therefore leaned towards giving the benefit of the doubt to the risk-takers.
Gary Neil
Collective common sense suffered as a result. Often in meetings, our gut reactions as risk managers were negative. But it was difficult to come up with hard-and-fast arguments for why you should decline a transaction, especially when you were sitting opposite a team that had worked for weeks on a proposal, which you had received an hour before the meeting started. In the end, with pressure for earnings and a calm market environment, we reluctantly agreed to marginal transactions.
Over time we accumulated a balance-sheet of traded assets which allowed for very little margin of error. We owned a large portfolio of “very low-risk” assets which turned out to be high-risk. A small price movement on billions of dollars’ worth of securities would translate into large mark-to-market losses. We thought that we had focused correctly on the non-investment-grade paper, of which we held little. We had not paid enough attention to the ever-growing mountain of highly rated but potentially illiquid assets. We had not fully appreciated that 20% of a very large number can inflict far greater losses than 80% of a small number.
Goals and goalkeepers
What have we, both as risk managers and as an industry, to learn from this crisis? A number of thoughts come to mind. One lesson is to go back to basics, to analyse your balance-sheet positions by type, size and complexity both before and after you have hedged them. Do not assume that ratings are always correct and if they are, remember that they can change quickly.
Another lesson is to account properly for liquidity risk in two ways. One is to increase internal and external capital charges for trading-book positions. These are too low relative to banking-book positions and need to be recalibrated. The other is to bring back liquidity reserves. This has received little attention in the industry so far. Over time fair-value accounting practices have disallowed liquidity reserves, as they were deemed to allow for smoothing of earnings. However, in an environment in which an ever-increasing part of the balance-sheet is taken up by trading assets, it would be more sensible to allow liquidity reserves whose size is set in scale to the complexity of the underlying asset. That would be better than questioning the whole principle of mark-to-market accounting, as some banks are doing.
Last but not least, change the perception and standing of risk departments by giving them more prominence. The best way would be to encourage more traders to become risk managers. Unfortunately the trend has been in reverse; good risk managers end up in the front-line and good traders and bankers, once in the front-line, very rarely go the other way. Risk managers need to be perceived like good goalkeepers: always in the game and occasionally absolutely at the heart of it, like in a penalty shoot-out.
This is hard to achieve because the job we do has the risk profile of a short option position with unlimited downside and limited upside. This is the one position that every good risk manager knows he must avoid at all costs. A wise firm will need to bear this in mind when it tries to persuade its best staff to take on such a crucial task.
IN JANUARY 2007 the world looked almost riskless. At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.
As risk managers we were responsible for approving credit requests and transactions submitted to us by the bankers and traders in the front-line. We also monitored and reported the level of risk across the bank’s portfolio and set limits for overall credit and market-risk positions.
The possibility that liquidity could suddenly dry up was always a topic high on our list but we could only see more liquidity coming into the market—not going out of it. Institutional investors, hedge funds, private-equity firms and sovereign-wealth funds were all looking to invest in assets. This was why credit spreads were narrowing, especially in emerging markets, and debt-to-earnings ratios on private-equity financings were increasing. “Where is the liquidity crisis supposed to come from?” somebody asked in the meeting. No one could give a good answer.
Looking back on it now we should of course have paid more attention to the first signs of trouble. No crisis comes completely out of the blue; there are always clues and advance warnings if you can only interpret them correctly. It was the hiccup in the structured-credit market in May 2005 which gave the strongest indication of what was to come. In that month bonds of General Motors were marked down by the rating agencies from investment grade to non-investment grade, or “junk”. Because the American carmaker’s bonds were widely held in structured-credit portfolios, the downgrades caused a big dislocation in the market.
Like most banks we owned a portfolio of different tranches of collateralised-debt obligations (CDOs), which are packages of asset-backed securities. Our business and risk strategy was to buy pools of assets, mainly bonds; warehouse them on our own balance-sheet and structure them into CDOs; and finally distribute them to end investors. We were most eager to sell the non-investment-grade tranches, and our risk approvals were conditional on reducing these to zero. We would allow positions of the top-rated AAA and super-senior (even better than AAA) tranches to be held on our own balance-sheet as the default risk was deemed to be well protected by all the lower tranches, which would have to absorb any prior losses.
In May 2005 we held AAA tranches, expecting them to rise in value, and sold non-investment-grade tranches, expecting them to go down. From a risk-management point of view, this was perfect: have a long position in the low-risk asset, and a short one in the higher-risk one. But the reverse happened of what we had expected: AAA tranches went down in price and non-investment-grade tranches went up, resulting in losses as we marked the positions to market.
This was entirely counter-intuitive. Explanations of why this had happened were confusing and focused on complicated cross-correlations between tranches. In essence it turned out that there had been a short squeeze in non-investment-grade tranches, driving their prices up, and a general selling of all more senior structured tranches, even the very best AAA ones.
That mini-liquidity crisis was to be replayed on a very big scale in the summer of 2007. But we had failed to draw the correct conclusions. As risk managers we should have insisted that all structured tranches, not just the non-investment-grade ones, be sold. But we did not believe that prices on AAA assets could fall by more than about 1% in price. A 20% drop on assets with virtually no default risk seemed inconceivable—though this did eventually occur. Liquidity risk was in effect not priced well enough; the market always allowed for it, but at only very small margins prior to the credit crisis.
So how did we get ourselves into a situation where we built up such large trading positions? There were a number of factors. As is often the case, it happened so gradually that it was barely perceptible.
Fighting the last war
The focus of our risk management was on the loan portfolio and classic market risk. Loans were illiquid and accounted for on an accrual basis in the “banking book” rather than on a mark-to-market basis in the “trading book”. Rigorous credit analysis to ensure minimum loan-loss provisions was important. Loan risks and classic market risks were generally well understood and regularly reviewed. Equities, government bonds and foreign exchange, and their derivatives, were well managed in the trading book and monitored on a daily basis.
The gap in our risk management only opened up gradually over the years with the growth of traded credit products such as CDO tranches and other asset-backed securities. These sat uncomfortably between market and credit risk. The market-risk department never really took ownership of them, believing them to be primarily credit-risk instruments, and the credit-risk department thought of them as market risk as they sat in the trading book.
The explosive growth and profitability of the structured-credit market made this an ever greater problem. Our risk-management response was half-hearted. We set portfolio limits on each rating category but otherwise left the trading desks to their own devices. We made two assumptions which would cost us dearly. First, we thought that all mark-to-market positions in the trading book would receive immediate attention when losses occurred, because their profits and losses were published daily. Second, we assumed that, if the market ran into difficulties, we could easily adjust and liquidate our positions, especially on securities rated AAA and AA. Our focus was always on the non-investment-grade part of the portfolio, especially the emerging-markets paper. The previous crises in Russia and Latin America had left a deeply ingrained fear of sudden liquidity shocks and widening credit spreads. Ironically, of course, in the credit crunch the emerging-market bonds have outperformed the Western credit assets.
We also trusted the rating agencies. It is hard to imagine now but the reputation of outside bond ratings was so high that if the risk department had ever assigned a lower rating, our judgment would have been immediately questioned. It was assumed that the rating agencies simply knew best.
We were thus comfortable with investment-grade assets and were struggling with the huge volume of business. We were too slow to sell these better-rated assets. We needed little capital to support them; there was no liquidity charge, very little default risk and a small positive margin, or “carry”, between holding the assets and their financing in the liquid interbank and repo markets. Gradually the structures became more complicated. Since they were held in the trading book, many avoided the rigorous credit process applied to the banking-book assets which might have identified some of the weaknesses.
The pressure on the risk department to keep up and approve transactions was immense. Psychology played a big part. The risk department had a separate reporting line to the board to preserve its independence. This had been reinforced by the regulators who believed it was essential for objective risk analysis and assessment. However, this separation hurt our relationship with the bankers and traders we were supposed to monitor.
Spoilsports
In their eyes, we were not earning money for the bank. Worse, we had the power to say no and therefore prevent business from being done. Traders saw us as obstructive and a hindrance to their ability to earn higher bonuses. They did not take kindly to this. Sometimes the relationship between the risk department and the business lines ended in arguments. I often had calls from my own risk managers forewarning me that a senior trader was about to call me to complain about a declined transaction. Most of the time the business line would simply not take no for an answer, especially if the profits were big enough. We, of course, were suspicious, because bigger margins usually meant higher risk. Criticisms that we were being “non-commercial”, “unconstructive” and “obstinate” were not uncommon. It has to be said that the risk department did not always help its cause. Our risk managers, although they had strong analytical skills, were not necessarily good communicators and salesmen. Tactfully explaining why we said no was not our forte. Traders were often exasperated as much by how they were told as by what they were told.
At the root of it all, however, was—and still is—a deeply ingrained flaw in the decision-making process. In contrast to the law, where two sides make an equal-and-opposite argument that is fairly judged, in banks there is always a bias towards one side of the argument. The business line was more focused on getting a transaction approved than on identifying the risks in what it was proposing. The risk factors were a small part of the presentation and always “mitigated”. This made it hard to discourage transactions. If a risk manager said no, he was immediately on a collision course with the business line. The risk thinking therefore leaned towards giving the benefit of the doubt to the risk-takers.
Gary Neil
Collective common sense suffered as a result. Often in meetings, our gut reactions as risk managers were negative. But it was difficult to come up with hard-and-fast arguments for why you should decline a transaction, especially when you were sitting opposite a team that had worked for weeks on a proposal, which you had received an hour before the meeting started. In the end, with pressure for earnings and a calm market environment, we reluctantly agreed to marginal transactions.
Over time we accumulated a balance-sheet of traded assets which allowed for very little margin of error. We owned a large portfolio of “very low-risk” assets which turned out to be high-risk. A small price movement on billions of dollars’ worth of securities would translate into large mark-to-market losses. We thought that we had focused correctly on the non-investment-grade paper, of which we held little. We had not paid enough attention to the ever-growing mountain of highly rated but potentially illiquid assets. We had not fully appreciated that 20% of a very large number can inflict far greater losses than 80% of a small number.
Goals and goalkeepers
What have we, both as risk managers and as an industry, to learn from this crisis? A number of thoughts come to mind. One lesson is to go back to basics, to analyse your balance-sheet positions by type, size and complexity both before and after you have hedged them. Do not assume that ratings are always correct and if they are, remember that they can change quickly.
