| | | Page 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28 | Watch, Its happening ,the global economic change.
| Anonymous Coward
User ID: 3762
9/14/2005 8:53 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Can´t be much longer now for the long awaited/expected correction/s. |
| .
User ID: 11285
9/14/2005 8:54 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Anyway, whether or not they actually DID listen to me, Stephen Roach of Morgan Stanley notes that "Belatedly, Alan Greenspan has finally paid lip service to the mounting perils of the Asset Economy. In his recent swan song at Jackson Hole, the Fed chairman cautioned that ´history has not dealt kindly´ with investors (i.e., American consumers) who may have gone too far in ´accepting lower compensation for risk´ on their asset holdings. Even couched in all the oblique caveats so typical of Fedspeak, this is quite a confession. The Father of the Asset Economy now fears he has created a monster."
Well, duh! Isn´t that exactly what I have been saying over and over and over for years and years? And isn´t that ALL I have been saying? And isn´t that why I have no friends (but plenty of new enemies), and I am now old and bitter and very, very angry? And did I mention very, very scared and paranoid? I meant to.
So if you are a holder of stocks or bonds or houses, then you should be afraid.
And if you hold bank stocks, you should be especially afraid, too, as Alan Abelson, in his "Up and Down Wall Street" column in Barron´s, noted that 61% of the total credit of the nation´s banks is (drum roll, please!) mortgage-related assets. And when you remember that economic crises always come about as the result of banks acting crazy and irresponsible, then, as the saying goes, "be very afraid."
And it is NOT just us American swine, as we are referred to by the Gestapo in those old movies, who are acting crazy and irresponsible. Who do you think that been buying all those tons and tons of debt we have created? Hahaha! Foreigners! Hahahaha! Guys with funny accents who get all the good-looking chicks even though they probably smell bad, too! Serves them right!
Speaking of oil, Hugo Mackenzie of the newsletter M2 has some "Venezuela presently has little interest in achieving its OPEC mandated quota @ 2.9 million bbl/d; despite all the mass media pabulum to the contrary. Chávez is first and foremost seeking reparations for previous Kleptocratic resource rape and pillage executed prior to his tenure."
So where is Chavez looking for someone to pay those reparations? "In October 2004, he began raising royalty fees to an average of ~ 17% from 1%. More importantly, he began exercising currency seignorage in paying for contract services in nonconvertible Venezuelan Bolivares as opposed to U.S. Dollars."
Smart move! It will increase demand for Bolvares, strengthening that currency, and they will get an extra boost from the way we are devaluing our own money, too! Nice move there, Mr. Chavez! It looks like I owe an apology to Mr. Chavez and the rest of the world´s Leftist collectivist idiots, as I usually criticize them, and everything they do and say, by getting right in their stupid little faces and screaming at them in a really, loud, snotty voice, dripping with the acid tones of Mogambo contempt and disgust (MCAD), about their pea-brained stupidity in believing that socialism or communism could ever actually work in the real world.
Speaking of oil, another Mogambo Alert Reader (MAR) named Feizal M. has a friend who works at the Saudi embassy, who says "A friend who works in the Saudi oil ministry, told us that the US pays for Saudi oil with inflation-linked securities. Which might explain the repeated adjusting of the components of the official CPI."
Further, Feizel has looked at the ratio of oil to gold and decided that "At yesterday´s prices of $434.5 vs. $68.94 it stands at 6.3 barrels of oil per ounce of gold, which is absolutely the cheapest it has ever been for a century if not more."
- In the newsletter View from Silicon Valley, they featured an essay by Rick Merritt, of EE Times, who says that a friend of his named Martin went to China, and came back, and reported "China reminds me of what this business was like in the U.S. 20 years ago. "People are young, enthusiastic and curious about what will happen next. You don´t see that so much here anymore."
Naturally, anytime I hear somebody criticizing someone as being old and unenthusiastic and having no curiosity left, I figure that they are criticizing The Mogambo, as I am not young, nor enthusiastic, nor curious. But before I fire off an email dripping with venom and containing just enough veiled threat of me coming over there and stapling his tongue to his forehead to keep him off my damned case in the future, I belatedly note that he was NOT being critical of The Mogambo, but was instead noting how China is going to eat our lunch. Oops! My mistake!
They suggest that Silicon Valley, that iconic jewel of the New America, could be the next "Rust Belt"! Hahaha! The march of time!