Another lesson is to account properly for liquidity risk in two ways. One is to increase internal and external capital charges for trading-book positions. These are too low relative to banking-book positions and need to be recalibrated. The other is to bring back liquidity reserves. This has received little attention in the industry so far. Over time fair-value accounting practices have disallowed liquidity reserves, as they were deemed to allow for smoothing of earnings. However, in an environment in which an ever-increasing part of the balance-sheet is taken up by trading assets, it would be more sensible to allow liquidity reserves whose size is set in scale to the complexity of the underlying asset. That would be better than questioning the whole principle of mark-to-market accounting, as some banks are doing.
Last but not least, change the perception and standing of risk departments by giving them more prominence. The best way would be to encourage more traders to become risk managers. Unfortunately the trend has been in reverse; good risk managers end up in the front-line and good traders and bankers, once in the front-line, very rarely go the other way. Risk managers need to be perceived like good goalkeepers: always in the game and occasionally absolutely at the heart of it, like in a penalty shoot-out.
This is hard to achieve because the job we do has the risk profile of a short option position with unlimited downside and limited upside. This is the one position that every good risk manager knows he must avoid at all costs. A wise firm will need to bear this in mind when it tries to persuade its best staff to take on such a crucial task.
Burst Bubble: Energy or Speculator?
Here’s how I see it. Many are rejoicing the bursting of the energy/commodities Bubble. Rapidly declining oil and resource prices are now expected to alleviate inflationary pressures, while bolstering household purchasing power. There’ll be no pressure on the Fed to raise rates, while their global central bank compatriots can soon begin cutting. The consensus view is that this is bullish for the U.S. economy and stock market and, if nothing else, market action did take attention away from troubling financial and economic news.
I am not one to easily dismiss notions of bursting Bubbles, and perhaps there is something to the energy bust thesis. I’m just skeptical of the idea that a slumping global economy is behind recent stunning price declines. Examining the global market backdrop, I sense different dynamics at play – important dynamics. And I tend to believe rapidly retreating commodities markets should be viewed in the context of a Bursting Leveraged Speculating Community Bubble.
The leveraged speculators have struggled since this year’s initial trading sessions. “Quant” and “market neutral” strategies in particular have foundered, although wild market volatility, illiquidity, and weak global securities markets have been an impediment for virtually all strategies. The hedge fund industry has been trying to adapt to tighter Credit conditions from the Wall Street firms and generally less liquid markets. Overall, leveraged strategies have been problematic, whether the underlying positions were in residential mortgages, commercial mortgages or corporate loans. The easy days of leveraged “spread trades” (“borrow cheap and lend dear”) quickly became quite difficult. And the easy returns in emerging markets turned abruptly into painful losses. Overall, global equities have performed quite poorly and global bonds somewhat poorly. Not many things have performed well and, worse yet, various trades that were supposed to offer diversification all became too tightly correlated.
Crude ended the first half at $140. Major commodities indices concluded June at record highs – sporting spectacular y-t-d gains. There’s no doubt that the speculator community had all crowded into the energy/commodities trade, one of a rapidly narrowing menu of speculations offering juicy (and desperately needed) returns. At the same time, the long energy/short financials “pairs trade” was also put on in great excess. The speculator community as well likely crowded further into dollar short positions, for years now an almost surefire winner. The more the crowded industry struggled for performance, the more they were forced to crowd into the same crowded trades. I would argue that the Bubble in the leveraged speculating community played a significant role in fueling energy/commodities prices inflation beyond what was justified by exceptionally bullish fundamentals. I wouldn’t, however, write off energy and commodities as burst Bubbles.
A lot of things had to go right for the vulnerable leveraged speculator community not to be pushed over the edge. Of course, markets tend to not accommodate the impaired – and the current market is particularly ruthless in this regard. The energy trade has unraveled badly. Commodities markets have been in near freefall. The dollar has mustered its most ferocious rally in quite some time. At the same time, agency debt and MBS spreads have widened, while global bond prices have offered little performance help. Corporate debt prices have performed poorly, while “private-label” MBS and various mortgage-related derivatives have traded dismally. Meanwhile, the financial stocks and other heavily shorted equities have rallied significantly. In short, a whole host of popular trades have gone wrong at the same time – a huge problem for the fragile industry.
We’re now in the midst of another one of these precarious periods. I believe global markets – equities, debt, currencies, and commodities – are all in some stage of dislocation (perhaps not emerging debt, at least yet). Trading conditions across the spectrum of markets are as chaotic as I’ve ever witnessed, a dislocation chiefly related to the now forced unwinds of speculative positions. Recent extreme global market volatility is part and parcel to the Heightened Monetary Disorder I have been addressing for months now. The Massive Global Pool of Speculative Finance has Run Amuck. The bulls will celebrate the rally, yet markets this unstable are prone to “melt-ups” that lead to breakdowns.
Earnings reports this week from Freddie Mac, Fannie Mae and AIG – three of our largest financial institutions – were horrendous. Financial sector hemorrhaging has actually accelerated, and definitely do not underestimate the impact of tightened Credit in the pipeline from Fannie, Freddie and others. With limited “capital” quickly evaporating, Freddie stated that its aggressive retained portfolio growth has come a conclusion. Fannie intimated about the same. Fannie will curtail purchases of alt-A loans, and it is clear that both companies have lost the capacity to provide the speculators a “backstop bid” in the MBS marketplace. This major additional tightening of mortgage Credit Availability and Marketplace Liquidity will further depress housing markets and bolster the headwinds buffeting our vulnerable economy.
Yet it is not the nature of dislocated markets to let fundamentals get in the way of price movement. Markets, after all, live on fear and greed. Sinking energy prices and a short squeeze ignited U.S. stocks this week. And surging stock prices always entice the optimistic viewpoint, with many viewing runs in stocks and the dollar as confirmation that the worst of the financial and economic crisis is behind us. The bursting of the so-called Energy/Commodities Bubble is also viewed in positive light.
Yet if the key dynamic is instead a Bursting Leveraged Speculating Community Bubble, entirely different dynamics are now in play. Enormous short positions have built up, the vast majority as part of “market neutral,” “quant” and myriad risk hedging strategies. If today’s dislocation develops into a significant unwind of these positions, the market immediately then becomes vulnerable to a disorderly “melt-up” followed almost inevitably by a sharp reversal and disorderly decline. The unwind of bearish speculations and hedges would be a most problematic market development, unleashing a final bout of speculative excess and disorder that would set the stage for a major market crisis.
It is not difficult to envision the backdrop for problematic market liquidation and deepening financial crisis. The hedge fund community is now susceptible to huge year-end redemptions, generally poor performance, shrinking assets & tighter Credit - all taking place in ia climate of inhospitable market conditions which dictate ongoing Credit system de-leveraging. The pool of players willing and able to acquire U.S. risk assets is being depleted by the week. To be sure, the unfolding change of fortunes for the leveraged speculating community is one more key facet of tighter system Credit and faltering Marketplace Liquidity – extremely problematic Financial Conditions for the finance-driven U.S. Bubble Economy. And this makes the current market dislocations in the face of rapidly deteriorating fundamentals such a dangerous development.
I am not one to easily dismiss notions of bursting Bubbles, and perhaps there is something to the energy bust thesis. I’m just skeptical of the idea that a slumping global economy is behind recent stunning price declines. Examining the global market backdrop, I sense different dynamics at play – important dynamics. And I tend to believe rapidly retreating commodities markets should be viewed in the context of a Bursting Leveraged Speculating Community Bubble.
The leveraged speculators have struggled since this year’s initial trading sessions. “Quant” and “market neutral” strategies in particular have foundered, although wild market volatility, illiquidity, and weak global securities markets have been an impediment for virtually all strategies. The hedge fund industry has been trying to adapt to tighter Credit conditions from the Wall Street firms and generally less liquid markets. Overall, leveraged strategies have been problematic, whether the underlying positions were in residential mortgages, commercial mortgages or corporate loans. The easy days of leveraged “spread trades” (“borrow cheap and lend dear”) quickly became quite difficult. And the easy returns in emerging markets turned abruptly into painful losses. Overall, global equities have performed quite poorly and global bonds somewhat poorly. Not many things have performed well and, worse yet, various trades that were supposed to offer diversification all became too tightly correlated.
Crude ended the first half at $140. Major commodities indices concluded June at record highs – sporting spectacular y-t-d gains. There’s no doubt that the speculator community had all crowded into the energy/commodities trade, one of a rapidly narrowing menu of speculations offering juicy (and desperately needed) returns. At the same time, the long energy/short financials “pairs trade” was also put on in great excess. The speculator community as well likely crowded further into dollar short positions, for years now an almost surefire winner. The more the crowded industry struggled for performance, the more they were forced to crowd into the same crowded trades. I would argue that the Bubble in the leveraged speculating community played a significant role in fueling energy/commodities prices inflation beyond what was justified by exceptionally bullish fundamentals. I wouldn’t, however, write off energy and commodities as burst Bubbles.
A lot of things had to go right for the vulnerable leveraged speculator community not to be pushed over the edge. Of course, markets tend to not accommodate the impaired – and the current market is particularly ruthless in this regard. The energy trade has unraveled badly. Commodities markets have been in near freefall. The dollar has mustered its most ferocious rally in quite some time. At the same time, agency debt and MBS spreads have widened, while global bond prices have offered little performance help. Corporate debt prices have performed poorly, while “private-label” MBS and various mortgage-related derivatives have traded dismally. Meanwhile, the financial stocks and other heavily shorted equities have rallied significantly. In short, a whole host of popular trades have gone wrong at the same time – a huge problem for the fragile industry.
We’re now in the midst of another one of these precarious periods. I believe global markets – equities, debt, currencies, and commodities – are all in some stage of dislocation (perhaps not emerging debt, at least yet). Trading conditions across the spectrum of markets are as chaotic as I’ve ever witnessed, a dislocation chiefly related to the now forced unwinds of speculative positions. Recent extreme global market volatility is part and parcel to the Heightened Monetary Disorder I have been addressing for months now. The Massive Global Pool of Speculative Finance has Run Amuck. The bulls will celebrate the rally, yet markets this unstable are prone to “melt-ups” that lead to breakdowns.
Earnings reports this week from Freddie Mac, Fannie Mae and AIG – three of our largest financial institutions – were horrendous. Financial sector hemorrhaging has actually accelerated, and definitely do not underestimate the impact of tightened Credit in the pipeline from Fannie, Freddie and others. With limited “capital” quickly evaporating, Freddie stated that its aggressive retained portfolio growth has come a conclusion. Fannie intimated about the same. Fannie will curtail purchases of alt-A loans, and it is clear that both companies have lost the capacity to provide the speculators a “backstop bid” in the MBS marketplace. This major additional tightening of mortgage Credit Availability and Marketplace Liquidity will further depress housing markets and bolster the headwinds buffeting our vulnerable economy.
Yet it is not the nature of dislocated markets to let fundamentals get in the way of price movement. Markets, after all, live on fear and greed. Sinking energy prices and a short squeeze ignited U.S. stocks this week. And surging stock prices always entice the optimistic viewpoint, with many viewing runs in stocks and the dollar as confirmation that the worst of the financial and economic crisis is behind us. The bursting of the so-called Energy/Commodities Bubble is also viewed in positive light.
Yet if the key dynamic is instead a Bursting Leveraged Speculating Community Bubble, entirely different dynamics are now in play. Enormous short positions have built up, the vast majority as part of “market neutral,” “quant” and myriad risk hedging strategies. If today’s dislocation develops into a significant unwind of these positions, the market immediately then becomes vulnerable to a disorderly “melt-up” followed almost inevitably by a sharp reversal and disorderly decline. The unwind of bearish speculations and hedges would be a most problematic market development, unleashing a final bout of speculative excess and disorder that would set the stage for a major market crisis.
It is not difficult to envision the backdrop for problematic market liquidation and deepening financial crisis. The hedge fund community is now susceptible to huge year-end redemptions, generally poor performance, shrinking assets & tighter Credit - all taking place in ia climate of inhospitable market conditions which dictate ongoing Credit system de-leveraging. The pool of players willing and able to acquire U.S. risk assets is being depleted by the week. To be sure, the unfolding change of fortunes for the leveraged speculating community is one more key facet of tighter system Credit and faltering Marketplace Liquidity – extremely problematic Financial Conditions for the finance-driven U.S. Bubble Economy. And this makes the current market dislocations in the face of rapidly deteriorating fundamentals such a dangerous development.
9 August 2008
Path to the Printing Press
The path to the printing press is a long one. It is used at first to spread credit indiscriminantly in sustaining commerce and funding financial systems. For the United States, that means horribly inefficient usage of credit in commerce, where 5 units of credit produce one unit of business activity. In the twisted bizarre arena that is Wall Street, the financial maze they created has imploded as yet another chapter is written in the standard textbook of boom & bust. They managed to cause the most powerful deflation storm in eighty years, all born from the monetary inflation wellspring, no easy feat. The Americans think they are immune to the immutable laws of economic nature. They dispatched most of their industry to the Pacific Rim, then Mexico, finally a more complex mix of Asia with China the new center. With that exodus went legitimate income. In its place was the great majority of the USEconomy resting atop a housing and mortgage bubble. The heretical US economists, led by the closest thing to Mr Magoo on the planet in the former US Federal Reserve Chairman, endorsed the plan as not only sound, but advanced in risk offset price modeling. Imagine Mr Magoo a knight! Now the entire model is in the process of dissolving, taking down the entire US banking system, including most lending institutions, into the sewer of acidic pits, the wasteland of dilution, or the cemetery for bankruptcy.
Long is the path to the printing press, the ultimate supposed savior of the nation. Current USFed Chairman Bernanke once said, “But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” His words are taken out of context, unfair to him. Sue me! The hidden cost is beyond description as huge, like ruin of a national financial foundation. It is a device that kills the host, hardly any solution. When the financial system is totally broken, when allies are totally betrayed, when investors are totally ransacked, when isolation is the spoils of current policy riddled with curried favor, the printing press remains to save the day. What heresy! Usage of the printing press in large scale volume will earn the certain reward of astronomical gold and silver prices. The decisions to be made will determine whether a return to precious metal supremacy is accompanied either first by very high interest rates and uncontrollable credit derivative meltdowns, or second by suppressed controlled interest rates and total discouragement of savings from artificially low interest rates. Systemic meltdown awaits the first path, while continued pursuit of bubbles the second path. Either way, gold wins! The spoils will be devastation for the first path, but rationing for the second path. Both paths require the most dreaded device to be deployed at the last turn, the printing press. Other alternatives will have been exhausted.
A tragedy is in progress. For three years, my premises have centered on foreign-held debt leading to lost sovereignty, on the inevitable wreckage of the US banking system (first with insolvency, later with bankruptcy, finally consolidation and nationalization, and a long drawn out housing bear market made worse by the extraordinary extension at its peak. That pathogenesis is on course, in progress still, despite supposed rescues, most being horribly designed and full of the same broken devices that Voltaire warned about. Few people think much about the Founding Fathers of the United States these days. They would be appalled, even say, I TOLD YOU SO. Thomas Jefferson warned specifically about handing over the power and authority over money to private banks, stating in clear terms that if granted, then in time the nation will lose their homes to bankers. We are there. The brilliant second president crafted the Constitution, an ignored document shredded by those who prefer war, fear, and private profit to liberty, free markets, and honest money, while they spout endlessly about freedom, national pride, and foreign threats. The menace is internal.
IMPERFECTIONS & DECEPTIONS
The Mortgage Relief Bill just signed into law should be regarded as a first pass at governmental rescue actions, the first of many. The first bill always represents the most difficult bill to pass. The succeeding bills will be easier, since the interference has been removed. The nationalization movement in mortgage finance has begun. The benefits will extend ranks to homeowners finally, and not exclusively to the banker elite as seen to the present date. One should note that the elite, primarily shareholders and bondholders, stand in first position of priority in this first bill designed toward rescue and relief. In return for quasi-formal guarantees from the formerly quasi-government agencies, Fannie & Freddie (F&F) will submit to strong reins from a newly created regulator. The Federal Housing Administration will insure up to $300 billion in such mortgage loans, as 400 thousand upside-down homeowners will be lined up for aid, provided loan originators eat a large helping of red ink. Attached to the legislative bill, more like snuck in, was a convenient increase of $800 billion to the USGovt federal debt limit, now at $10.6 trillion.
The bailouts directed to F&F will require at least $1.5 trillion in my estimation, once credit derivative losses are revealed down the road. Regard the Mortgage Relief Bill as a sentinel signal that the USDollar will indeed fall another 20% eventually, thus propelling the gold price to unexpected heights. A total systemic bank breakdown is close at hand, when the next larger and broader wave of mortgage defaults occurs. They have nowhere near enough capital to offset upcoming losses. Each new package of official government relief measures will be easier to implement, since the crisis has been recognized. Lawrence Lindsey hates the Mortgage Relief Bill, and went into great detail as to why. He regards it is another bailout for the Fannie & Freddie elite, which happens to be what the USFed lending facilities have been for Wall Street firms so far. The F&F structure remains intact, when clearly faulty if not a shocking failure. It is still not yet nationalized, but heading in that direction. The bill preserves the institution without ensuring its functions. It prevents losses to investors, while saddling the taxpayer with an unlimited liability. If truth be known, Fannie Mae must be continued in present form, unless its giant hidden credit derivatives are revealed, unless its unspeakable fraud is revealed totaling over $1 trillion in fully accounted tidy form, neatly covered up by the last three administrations. Imagine your own fully funded slush fund for theft with impunity. Keep it going! Call it a boon to homeowners, paving the way to the American Dream. Fannie & Freddie are tour guides, cheer leaders, trail blazer guides on the path to the printing press. Nothing will betray the system more than the F&F main event how, even betray foreigners. A risk actually exists that foreign Sovereign Wealth Funds might eventually own the F&F, lock stock and barrel. So Jefferson’s warning might be even worse, than foreign bankers will own the homes lost by the American people. F&F together own tens of thousands of foreclosed homes. Soon they will see the light, and begin to rent them for income.
The biggest intangible loss in recent months has been in bank executive credibility. This goes parallel to the lost credibility of the central bank at the US Federal Reserve. Nearly every forecast or economic viewpoint or banking perception proved to be totally off the mark. Nearly every promise made by John Thain to investors since he took the helm at Merrill Lynch has been broken. Nearly all his viewpoints have been incorrect. Yet he keeps on talking. Then there was CEO Richard Fuld of Lehman Brothers, whose words proved totally off the mark. Then there was CEO Kerry Killinger of Washington Mutual, whose words proved totally off the mark. Then there was CEO Ken Thompson of Wachovia, whose words proved totally off the mark. Then there was AIG head Martin Sullivan, whose words proved totally off the mark. At least bankers from the top down through the ranks are consistent. To be otherwise would cause confusion.
MORE BIGGER BANK LOSSES DEAD AHEAD
Opinions are arriving surprisingly fast onto the analytic scene, that bank losses have not peaked. In fact, they will be much larger and broader in the next year. Banks have suffered $480 billion so far in stated losses, a figure that moves like a clock racking up more red ink each hour. Meredith Whitney of Oppenheimer believes Wall Street firms have yet to cut operating costs significantly, and have yet to meaningfully write down portfolio assets in stated losses. These once powerful firms forecast only a 20% to 25% fall in housing prices from peak to trough, a delusional viewpoint to use as an accounting foundation, let alone corporate planning. Check inventory levels and foreclosure figures. Their only claim to power nowadays is their control of the USGovt, USFed, US Dept of Treasury, debt rating agencies, regulators, and press networks. Heck! That is power indeed! To be a banker in the Untied States nowadays requires a certificate in fraud or stupidity, perhaps both, a firm grasp of heresy, and surely a degree from the School of Charlatan. Once again, Wall Street executives have no business except to manage their demise from choking on their own feces and toxic waste. They are victims of their own fraud and greed. Their stock and bond issuance has virtually vanished. Their own corporate stock values are supported by criminal restrictions to shorting rules, along with intimidation. Some opportunities await the intrepid investor, as the bank sector has shot its wad in August.