Pay and promotions are getting scarce. Even jobs are scarce. One guy wrote, "I work for Nortel. We haven´t hired new engineers in five years." And others say things like "We´ve only laid off workers the last four years", and "All new hires are from non-U.S.A. markets"
In response, the workweek is now averaging 47.1 hours per week. One guy says "I am required to carry a cell phone 24/7. I am called any time there is a problem, and expected to answer. We have had people terminated for not answering phones."
The surprising part was when I read, "Despite tough times, 68 percent of engineers said they are generally satisfied with their employers and careers. A whopping 88 percent said they were very or somewhat satisfied with engineering overall."
- I think it is interesting that nobody is standing up and saying that they want to be the next chairman of the Federal Reserve when Greenspan retires next January. I am hoping to be the surprise, dark-horse, write-in winner. So, if anybody calls you asking for suggestions about the next chairman of the Federal Reserve, I would appreciate it if you would tell them "The Mogambo! Go, go, Mogambo!"
This is a good move, as I know exactly what to do. And since nobody likes me anyway, I don´t have to worry about making people mad at me. The first thing to do, of course, is to disable the button that creates money and credit in the banking system, and then go to lunch. And stay there. From then on, Adam Smith´s famous "invisible hand" of the marketplace will take care of everything, as each person will seek to produce, so that they can consume, everyone fighting it out in the open marketplace with the twin weapons of price and quality, slashing and thrusting, dog-eat-dog, relentlessly driving prices down and quality up, which produces a rising standard of living for everybody, with the glorious blessing of zero (or falling) inflation, so that everybody partakes in the blessings of a perfectly-run economy, and everyone is happy, and everything is wonderful, and then they don´t have to work so much, and then people could spend a lot of time gorging themselves on barbeque, and dancing the night away in the streets, reveling in a staggering, drunken haze at the monthly celebrations of the Monthly Mogambo Festival (MMF), where all people celebrate their beloved Mogambo, whose wise economic leadership made it all possible, but who merely followed the macroeconomic prescriptions as laid out by Mises and the only true theory of economics, the Austrian School of Economics. But just make sure that we understand one another, The Mogambo gets the glory and the money.
As an example, Joseph Z, in casual conversation with friends who are police and hospital ER workers, has found out that heroin is cheaper than it ever was, especially when you adjust for quality. He writes " ´Dime bags´ STILL cost US$ 10.00 and have more content (and is) around 60-75% pure. So how does this ´commodity´ [and I use this term MOST loosely], increase in purity, AND in amount but stay the same price in nominal US$?"
The answer is that the marketplace for heroin, as are most drugs, is large and has been around a long time, and now there are lots and lots of producers and suppliers. And anytime you get that much competition in anything, they must all compete with each other on the basis of quality and price. It´s how economics works when unfettered by a fascist government. It´s as simple as that!
This is the wonderful beauty of free enterprise! You end up with higher quality and lower price, which is the same as increasing the quality of living! And I am sure that you are NOT going to argue with me about whether or not heroin addicts have received a higher standard of living, in that they have experienced zero inflation in price and gotten higher quality!
- To show you that the news about inflation is finally getting around, there was a cute little self-test at Newstarget.com, that they called their Gullibility Factor test. The question is (true or false) "Inflation is a natural side effect of a healthy, growing economy."
The answer is, of course, false. But beyond that, they deliciously explain it as "FALSE. Monetary inflation, which saps the buying power of your dollars, is intentionally caused by the expansion of the money supply which is, in turn, controlled by the Federal Reserve. The net effect is a hidden tax on Americans´ income and savings (a tax most people never notice). In an honest economy, the money supply would remain constant, and the annual inflation rate would be zero. Inflation is not natural, it´s a manipulation that acts as hidden taxation."
I leap to my feet and shout "Bravo! Well said! Bravo!"
And suddenly I am excited, since it was looking like I might have found another test that I could pass, unlike calculus or that damned impossible Driver´s License test. Anyway, I stuck around to read more. Another question was "When you deposit money in a savings account at a bank, that bank holds your money for you until you ask for it back." The answer, again, of course, is "FALSE. Banks do not hold your money, they use your money as a reserve and then lend out ten times as much money to other customers."
This is where I took points away for being hopelessly out of date. (The crowd shouts in unison "How far out of date, Mogambo?"). I answer, "To show you how far behind the times these guys are, the ratio is now almost a hundred to one! The banks have given themselves permission to loan out almost a hundred dollars for every dollar of deposits! Hahahaha! It´s fractional reserve banking gone mad!"
Then they go on to explain fractional banking. "The entire U.S. banking system is a fractional reserve system, meaning only a fraction of your money is held in reserve. Banks are counting on the fact that only a small percentage of their customers will ever ask for their reserves on any given day." So, in "bank-think", this is "idle money".
So they loan out a hundred dollars for every dollar of deposits. The money supply is increased by $100. And when each of those newly-loaned dollars get spent and deposited in some bank somewhere, then THAT bank loans out a hundred dollars for each newly deposited dollar! Now the money supply has been expanded by $10,000. And then when THOSE new dollars are spent and deposited in some bank somewhere, then the bank loans out ANOTHER hundred dollars for each dollar deposited, and the money supply has expanded to $1,000,000! And around, and around, and around it goes, new money being created at each step! We started off with one lousy dollar, and after just three iterations of the system, we have a million dollars! A million! And after just three iterations, we are not even CLOSE to being done! Now you see why I am so insane about this thing? The economy hada money supply of one lousy dollar, and suddenly there are a million dollars in the money supply, all chasing the same amount of goods and services! It´s inflation! Gahhhhhhhh!
- Since I haven´t brought up my usual demand that you stop downloading pornography from the net and go out and get some gold, you think I may have forgotten about it. Ha! Although things look bleak, Bill M. writes "Trust me. If you can survive, it will only be with gold and silver." But it will not be an easy task, as "Fascists and Socialists can, and do, do anything they want, unless they are stopped. And the ´stopping´ this time will bugger your wildest imagining." Hahaha! "Bugger my wildest imagining"! What a terrific phrase! And so delicately reminiscent of how pleasant it will be getting royally screwed big time.
And speaking of alert readers, Mike in Long Beach wrote to say that he was impressed with my argument that silver is a screaming buy, although silver has been a losing bet for him for almost a decade. Even so, he captures the surprising devaluation of silver as "Imagine a saloon in 1900.´Hey, barkeep!´ you say. ´Give me a beer.´ Barkeep says ´Comin´ up... One ounce of silver, please.´ "
What would have been the result of charging an entire ounce of silver for a lousy beer? Mike figures "BAM, BAM, BAM! No mo´ barkeep." Hahaha!
What is the moral of the story? Silver is rock-bottom cheap at these prices, as in "never before in the annals of time" cheap. And if you go rooting around in those annals of time, you will likely be impressed with how much things stunk in the old days, mostly because there were horses and animals taking a crap everywhere you looked, but you will also be gainfully instructed by how everybody who ever bought any real asset at the "lowest prices in history" always made some serious money in the end.
Another Mogambo Alert Reader (MAR), Scott G., reports that "Steve Liesman said that the total destruction of New Orleans would be an economic plus to the good ole US of A." Hahahaha! Thanks, Mogambo Alert Reader Scott G.! I was going to actually run a contest about who would be the first to say that they were totally ignorant of the Bastiat Broken Window Fallacy. I just never imagined that it would be the chief economics hot shot of CNBC! Hahahaha! Of course, I do not actually know if this is true or not, but it is just too, too, too delicious a piece of vicious gossip to not pass along.
Dr. Gary North, of the newsletter Reality Check, is behind me on this one, too.. He writes, "There are still economic illiterates out there who think that a catastrophe is good for business. After all, it will lead to increased employment in the construction industry. But this analysis ignores the fact that nobody was ready to spend this kind of money voluntarily prior to the hurricane. There are winners, but there are far more losers."
And Bill Bonner of the Daily Reckoning is another guy who is really, really, really hip to this economics stuff, too, and he writes "A few dimwits imagine that a natural disaster can be a positive thing. They see the clean-up and the new building as economic boons. Of course, if it were that easy to make economic progress, we could knock out the levees every few years. No, the hurricane is a negative for the wealth of Americans. It will cost money to undo the damage."
- On Bloomberg we read that the dollar is responding to the inexorable pressures of Gresham´s Law, were bad currency is shunned. "China and Russia may stop using the dollar to service bilateral trade. The two countries started moving in this direction by letting their banks open corresponding accounts with each other."
- As another example of the horror of inflation, as if you needed another one, the Census Bureau said that "another 1.1 million Americans fell into poverty last year, bringing the total to 37 million people living below the poverty line, defined as $19,307 for a family of four." In terms of percentage of the population, they say that "The poverty rate was 12.7 percent last year, up from 11.3 percent in 2000 before the beginning of the last recession." So the percentage increase in poverty was 12.4% in five years? That comes to 2.36% a year! Just about the same as the inflation rate! Coincidence? Ha! I think not!