After raising cash from capital sale to replenish core assets and to revive balance sheets, Wall Street firms and big US banks will be unable to do so during the next big round, due this autumn, next winter, and spring. THAT IS WHEN ONE SHOULD EXPECT NATIONALIZATION OF THE US BANKS, FROM USGOVT BAILOUTS AND TOTAL ASSUMPTION OF DEBT OBLIGATIONS. This event will coincide with the nationalization of the US mortgage finance industry (see Fannie Mae & Freddie Mac) and the US car industry (see GM, Ford, Chrysler). As for the airlines, look instead for Emirate Airlines and Qatar Airlines to take plenty of American routes, at top dollar prices, since they have deep pockets and can obtain jet fuel on the cheap. The trio of banks, mortgage finance, and car industries will compose the core of the Nationalized USEconomy foundation. Our turkey leaders will then boast of stability restored, when actually bankruptcy will be shared, institutionalized, and its bitter fruit made available for all to sup at the dining room table. One should beware that nationalization is a highway, a really wide path to the printing press, wide enough for all to walk, very slowly, and with limited opportunity.
Standard methods have been used that are totally broken for valuing US banks generally. The price/earnings ratios do not work, price/book values do not work, and debt/asset ratios do not work. All fail for the simple reason that no profits exist, book value is negative, and bank insolvency puts the third ratio into a truly dark place where continued operation is almost impossible. A bank does not lend money when it is broke! Instead, it fakes its solvency and fights to con investors into donating money into a black hole in exchange for equity without control. Their congame has blossomed.
Last midsummer in 2007, in the Hat Trick Letter reports, a warning was given that prime adjustable rate mortgages (ARM) would begin to default in one year. That is now, and the fabled Exploding ARMs, called officially Option ARMs, have indeed begun to default. The schedule of prime mortgage price began the reset process late last year, but have moved into high ground only this year. A few aspects are alarming, most importantly their size, at five times greater in volume than subprimes and Alt-A home loans. Price resets involve monthly costs rising at least 50% per month. In cases where triggers are hit for negative amortized loan balances having grown to 10% or 15% above the original balance, past interest and penalties are stacked atop new principal contributions to make for often a double or triple in monthly payment requirements! Default usually results, and for some, that prospect has led to some to abandon the homes, or even to halt making payments altogether.
In all, almost a half a trillion$ of ARMs will reset this year, vastly eclipsing the subprimes. Far too many are defaulting even before any adjustments, enough to scare the crapp out of bankers! Thoughts of banking system recovery and stabilization periods are pipedreams. The worst has yet to come, dead ahead. The bank losses will be at least triple the nearly $500 billion that has been suffered to date. Few analysts have factored in prime loan losses, let alone commercial loan losses, both next, both assured given the sickening rise in defaults. Focus must be given to how the 30-year fixed mortgage rates are now higher than when the USFed began to cut the funds rate in September 2007. Take this as a signal of rejection to monetary policy and failure by the central bank to reverse the risk environment. Meanwhile, evidence mounts on loan distress. Comparisons can be easily made. The subprime loans are in the 16% neighborhood on default, setting the standard. The Alt-A percentage of loans in arrears and the prime loan delinquencies are high enough to cause alarm to bankers. Bank analysts have noticed, even Jamie Dimon of JPMorgan. Details of the banking system, reset schedule for prime adjustable mortgages, foreclosures, peak for bank losses, FDIC watch lists, FDIC vulnerability, California update, and more are in the August Hat Trick Letter due out this weekend, possibly Monday.
BETRAYALS GALORE
Eventually investors who stepped into the previous rescues felt betrayed by huge losses. They were suckered. See Blackstone. See Citigroup. See Merrill Lynch. Asians and Arabs have been the principal benefactors so far. They have been burned. The first long round of bailouts for US banks was not sponsored by the USFed, but rather by foreign Sovereign Wealth Funds (SWF). These face 40% to 50% losses. For this privilege they were granted no voting rights, no seats on the Board of Directors, still second class citizens, yet in the driver’s seat for the corporate survival of desperate financial firms. On the next round of bailouts, foreign SWFunds will demand better terms. Heck! They might eventually demand a seat at the prestigious G-7 Meetings, where finance ministers for the world’s largely bankrupt Western nations plus Japan conduct meetings. The last one was a total waste, discussing greenhouse emissions when the global banking system burned from the Western edges. The next rounds will surely grow more contentious. Eventually, foreigners will have had their fill. The Untied States must finally relinquish some important ground, like granting bank licenses to foreign banks with Chinese and Arab names. When the US leaders tire of selling control to foreign entities, they will turn to their trusted self-destructive mechanism. At last resort, the printing press will be relied upon to restore cash to the depleted balance sheets. They think it will be money, but it is just paper, the most corrosive paper on the planet. It is far more corrosive than any industrial chemical. It kills entire industries, and millions of jobs. It even kills independent statehood. It opens the door to international carpetbaggers.
A systemic failure is in progress, in a painful ultra-slow excruciating process. People have finally begun to see the failure, often as something terribly wrong in vague terms. But they are still asleep as to causes and perpetrators. If they comprehended the depth of the problems, they would refuse to grant further control to perpetrators of the bank destruction. Deceptive banker reports still come, like the total charade by Wells Fargo. By extending their definition of loan default to 180 days or so, from the standard 90 days, they were able to write off far less in credit portfolio losses. Investors bit hard on the bait, and bid up their stock by over 20% on that day. What idiots! Wells Fargo has $84 billion in home equity loans in their portfolio. They are first to be killed off in home loan defaults, well before the senior first mortgages.
Bank insolvency is out in the open nowadays. The trend has become crystal clear, as successive quarters reveal incrementally larger bank portfolio losses. The worst lies ahead. A tip of the hat to Nouriel Roubini from New York University. He has the stones to tell Wall Street that the US banking system faces between $1 and $2 trillion in accumulative losses. During a recent interview, the anchors who interviewed him were in minor shock, and did not dish out their usual cocky disrespect. They might realize that Roubini is 90% correct for his forecasts placed publicly over the last two years. They might realize that Wall Street executives and USFed members have been 90% wrong.
On the world stage, a tragedy has become apparent in recent weeks. THE ENTIRE ANGLOSPHERE BANK & ECONOMIC SYSTEMS ARE IMPLODING. The built economies atop housing bubble foundations, the common lethal transgression. The United States, the United Kingdom (England), Ireland, Australia, and New Zealand are suffering from critically wounded banking systems, led by housing markets. This was another longstanding forecast here. The latest nation to come to my attention for implosion is Northern Ireland, which runs on the pound sterling currency, being rooted as a British satellite. They have an even more damaged bank and economic system than Ireland (the central nation to the south), which is euro-based in currency. Geopolitical implications from the AngloSphere vicious decline are beyond description, as power shifts from West to East. The main problem is that military might is centered in the West, but wealth is centered in the East, while financial institutions are dominated by the West. Conflicts and compromise comes, even as sovereignty is yielded.
QUICK CONCLUSION
The Untied States will soon find itself cornered, isolated, having burned the hands of those who offered timely aid and rescues. It is heading down a path to nationalize Fannie Mae, its broken and corrupt insolvent mortgage centrifuge. When just a few decent sized banks fall, the Federal Deposit Insurance Corp will go begging to the same USGovt window, one located far lower than any spot in the dry hot Mojave Desert. The FDIC will be resupplied by more USGovt funds, maybe even from banks healthy enough to cough up a few bucks. Far more banks are troubled than the 90 on the FDIC official watch list, which did not include IndyMac. The amount of uninsured funds in US banks is over $2 trillion. Hundreds of US banks are destined to go bust, according to less biased bank analysts, given in detail in the August report. The next rounds will include prime and commercial loans, whose volume will certainly push out almost $500 billion in more losses. At least double the current bank losses! The US financial system is a viper pit of interconnected collusion. The USFed, the Dept of Treasury, Wall Street firms, USGovt regulators, the debt rating agencies, the Securities & Exchange Commission, the Commodity Futures Trading Commission, and major financial networks are so tight, that when they speak, their buttocks squeak, since the nether region is where their words emanate from.
When the US runs out of sources of money to tap, runs out of fools, hits the wall on handing away its national sovereignty, it will resort to the printing press. It is a device that kills the host, hardly any final solution. Ironically, USFed Chairman Bernanke has not resorted much to date in its usage for rescues. He has overseen the ruin of the USFed itself, accepting toxic assets from the mortgage world. He was won praise for this action. Such is the penalty for regulatory laxity by his predecessor. He will eventually turn to the print press that he once boasted about, boasted to be a national advantage. Instead, it is the noose around the neck of the USDollar, and the catapult cord for the gold price. Some big bank liquidation events are planned soon, like in the next several weeks, maybe sooner.
The Boyz took gold down again, as the USDollar has seen surprisingly resilience. They want the gold price down as much as possible before the fireworks clouded by desperation this autumn. The gold price resembles what was seen one year ago, suppressed immediately before a big push up, a scary push up, a 25% rise. The financial sector bounce is 95% cooked done finished. Time for gold to take back the spotlight. In fact, the pendulum has begun to swing from crude oil to gold. Some might view this transition as a small consolation. Not here.
Long is the path to the printing press, the ultimate supposed savior of the nation. Current USFed Chairman Bernanke once said, “But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” His words are taken out of context, unfair to him. Sue me! The hidden cost is beyond description as huge, like ruin of a national financial foundation. It is a device that kills the host, hardly any solution. When the financial system is totally broken, when allies are totally betrayed, when investors are totally ransacked, when isolation is the spoils of current policy riddled with curried favor, the printing press remains to save the day. What heresy! Usage of the printing press in large scale volume will earn the certain reward of astronomical gold and silver prices. The decisions to be made will determine whether a return to precious metal supremacy is accompanied either first by very high interest rates and uncontrollable credit derivative meltdowns, or second by suppressed controlled interest rates and total discouragement of savings from artificially low interest rates. Systemic meltdown awaits the first path, while continued pursuit of bubbles the second path. Either way, gold wins! The spoils will be devastation for the first path, but rationing for the second path. Both paths require the most dreaded device to be deployed at the last turn, the printing press. Other alternatives will have been exhausted.