At 40 hours a week for 52 weeks a year is, that´s 2,080 hours of work (and paid holidays). When multiplied by $5.15 an hour, the worker earns $10,712! Of which he has to pay 7.67% right off the top for FICA! Hahahaha! So the most the worker can take home, assuming no income tax or other deductions at all, is $9,892! So TWO minimum-wage workers, pooling their wages from full-time work, will take home $19,784, which is $477 more than the poverty line! Hahahaha!
So the next time you see Alan Greenspan or Ben Bernanke or any of those other bozos, what I want you to do is strike up a casual conversation, talking about the weather or something, and then, unexpectedly, you grab him by the tie, haul his face down to the page, and scream "Look at it! Look at it, damn you! This is the result of your consistent, persistent, grinding, impoverishing inflation, you despicable loathsome morons!"
But you won´t. And they won´t let me get near the place anymore.
Ugh.
*****The Mogambo Sez: A new report published by Sprott Asset Management of Toronto, entitled "Move Over, Adam Smith: The Visible Hand of Uncle Sam" concluded that the U.S. government has manipulated the stock market to keep asset prices up so many times, and for so long, that "what apparently started as a stopgap measure may have morphed into a serious moral hazard situation, with market manipulation an endemic feature of the U.S. stock market."
That anyone doubted it is what surprises me. They HAVE to keep the stock market up, as the financial services industry produces 40% of the profits made by the whole freaking country! Every level of government has borrowed and spent with the idea that inflation will always be around 3%, which means that their tax revenues will increase forever, and they have spent accordingly!
And, as if that wasn´t dependence enough, everybody´s retirement plan is also totally dependent on the stock market! My God! And you thought the government was NOT intervening in the market? Hahahaha! When the tragic results of the market falling by 50% would only put it in the middle of historic range of the price to earnings (P/E) statistic? Hahahaha!
Like they say, at the end of long booms brought about by the creation of excess money and credit, the amount of corruption is off the charts.
Sep 06, 2005
Richard Daughty
email: scgcjs@gte.net
Daughty Archives
The Daily Reckoning
Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron´s, The Daily Reckoning and other fine publications. |
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User ID: 27842
10/3/2005 10:10 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Sept 30, 2005
Global: Batonless
Currencies: USD Now a High-Yield, No Longer a Funding, Currency
United Kingdom: Those Hoping for More Rate Cuts May be Disappointed
Poland: PiS and harmony?
Asia/Pacific: Coping with a Strong Dollar
Japan: Positive Ground in 3 Months
Global: Batonless
Stephen Roach (New York)
The Maestro has dropped his baton. In a series of stunning about-faces, Federal Reserve Chairman Alan Greenspan has just recast his perceptions of the critically important relationship between monetary policy and asset markets. Not only does he finally own up to the perils of America’s housing bubble, but he now concedes that speculative froth in asset markets may well have been a direct outgrowth of the Fed’s policy stance. These revisionist views are in stark contrast to the Chairman’s public stance over the last decade. This raises profound questions about the Greenspan legacy and also underscores the tough problems that are about to be passed on to his successor.
The first step in this two-part confession came in the form of a rare research paper just published by the Chairman and a Fed staffer (see Alan Greenspan and James Kennedy, “Estimates of Home Mortgage Originations, Repayments, and Debt on One-to-Four-Family Residences,” September 2005). On one level, this is a very technical paper, providing a detailed statistical decomposition of the sources of mortgage lending activity in the US. But on another level, it reveals the full force of one of the key drivers of the Asset Economy -- equity extraction from residential property. According to the Greenspan-Kennedy framework, US homeowners tapped the ever-expanding home equity till to the tune of about $600 billion in 2004 -- equivalent to about 7% of disposable personal income, or more than double the 3% share recorded in 2000. In a companion speech, Greenspan goes on to concede that this equity extraction from ever rising property values was large enough to have accounted for all of the decline in the personal saving rate since 1995 (see his 26 September speech, “Mortgage Banking”).
Bingo! It then follows that the substitution of asset-based saving (i.e., home equity extraction) for income-based personal saving created a major shortfall in national saving. And what is a saving-short US economy to do under such circumstances? Two choices -- curtail investment and grow more slowly or stay the course by importing surplus saving from abroad and running massive current-account deficits to attract that capital. Of course, it was an easy choice for the world’s leading economy -- witness America’s gaping current-account deficit running at close to an $800 billion annual rate in the first half of 2005. But with this easy choice has come tough consequences -- namely, a US current account deficit that accounts for fully 70% of all the external deficits in today’s unbalanced world. In short, equity extraction has spawned the “mother” of all imbalances -- not just for the US but for the global economy at large. This, in my view, is when asset bubbles become most destructive -- when they create distortions and dangers that transcend the asset class itself. America’s housing bubble and its current account deficit are joined at the hip -- and the rest of the world is being sucked into the funding side of the equation. And Alan Greenspan has just figured that out?