A tragedy is in progress. For three years, my premises have centered on foreign-held debt leading to lost sovereignty, on the inevitable wreckage of the US banking system (first with insolvency, later with bankruptcy, finally consolidation and nationalization, and a long drawn out housing bear market made worse by the extraordinary extension at its peak. That pathogenesis is on course, in progress still, despite supposed rescues, most being horribly designed and full of the same broken devices that Voltaire warned about. Few people think much about the Founding Fathers of the United States these days. They would be appalled, even say, I TOLD YOU SO. Thomas Jefferson warned specifically about handing over the power and authority over money to private banks, stating in clear terms that if granted, then in time the nation will lose their homes to bankers. We are there. The brilliant second president crafted the Constitution, an ignored document shredded by those who prefer war, fear, and private profit to liberty, free markets, and honest money, while they spout endlessly about freedom, national pride, and foreign threats. The menace is internal.
IMPERFECTIONS & DECEPTIONS
The Mortgage Relief Bill just signed into law should be regarded as a first pass at governmental rescue actions, the first of many. The first bill always represents the most difficult bill to pass. The succeeding bills will be easier, since the interference has been removed. The nationalization movement in mortgage finance has begun. The benefits will extend ranks to homeowners finally, and not exclusively to the banker elite as seen to the present date. One should note that the elite, primarily shareholders and bondholders, stand in first position of priority in this first bill designed toward rescue and relief. In return for quasi-formal guarantees from the formerly quasi-government agencies, Fannie & Freddie (F&F) will submit to strong reins from a newly created regulator. The Federal Housing Administration will insure up to $300 billion in such mortgage loans, as 400 thousand upside-down homeowners will be lined up for aid, provided loan originators eat a large helping of red ink. Attached to the legislative bill, more like snuck in, was a convenient increase of $800 billion to the USGovt federal debt limit, now at $10.6 trillion.
The bailouts directed to F&F will require at least $1.5 trillion in my estimation, once credit derivative losses are revealed down the road. Regard the Mortgage Relief Bill as a sentinel signal that the USDollar will indeed fall another 20% eventually, thus propelling the gold price to unexpected heights. A total systemic bank breakdown is close at hand, when the next larger and broader wave of mortgage defaults occurs. They have nowhere near enough capital to offset upcoming losses. Each new package of official government relief measures will be easier to implement, since the crisis has been recognized. Lawrence Lindsey hates the Mortgage Relief Bill, and went into great detail as to why. He regards it is another bailout for the Fannie & Freddie elite, which happens to be what the USFed lending facilities have been for Wall Street firms so far. The F&F structure remains intact, when clearly faulty if not a shocking failure. It is still not yet nationalized, but heading in that direction. The bill preserves the institution without ensuring its functions. It prevents losses to investors, while saddling the taxpayer with an unlimited liability. If truth be known, Fannie Mae must be continued in present form, unless its giant hidden credit derivatives are revealed, unless its unspeakable fraud is revealed totaling over $1 trillion in fully accounted tidy form, neatly covered up by the last three administrations. Imagine your own fully funded slush fund for theft with impunity. Keep it going! Call it a boon to homeowners, paving the way to the American Dream. Fannie & Freddie are tour guides, cheer leaders, trail blazer guides on the path to the printing press. Nothing will betray the system more than the F&F main event how, even betray foreigners. A risk actually exists that foreign Sovereign Wealth Funds might eventually own the F&F, lock stock and barrel. So Jefferson’s warning might be even worse, than foreign bankers will own the homes lost by the American people. F&F together own tens of thousands of foreclosed homes. Soon they will see the light, and begin to rent them for income.
The biggest intangible loss in recent months has been in bank executive credibility. This goes parallel to the lost credibility of the central bank at the US Federal Reserve. Nearly every forecast or economic viewpoint or banking perception proved to be totally off the mark. Nearly every promise made by John Thain to investors since he took the helm at Merrill Lynch has been broken. Nearly all his viewpoints have been incorrect. Yet he keeps on talking. Then there was CEO Richard Fuld of Lehman Brothers, whose words proved totally off the mark. Then there was CEO Kerry Killinger of Washington Mutual, whose words proved totally off the mark. Then there was CEO Ken Thompson of Wachovia, whose words proved totally off the mark. Then there was AIG head Martin Sullivan, whose words proved totally off the mark. At least bankers from the top down through the ranks are consistent. To be otherwise would cause confusion.
MORE BIGGER BANK LOSSES DEAD AHEAD
Opinions are arriving surprisingly fast onto the analytic scene, that bank losses have not peaked. In fact, they will be much larger and broader in the next year. Banks have suffered $480 billion so far in stated losses, a figure that moves like a clock racking up more red ink each hour. Meredith Whitney of Oppenheimer believes Wall Street firms have yet to cut operating costs significantly, and have yet to meaningfully write down portfolio assets in stated losses. These once powerful firms forecast only a 20% to 25% fall in housing prices from peak to trough, a delusional viewpoint to use as an accounting foundation, let alone corporate planning. Check inventory levels and foreclosure figures. Their only claim to power nowadays is their control of the USGovt, USFed, US Dept of Treasury, debt rating agencies, regulators, and press networks. Heck! That is power indeed! To be a banker in the Untied States nowadays requires a certificate in fraud or stupidity, perhaps both, a firm grasp of heresy, and surely a degree from the School of Charlatan. Once again, Wall Street executives have no business except to manage their demise from choking on their own feces and toxic waste. They are victims of their own fraud and greed. Their stock and bond issuance has virtually vanished. Their own corporate stock values are supported by criminal restrictions to shorting rules, along with intimidation. Some opportunities await the intrepid investor, as the bank sector has shot its wad in August.
After raising cash from capital sale to replenish core assets and to revive balance sheets, Wall Street firms and big US banks will be unable to do so during the next big round, due this autumn, next winter, and spring. THAT IS WHEN ONE SHOULD EXPECT NATIONALIZATION OF THE US BANKS, FROM USGOVT BAILOUTS AND TOTAL ASSUMPTION OF DEBT OBLIGATIONS. This event will coincide with the nationalization of the US mortgage finance industry (see Fannie Mae & Freddie Mac) and the US car industry (see GM, Ford, Chrysler). As for the airlines, look instead for Emirate Airlines and Qatar Airlines to take plenty of American routes, at top dollar prices, since they have deep pockets and can obtain jet fuel on the cheap. The trio of banks, mortgage finance, and car industries will compose the core of the Nationalized USEconomy foundation. Our turkey leaders will then boast of stability restored, when actually bankruptcy will be shared, institutionalized, and its bitter fruit made available for all to sup at the dining room table. One should beware that nationalization is a highway, a really wide path to the printing press, wide enough for all to walk, very slowly, and with limited opportunity.
Standard methods have been used that are totally broken for valuing US banks generally. The price/earnings ratios do not work, price/book values do not work, and debt/asset ratios do not work. All fail for the simple reason that no profits exist, book value is negative, and bank insolvency puts the third ratio into a truly dark place where continued operation is almost impossible. A bank does not lend money when it is broke! Instead, it fakes its solvency and fights to con investors into donating money into a black hole in exchange for equity without control. Their congame has blossomed.
Last midsummer in 2007, in the Hat Trick Letter reports, a warning was given that prime adjustable rate mortgages (ARM) would begin to default in one year. That is now, and the fabled Exploding ARMs, called officially Option ARMs, have indeed begun to default. The schedule of prime mortgage price began the reset process late last year, but have moved into high ground only this year. A few aspects are alarming, most importantly their size, at five times greater in volume than subprimes and Alt-A home loans. Price resets involve monthly costs rising at least 50% per month. In cases where triggers are hit for negative amortized loan balances having grown to 10% or 15% above the original balance, past interest and penalties are stacked atop new principal contributions to make for often a double or triple in monthly payment requirements! Default usually results, and for some, that prospect has led to some to abandon the homes, or even to halt making payments altogether.
In all, almost a half a trillion$ of ARMs will reset this year, vastly eclipsing the subprimes. Far too many are defaulting even before any adjustments, enough to scare the crapp out of bankers! Thoughts of banking system recovery and stabilization periods are pipedreams. The worst has yet to come, dead ahead. The bank losses will be at least triple the nearly $500 billion that has been suffered to date. Few analysts have factored in prime loan losses, let alone commercial loan losses, both next, both assured given the sickening rise in defaults. Focus must be given to how the 30-year fixed mortgage rates are now higher than when the USFed began to cut the funds rate in September 2007. Take this as a signal of rejection to monetary policy and failure by the central bank to reverse the risk environment. Meanwhile, evidence mounts on loan distress. Comparisons can be easily made. The subprime loans are in the 16% neighborhood on default, setting the standard. The Alt-A percentage of loans in arrears and the prime loan delinquencies are high enough to cause alarm to bankers. Bank analysts have noticed, even Jamie Dimon of JPMorgan. Details of the banking system, reset schedule for prime adjustable mortgages, foreclosures, peak for bank losses, FDIC watch lists, FDIC vulnerability, California update, and more are in the August Hat Trick Letter due out this weekend, possibly Monday.
BETRAYALS GALORE
Eventually investors who stepped into the previous rescues felt betrayed by huge losses. They were suckered. See Blackstone. See Citigroup. See Merrill Lynch. Asians and Arabs have been the principal benefactors so far. They have been burned. The first long round of bailouts for US banks was not sponsored by the USFed, but rather by foreign Sovereign Wealth Funds (SWF). These face 40% to 50% losses. For this privilege they were granted no voting rights, no seats on the Board of Directors, still second class citizens, yet in the driver’s seat for the corporate survival of desperate financial firms. On the next round of bailouts, foreign SWFunds will demand better terms. Heck! They might eventually demand a seat at the prestigious G-7 Meetings, where finance ministers for the world’s largely bankrupt Western nations plus Japan conduct meetings. The last one was a total waste, discussing greenhouse emissions when the global banking system burned from the Western edges. The next rounds will surely grow more contentious. Eventually, foreigners will have had their fill. The Untied States must finally relinquish some important ground, like granting bank licenses to foreign banks with Chinese and Arab names. When the US leaders tire of selling control to foreign entities, they will turn to their trusted self-destructive mechanism. At last resort, the printing press will be relied upon to restore cash to the depleted balance sheets. They think it will be money, but it is just paper, the most corrosive paper on the planet. It is far more corrosive than any industrial chemical. It kills entire industries, and millions of jobs. It even kills independent statehood. It opens the door to international carpetbaggers.
A systemic failure is in progress, in a painful ultra-slow excruciating process. People have finally begun to see the failure, often as something terribly wrong in vague terms. But they are still asleep as to causes and perpetrators. If they comprehended the depth of the problems, they would refuse to grant further control to perpetrators of the bank destruction. Deceptive banker reports still come, like the total charade by Wells Fargo. By extending their definition of loan default to 180 days or so, from the standard 90 days, they were able to write off far less in credit portfolio losses. Investors bit hard on the bait, and bid up their stock by over 20% on that day. What idiots! Wells Fargo has $84 billion in home equity loans in their portfolio. They are first to be killed off in home loan defaults, well before the senior first mortgages.
Bank insolvency is out in the open nowadays. The trend has become crystal clear, as successive quarters reveal incrementally larger bank portfolio losses. The worst lies ahead. A tip of the hat to Nouriel Roubini from New York University. He has the stones to tell Wall Street that the US banking system faces between $1 and $2 trillion in accumulative losses. During a recent interview, the anchors who interviewed him were in minor shock, and did not dish out their usual cocky disrespect. They might realize that Roubini is 90% correct for his forecasts placed publicly over the last two years. They might realize that Wall Street executives and USFed members have been 90% wrong.
On the world stage, a tragedy has become apparent in recent weeks. THE ENTIRE ANGLOSPHERE BANK & ECONOMIC SYSTEMS ARE IMPLODING. The built economies atop housing bubble foundations, the common lethal transgression. The United States, the United Kingdom (England), Ireland, Australia, and New Zealand are suffering from critically wounded banking systems, led by housing markets. This was another longstanding forecast here. The latest nation to come to my attention for implosion is Northern Ireland, which runs on the pound sterling currency, being rooted as a British satellite. They have an even more damaged bank and economic system than Ireland (the central nation to the south), which is euro-based in currency. Geopolitical implications from the AngloSphere vicious decline are beyond description, as power shifts from West to East. The main problem is that military might is centered in the West, but wealth is centered in the East, while financial institutions are dominated by the West. Conflicts and compromise comes, even as sovereignty is yielded.
QUICK CONCLUSION
The Untied States will soon find itself cornered, isolated, having burned the hands of those who offered timely aid and rescues. It is heading down a path to nationalize Fannie Mae, its broken and corrupt insolvent mortgage centrifuge. When just a few decent sized banks fall, the Federal Deposit Insurance Corp will go begging to the same USGovt window, one located far lower than any spot in the dry hot Mojave Desert. The FDIC will be resupplied by more USGovt funds, maybe even from banks healthy enough to cough up a few bucks. Far more banks are troubled than the 90 on the FDIC official watch list, which did not include IndyMac. The amount of uninsured funds in US banks is over $2 trillion. Hundreds of US banks are destined to go bust, according to less biased bank analysts, given in detail in the August report. The next rounds will include prime and commercial loans, whose volume will certainly push out almost $500 billion in more losses. At least double the current bank losses! The US financial system is a viper pit of interconnected collusion. The USFed, the Dept of Treasury, Wall Street firms, USGovt regulators, the debt rating agencies, the Securities & Exchange Commission, the Commodity Futures Trading Commission, and major financial networks are so tight, that when they speak, their buttocks squeak, since the nether region is where their words emanate from.
When the US runs out of sources of money to tap, runs out of fools, hits the wall on handing away its national sovereignty, it will resort to the printing press. It is a device that kills the host, hardly any final solution. Ironically, USFed Chairman Bernanke has not resorted much to date in its usage for rescues. He has overseen the ruin of the USFed itself, accepting toxic assets from the mortgage world. He was won praise for this action. Such is the penalty for regulatory laxity by his predecessor. He will eventually turn to the print press that he once boasted about, boasted to be a national advantage. Instead, it is the noose around the neck of the USDollar, and the catapult cord for the gold price. Some big bank liquidation events are planned soon, like in the next several weeks, maybe sooner.
The Boyz took gold down again, as the USDollar has seen surprisingly resilience. They want the gold price down as much as possible before the fireworks clouded by desperation this autumn. The gold price resembles what was seen one year ago, suppressed immediately before a big push up, a scary push up, a 25% rise. The financial sector bounce is 95% cooked done finished. Time for gold to take back the spotlight. In fact, the pendulum has begun to swing from crude oil to gold. Some might view this transition as a small consolation. Not here.
4 August 2008
The Saga of Humpty Dumpty
by John Needham, The Daniel Code Report | August 1, 2008
Humpty Dumpty sat on a wall; Humpty Dumpty had a great fall
All the King’s horses and all the King’s men; Couldn’t put Humpty together again.
As taught by my Burmese Nanny
The implications of Mother Goose’s nursery rhyme first printed in 1810 is that the great and good of the land (the horses naturally rank as the good) had no other priority than to repair Humpty and reinstate him on the wall. This longing to reject change and reinstate the perceived natural order, at least where that natural order means cosseting a generation with unparalleled spending power and access to liquidity, is the reason for the frenetic actions of central bankers and Treasury officials as they strive diligently to restore that which the people have come to demand as their right.
Humpty Dumpty in US
As the Treasury Secretary morphs from designating institutions with “too big to fail” status to demanding regulations where “institutions can be allowed to fail,” we see the urgent hand of executive government in that most dangerous of constitutional times, a time where half the Senate has changed and the balance are now vulnerable. For all three of the US decision making institutions to be aligned again is the greatest fear of incumbents, and so the inevitability of the law of pendulums (they go back and forth sport) must be debased, defeated, deferred or ultimately shoved into the national deficit for others to worry about many years hence.
In a crucial US election year the imperative of preventing reasonable consequences flowing from unreasonable policy and hence behavioral failures is excruciating, but so far US policy has had the mantle of respectability draped over its shoulders as governments world wide have elected the “lesser evil” policy, that of putting the egg back in its shell. Unfortunately for the egg scoopers, much has changed since Mother Goose tacitly endorsed the rescue efforts by the King’s men, not to mention the horses. Ludwig von Mises describes the endgame brought on by reckless expansion of credit:
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."
Humpty’s erstwhile rescuers are definitely in the “or later” camp. The desperation of the $300 billion US Housing Bill, totally unfunded, falls squarely into the “do something; anything” category, and will be just as effective as were the efforts of the King’s men in 1810. This from Reuters: A new fund, paid for with profits from the mortgage companies Fannie Mae and Freddie Mac, will help build affordable rental housing. The two companies will be allowed to buy pricier mortgages, up to $625,000, which would make stable loans available to buyers in expensive cities. The problem here is that these companies don’t actually have real profits. They have billions in unrealized losses. Quite how using a government bailout to increase the availability of top end mortgages, qualifies as helping struggling home owners has escaped me entirely. Must be an economists thing.
The President also was sensitive to complaints by fiscal conservatives, who object to the increase in the debt ceiling and the bailout for Fannie Mae and Freddie Mac shareholders. Some, but not all, were mollified by the bill's establishment of a regulator with stronger reins over the two companies and the new "consultative" role overseeing the companies for the Federal Reserve. The White House cast Bush's quiet signing of the bill as an act of expedience, not camouflage
In addition to the helpful components of the housing bill, The Center for Responsible Lending supports additional common-sense solutions, such as providing temporary deferment of foreclosures until housing markets stabilize. In this context “stabilize” means levitate. The inevitable conclusion that is being missed or simply ignored in this wave of Humpty restorations is that what we have seen in housing, auto loan and credit card debt, in the past 5 years in particular, is not normal. Bubbles are always an aberration that always lead to mean reversion in overblown markets
S&P
The current institutional belief is that the S&P can happily hold the range from 1250 to 1450. This belief is based on the assertion that half of the earnings in S&P companies are generated offshore and presumably are therefore immune from being degraded if US experiences several periods of below trend growth. Australia too has this belief with the variance that Down Under it is expressed as “China will save us”. It’s not going to happen folks. As the driver of the global economy US has in a decade swapped its industrial might for an outsourcing contract and ephemeral corporate profits, by arbitraging its back offices to developing countries. Last week Starbucks announced that it would close 60 of its 78 coffee shops in Australia. The Australian economy has yet to feel the ravages of the housing implosion and with mining enjoying a generational boom as Western Australia and Queensland tear large holes in the landscape to pour iron ore and coal into the insatiable maw of China, you cannot find a pessimist in the whole country. Yet Starbucks’ strategy is in tatters here.
Institutional trust that overseas earnings will support current stock price multiples is another egg on another wall. It too will fall.
Humpty Dumpty Down Under
“Ironwood” aka Mike E from Australia wrote during the week to take issue with my statement that "The four major Australian/New Zealand banks have already received undisclosed billions in loans and quasi capital injections from the Australian Futures Fund." Mike attached an article from a prominent Australian newsletter writer that bestowed blessings on the Futures Fund for its ostensibly sensible behaviour and said “There is an element of public good in investing bank bills because, as the ABN Amro paper pointed out, interest rates on home loans would probably be higher if Australia's major banks had been forced to obtain more expensive funding offshore. The Future Fund took higher risks shifting its deposits from the risk free RBA (sic Reserve Bank of Australia) into bank bills. But in doing so it acted within the parameters of its directions from the parliament to take an acceptable but not excessive level of risk.” Mike adds “I do not believe that our Future Fund or Reserve Bank are involved in underhand dealings”
Whilst it would arguably have been better to have higher housing interest rates earlier and save some of the poor unfortunates from their own excesses, that is another issue best left for another day. The newsletter writer is a highly skilled financial journalist and commentator and comes across as a lovely guy, but he has approached the whole question of the Future Fund with the benign eye of a gentle observer.
I, on the other hand, am an aged Attorney who spent many years pursuing (and defending) rogues in suits in commercial litigation. I long ago lost faith in men in suits, particularly those who have their snouts in the public purse. I would add to this list women in suits. They are after all, well, women in suits. I prefer my variety in dresses but then again as my children so aptly remind me, I am not only old but old fashioned to boot. Nonetheless in the interests of fairly assessing the weight to be given to the self serving statements that issue from these worthies, let me put the other side of the case.
April 17 (Bloomberg) -- The Australian government's A$60 billion ($56 billion) Future Fund is among the least transparent in the world, the Australian Financial Review reported, citing a ranking of sovereign wealth funds. The Fund was ranked 9th among 10 sovereign pension savings businesses that failed to meet Washington-based Peterson Institute of International Economics' standards of governance.
AAP on Senate estimates committee-22 February 2008. David Neal, the fund's chief investment officer, said Australian share values had dropped about 15 per cent in recent months, knocking $600 million to $700 million off the value of its local share portfolio. He was unable to give an immediate accurate loss of the international equity portfolio because it was complicated by the currency element. Mr Neal said the fund also invested in global property trusts during two transactions in late October and early November. The property trusts break down to 50 per cent in US assets, 30 per cent European and 20 per cent Asian, Mr Neal said the US trusts were predominantly in commercial property, which was not as badly hit as the residential market following the collapse of the US sub-prime market.
SYDNEY, June 12 (Reuters) - Cash-strapped Australian banks are tapping the country's sovereign wealth fund to raise new finance as traditional sources of funding dry up in the ongoing global credit crisis. Australia and New Zealand Banking Group Ltd (ANZ) Australia's third-biggest lender by assets, has raised about A$500 million ($472 million) in term funding from the Future Fund, an industry source said on Thursday. "My understanding is that all Australian banks have done transactions with (the Future Fund). If you want debt in your portfolio, having some bank term debt is not a bad option, particularly given that you are getting more attractive spreads," said one industry source, who declined to be identified.
ABC News-The $51 billion in the Federal Government's Future Fund will be managed by a foreign bank with no base in Australia. Northern Trust will manage the Future Fund's money from its regional headquarters in Singapore using staff in Bangalore, India. That simple task will generate Northern Trust about $30 million in annual fees.
Wed Apr 23, 2008, April 23 (Reuters) - Australian sovereign wealth fund the Future Fund, which has A$60 billion ($57 billion) in assets, said on Wednesday it was eyeing private transactions and debt markets amid the current stock market turmoil. General Manager Paul Costello told a business lunch the fund was a cashed-up supplier of liquidity that was operating in a market currently short of providers of funds. Costello said the fund's private markets team was looking at infrastructure, private equity and real estate investments. Costello said debt strategies were also attractive in the current investment climate, and there were plenty of opportunities outside of the stock market.
Future Fund billions help banks ride credit storm The Age. July 14, 2008. The Federal Government's Future Fund and the Reserve Bank have quietly propped up the banks through the global financial turmoil of the past year, ABN-Amro economists have revealed. They say the two institutions provided a quarter of the massive growth in bank funding to fight off the global credit crunch.
On this evidence the Future Fund management comes off somewhere between naïve and plain stupid. Commercial real estate, debt strategies, inability to figure currency conversions for a Senate hearing, failing to meet international governance standards! Messrs Costello and Neal would do better to cut out the business lunches and do their homework. I get a peanut butter sandwich for lunch, if I’m lucky, but even this geriatric lawyer can figure currency conversions. It appears to me that these guys are acting more like a start up hedge fund than the conservator of the country’s vital budget surpluses. The thought that these tyros are “looking at infrastructure, private equity and real estate investments” is kinda scary. NAB has just demonstrated what happens when the country cousins try to play with the big boys.
Ironwood then goes on to ask "Is there some Federal protection beyond the AU$20,000 per account holder which was recently announced? ” My response is that I haven’t parsed the terms of their client account protection but this is not an issue. Australia's big four banks are among only 20 AA rated commercial banks in the world. According to Standard & Poor's there are less than five commercial banks in the world with higher ratings.
The issue is that some of these guys are careless with the truth and “full disclosure” and “true and fair” accounts are not phrases that readily spring to mind regarding their recent conduct.
More Canaries
Last Friday astute FSO readers were aware of the first real mark to market of US CDOs when “News from Down Under” reported that National Australia Bank (NAB) had valued their senior tranche US CDOs at 10c in the dollar. I assumed that a dutiful audit clerk had finally suggested that facing reality was a good idea or was at least in keeping with the lofty ideals apparent in all Australian banks. My assumption was not only wrong but empirically flawed in ascribing such notions to they of the Janus mask (see FSO archives; Crash!). As the other shoe dropped on Tuesday, the story unrolled.
NAB were partners with US investment bank Merrill Lynch in this investment. This from Crikey.com:
The National Australia Bank's shock write-down of $830 million worth of collateralised debt obligations (CDOs) can now be explained. It was triggered by a move from struggling US investment bank Merrill Lynch to get rid of billions worth of CDOs in which the NAB was a co-investor. Merrill's took a decision to sell the CDOs at a written-down value and the NAB had no option but to follow suit. Its larger write-down than Merrill Lynch (90% vs. 78%) reflects its lower ranking of security. The NAB was involved in a parcel of what’s called "super-senior" CDOs with a face value of $19.9 billion. In effect Merrill's move to sell these holdings of CDOs to a distressed debt fund investor, forced the NAB to write-down the value of its holding in the CDOs.
It's that phrase in the above paragraph; "super senior ABS CDO" which reveals what happened. This sale was dated June 27. NAB was a 'senior' ranked investor in the CDOs and when a super-senior ranked investor decided to liquidate or sell the CDOs at a lower value, the other investors have no say in the matter and have to follow suit.
For Marius D to whom I promised an explanation of CDOs, I trust this assists. In truth I studied the structure of CDOs for some hours before admitting temporary defeat, but the short version is they are a manufactured security with the features that I have written about previously, the chief one being that all are different and so cannot be valued on a transparent basis. Perversely this is one of the features that has made them so attractive to institutions.
To add insult to injury NAB had been running an $800 million bond sale during the period that it was aware of the impending CDO write down but sadly omitted to mention the looming problem to investors who lapped up the road show and marketing blitz for the bond offer. NAB has since refunded hundreds of millions of dollars to irate investors who had bought into the bond sale in the days before the write down, according to reports today from UK Telegraph. More jolly good fun from your friendly bankers!
Gold, HUI and DX
US Dollar index had an unexpected burst of institutional support last Friday, and again on Thursday of this week, which continues to pressure Comex Gold, still holding up valiantly in the face of DX which is now rallying into the fifth month since its celebrated low on 17th March, foreshadowed and discussed in previous Financial Sense articles. At present Gold is holding within two standard deviations of its regression channel from the 05/02 low, but is decidedly on the bottom of that channel and is not being helped by weakness in the HUI Gold Bugs index
For the sharp eyed who noted the precise low in Gold at 893.30 on Wednesday, the red line at 893.1 is not a poorly drawn recognition of that turn but the Danielcode retracement level that has been on this chart for subscribers since a few days after the 07/15 swing high. For those who might wonder how often this occurs, the answer is almost all the time. The Daniel number sequence controls all markets by creating secret price levels that markets recognise but others do not see. I pray my subscribers indulgence for showing this chart, but there will be a new one with new numbers posted on Monday. Gold traders need to know these numbers.
Many traders and investors use D2 or derived data from HUI to verify signals in the primary Gold market. For those who are hoping for an early resumption of the tear away bull market, this indicator at least will be disappointing. HUI is stubbornly maintaining its sell signal on the monthly chart and tested its 2008 low on Wednesday. For Financial Sense readers I provide some free, and interesting Gold and HUI charts at the Danielcode website. They inject a degree of discipline and rigor to the weekly and monthly signals in both of these markets and are updated every Monday. You are most welcome to visit.
Humpty Dumpty sat on a wall; Humpty Dumpty had a great fall
All the King’s horses and all the King’s men; Couldn’t put Humpty together again.
As taught by my Burmese Nanny
The implications of Mother Goose’s nursery rhyme first printed in 1810 is that the great and good of the land (the horses naturally rank as the good) had no other priority than to repair Humpty and reinstate him on the wall. This longing to reject change and reinstate the perceived natural order, at least where that natural order means cosseting a generation with unparalleled spending power and access to liquidity, is the reason for the frenetic actions of central bankers and Treasury officials as they strive diligently to restore that which the people have come to demand as their right.
Humpty Dumpty in US
As the Treasury Secretary morphs from designating institutions with “too big to fail” status to demanding regulations where “institutions can be allowed to fail,” we see the urgent hand of executive government in that most dangerous of constitutional times, a time where half the Senate has changed and the balance are now vulnerable. For all three of the US decision making institutions to be aligned again is the greatest fear of incumbents, and so the inevitability of the law of pendulums (they go back and forth sport) must be debased, defeated, deferred or ultimately shoved into the national deficit for others to worry about many years hence.
In a crucial US election year the imperative of preventing reasonable consequences flowing from unreasonable policy and hence behavioral failures is excruciating, but so far US policy has had the mantle of respectability draped over its shoulders as governments world wide have elected the “lesser evil” policy, that of putting the egg back in its shell. Unfortunately for the egg scoopers, much has changed since Mother Goose tacitly endorsed the rescue efforts by the King’s men, not to mention the horses. Ludwig von Mises describes the endgame brought on by reckless expansion of credit:
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."
Humpty’s erstwhile rescuers are definitely in the “or later” camp. The desperation of the $300 billion US Housing Bill, totally unfunded, falls squarely into the “do something; anything” category, and will be just as effective as were the efforts of the King’s men in 1810. This from Reuters: A new fund, paid for with profits from the mortgage companies Fannie Mae and Freddie Mac, will help build affordable rental housing. The two companies will be allowed to buy pricier mortgages, up to $625,000, which would make stable loans available to buyers in expensive cities. The problem here is that these companies don’t actually have real profits. They have billions in unrealized losses. Quite how using a government bailout to increase the availability of top end mortgages, qualifies as helping struggling home owners has escaped me entirely. Must be an economists thing.
The President also was sensitive to complaints by fiscal conservatives, who object to the increase in the debt ceiling and the bailout for Fannie Mae and Freddie Mac shareholders. Some, but not all, were mollified by the bill's establishment of a regulator with stronger reins over the two companies and the new "consultative" role overseeing the companies for the Federal Reserve. The White House cast Bush's quiet signing of the bill as an act of expedience, not camouflage
In addition to the helpful components of the housing bill, The Center for Responsible Lending supports additional common-sense solutions, such as providing temporary deferment of foreclosures until housing markets stabilize. In this context “stabilize” means levitate. The inevitable conclusion that is being missed or simply ignored in this wave of Humpty restorations is that what we have seen in housing, auto loan and credit card debt, in the past 5 years in particular, is not normal. Bubbles are always an aberration that always lead to mean reversion in overblown markets
S&P
The current institutional belief is that the S&P can happily hold the range from 1250 to 1450. This belief is based on the assertion that half of the earnings in S&P companies are generated offshore and presumably are therefore immune from being degraded if US experiences several periods of below trend growth. Australia too has this belief with the variance that Down Under it is expressed as “China will save us”. It’s not going to happen folks. As the driver of the global economy US has in a decade swapped its industrial might for an outsourcing contract and ephemeral corporate profits, by arbitraging its back offices to developing countries. Last week Starbucks announced that it would close 60 of its 78 coffee shops in Australia. The Australian economy has yet to feel the ravages of the housing implosion and with mining enjoying a generational boom as Western Australia and Queensland tear large holes in the landscape to pour iron ore and coal into the insatiable maw of China, you cannot find a pessimist in the whole country. Yet Starbucks’ strategy is in tatters here.
Institutional trust that overseas earnings will support current stock price multiples is another egg on another wall. It too will fall.
Humpty Dumpty Down Under
“Ironwood” aka Mike E from Australia wrote during the week to take issue with my statement that "The four major Australian/New Zealand banks have already received undisclosed billions in loans and quasi capital injections from the Australian Futures Fund." Mike attached an article from a prominent Australian newsletter writer that bestowed blessings on the Futures Fund for its ostensibly sensible behaviour and said “There is an element of public good in investing bank bills because, as the ABN Amro paper pointed out, interest rates on home loans would probably be higher if Australia's major banks had been forced to obtain more expensive funding offshore. The Future Fund took higher risks shifting its deposits from the risk free RBA (sic Reserve Bank of Australia) into bank bills. But in doing so it acted within the parameters of its directions from the parliament to take an acceptable but not excessive level of risk.” Mike adds “I do not believe that our Future Fund or Reserve Bank are involved in underhand dealings”
Whilst it would arguably have been better to have higher housing interest rates earlier and save some of the poor unfortunates from their own excesses, that is another issue best left for another day. The newsletter writer is a highly skilled financial journalist and commentator and comes across as a lovely guy, but he has approached the whole question of the Future Fund with the benign eye of a gentle observer.
I, on the other hand, am an aged Attorney who spent many years pursuing (and defending) rogues in suits in commercial litigation. I long ago lost faith in men in suits, particularly those who have their snouts in the public purse. I would add to this list women in suits. They are after all, well, women in suits. I prefer my variety in dresses but then again as my children so aptly remind me, I am not only old but old fashioned to boot. Nonetheless in the interests of fairly assessing the weight to be given to the self serving statements that issue from these worthies, let me put the other side of the case.
April 17 (Bloomberg) -- The Australian government's A$60 billion ($56 billion) Future Fund is among the least transparent in the world, the Australian Financial Review reported, citing a ranking of sovereign wealth funds. The Fund was ranked 9th among 10 sovereign pension savings businesses that failed to meet Washington-based Peterson Institute of International Economics' standards of governance.
AAP on Senate estimates committee-22 February 2008. David Neal, the fund's chief investment officer, said Australian share values had dropped about 15 per cent in recent months, knocking $600 million to $700 million off the value of its local share portfolio. He was unable to give an immediate accurate loss of the international equity portfolio because it was complicated by the currency element. Mr Neal said the fund also invested in global property trusts during two transactions in late October and early November. The property trusts break down to 50 per cent in US assets, 30 per cent European and 20 per cent Asian, Mr Neal said the US trusts were predominantly in commercial property, which was not as badly hit as the residential market following the collapse of the US sub-prime market.
SYDNEY, June 12 (Reuters) - Cash-strapped Australian banks are tapping the country's sovereign wealth fund to raise new finance as traditional sources of funding dry up in the ongoing global credit crisis. Australia and New Zealand Banking Group Ltd (ANZ) Australia's third-biggest lender by assets, has raised about A$500 million ($472 million) in term funding from the Future Fund, an industry source said on Thursday. "My understanding is that all Australian banks have done transactions with (the Future Fund). If you want debt in your portfolio, having some bank term debt is not a bad option, particularly given that you are getting more attractive spreads," said one industry source, who declined to be identified.
ABC News-The $51 billion in the Federal Government's Future Fund will be managed by a foreign bank with no base in Australia. Northern Trust will manage the Future Fund's money from its regional headquarters in Singapore using staff in Bangalore, India. That simple task will generate Northern Trust about $30 million in annual fees.
Wed Apr 23, 2008, April 23 (Reuters) - Australian sovereign wealth fund the Future Fund, which has A$60 billion ($57 billion) in assets, said on Wednesday it was eyeing private transactions and debt markets amid the current stock market turmoil. General Manager Paul Costello told a business lunch the fund was a cashed-up supplier of liquidity that was operating in a market currently short of providers of funds. Costello said the fund's private markets team was looking at infrastructure, private equity and real estate investments. Costello said debt strategies were also attractive in the current investment climate, and there were plenty of opportunities outside of the stock market.
Future Fund billions help banks ride credit storm The Age. July 14, 2008. The Federal Government's Future Fund and the Reserve Bank have quietly propped up the banks through the global financial turmoil of the past year, ABN-Amro economists have revealed. They say the two institutions provided a quarter of the massive growth in bank funding to fight off the global credit crunch.
On this evidence the Future Fund management comes off somewhere between naïve and plain stupid. Commercial real estate, debt strategies, inability to figure currency conversions for a Senate hearing, failing to meet international governance standards! Messrs Costello and Neal would do better to cut out the business lunches and do their homework. I get a peanut butter sandwich for lunch, if I’m lucky, but even this geriatric lawyer can figure currency conversions. It appears to me that these guys are acting more like a start up hedge fund than the conservator of the country’s vital budget surpluses. The thought that these tyros are “looking at infrastructure, private equity and real estate investments” is kinda scary. NAB has just demonstrated what happens when the country cousins try to play with the big boys.
Ironwood then goes on to ask "Is there some Federal protection beyond the AU$20,000 per account holder which was recently announced? ” My response is that I haven’t parsed the terms of their client account protection but this is not an issue. Australia's big four banks are among only 20 AA rated commercial banks in the world. According to Standard & Poor's there are less than five commercial banks in the world with higher ratings.
The issue is that some of these guys are careless with the truth and “full disclosure” and “true and fair” accounts are not phrases that readily spring to mind regarding their recent conduct.
More Canaries
Last Friday astute FSO readers were aware of the first real mark to market of US CDOs when “News from Down Under” reported that National Australia Bank (NAB) had valued their senior tranche US CDOs at 10c in the dollar. I assumed that a dutiful audit clerk had finally suggested that facing reality was a good idea or was at least in keeping with the lofty ideals apparent in all Australian banks. My assumption was not only wrong but empirically flawed in ascribing such notions to they of the Janus mask (see FSO archives; Crash!). As the other shoe dropped on Tuesday, the story unrolled.
NAB were partners with US investment bank Merrill Lynch in this investment. This from Crikey.com:
The National Australia Bank's shock write-down of $830 million worth of collateralised debt obligations (CDOs) can now be explained. It was triggered by a move from struggling US investment bank Merrill Lynch to get rid of billions worth of CDOs in which the NAB was a co-investor. Merrill's took a decision to sell the CDOs at a written-down value and the NAB had no option but to follow suit. Its larger write-down than Merrill Lynch (90% vs. 78%) reflects its lower ranking of security. The NAB was involved in a parcel of what’s called "super-senior" CDOs with a face value of $19.9 billion. In effect Merrill's move to sell these holdings of CDOs to a distressed debt fund investor, forced the NAB to write-down the value of its holding in the CDOs.
It's that phrase in the above paragraph; "super senior ABS CDO" which reveals what happened. This sale was dated June 27. NAB was a 'senior' ranked investor in the CDOs and when a super-senior ranked investor decided to liquidate or sell the CDOs at a lower value, the other investors have no say in the matter and have to follow suit.
For Marius D to whom I promised an explanation of CDOs, I trust this assists. In truth I studied the structure of CDOs for some hours before admitting temporary defeat, but the short version is they are a manufactured security with the features that I have written about previously, the chief one being that all are different and so cannot be valued on a transparent basis. Perversely this is one of the features that has made them so attractive to institutions.
To add insult to injury NAB had been running an $800 million bond sale during the period that it was aware of the impending CDO write down but sadly omitted to mention the looming problem to investors who lapped up the road show and marketing blitz for the bond offer. NAB has since refunded hundreds of millions of dollars to irate investors who had bought into the bond sale in the days before the write down, according to reports today from UK Telegraph. More jolly good fun from your friendly bankers!
Gold, HUI and DX
US Dollar index had an unexpected burst of institutional support last Friday, and again on Thursday of this week, which continues to pressure Comex Gold, still holding up valiantly in the face of DX which is now rallying into the fifth month since its celebrated low on 17th March, foreshadowed and discussed in previous Financial Sense articles. At present Gold is holding within two standard deviations of its regression channel from the 05/02 low, but is decidedly on the bottom of that channel and is not being helped by weakness in the HUI Gold Bugs index
For the sharp eyed who noted the precise low in Gold at 893.30 on Wednesday, the red line at 893.1 is not a poorly drawn recognition of that turn but the Danielcode retracement level that has been on this chart for subscribers since a few days after the 07/15 swing high. For those who might wonder how often this occurs, the answer is almost all the time. The Daniel number sequence controls all markets by creating secret price levels that markets recognise but others do not see. I pray my subscribers indulgence for showing this chart, but there will be a new one with new numbers posted on Monday. Gold traders need to know these numbers.
Many traders and investors use D2 or derived data from HUI to verify signals in the primary Gold market. For those who are hoping for an early resumption of the tear away bull market, this indicator at least will be disappointing. HUI is stubbornly maintaining its sell signal on the monthly chart and tested its 2008 low on Wednesday. For Financial Sense readers I provide some free, and interesting Gold and HUI charts at the Danielcode website. They inject a degree of discipline and rigor to the weekly and monthly signals in both of these markets and are updated every Monday. You are most welcome to visit.
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