But that pales in comparison to the second step in this two part confession -- Greenspan’s admission that the Fed’s monetary policy stance may have played an important role in fostering asset bubbles and the imbalances they engender. In what he refers to as “the greatest irony of economic policymaking” the Chairman has also come around to the conclusion that success can breed peril -- or that sustained very low levels of nominal interest rates can give rise to asset bubbles (see his 27 September speech, “Economic Flexibility”). But this is not a shocker to anyone else. At low levels of inflation and the equally low levels of nominal interest rates that accompany such an outcome, excess liquidity can become a much more powerful force in shaping asset values than otherwise might be the case. The IT- and Internet-enabled technological breakthroughs were the icing on the cake in taking productivity growth higher and, as a result, in pushing inflation and interest rates lower.
So after all these bubbles, Greenspan finally gets it. Yes, under certain conditions, equity valuations can be turbo-charged by monetary accommodation. Those stars were in perfect alignment in the latter half of the 1990s. The Fed chairman appears to have come to the same realization with respect to property bubbles. Even couched in all the caveats of Fedspeak, this is a stunning admission for a central banker who has long been against the targeting of asset values. This gets to what I have long felt was Greenspan’s most egregious policy blunder -- failing to use the tools of monetary policy to nip the first bubble in the bud back in the late 1990s (see my 25 April 2005 dispatch, “Original Sin”).
What is particularly galling about this aspect of the confession is Greenspan’s effort to re-write the role he personally played during this era of froth. In his 27 September speech on flexibility, he notes, “As the FOMC transcripts of the mid-1990s duly note, we at the Fed were uncomfortable with a stock market that appeared as early as 1996 to disconnect from its moorings.” If the Chairman shared this discomfort, as the “we” in that statement seems to suggest, then why was he taking on the role ofcheerleader as the Nasdaq spiked toward 5000? Don’t forget this is the same central banker who proudly proclaimed in early 2000, “We may conceivably conclude from that vantage point that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever” (see his 13 January 2000 speech, “Technology and the Economy”). Selective recall or not, Alan Greenspan was the pied piper of the New Paradigm and the equity bubble it spawned. And up until recently, he took a similar tack with respect to the property bubble -- constantly maintaining that excesses in certain local real estate markets could not morph into a nationwide problem. With 25 states plus the District of Columbia now in double-digit house price appreciation mode over the last year, the Fed chairman suddenly sees the light!
Greenspan, of course, will not be there to pick up the pieces. That unfortunate task falls to his successor -- whomever that may be. History tells us that even under the best of circumstances, transitions to a new Fed chairman are fraught with peril. Financial markets are quick to test the new central banker. That was certainly the case when Alan Greenspan took over in August 1987 -- the stock market crashed two months later. That was also the case when Paul Volcker became chairman in August 1979 -- the bond market quickly tanked. And the onset of G. William Miller’s brief tenure in March 1978 ushered in a dollar crisis. Just from that perspective alone, there’s good reason to worry about the markets in early 2006. But there’s an even greater reason to worry about the coming transition to a new Fed chairman. Courtesy of bubble-induced distortions that Greenspan condoned, today’s saving and current-account disequilibria dwarf anything that a new chairman has had to face in the past. The average net national saving rate that Miller, Volcker, and Greenspan inherited was 7.4%; today it is 2% and likely to be a good deal lower in early 2006. Similarly, America’s current account deficit averaged -1.5% of GDP in the three most recent Fed chairmen transitions; today, it is closer to -6.5%.
In the end, America’s current-account funding problem remains very much a confidence game. To the extent, the confidence of foreign lenders is shaken as it normally is by the transition to a new Fed chairman, America’s unprecedented imbalances imply that financial market risks could be all the more acute. That could be the cruelest legacy of all for Alan Greenspan to leave to his successor. Right about now, the Maestro could certainly use a new baton
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Currencies: USD Now a High-Yield, No Longer a Funding, Currency
Stephen L. Jen
USD: From a Funding to a High-Yield Currency
One of the most important changes between last and this year is the evolution of the dollar from a funding to a high-yield currency. The fact the US cash rate is now higher than the 30-year German yield, significantly above the 10-year JGB yield, and only 50 bp below the USD 10-year yield is very important. High cash yield will help support the dollar against all currencies.
My Thoughts
· Thought 1. The Fed will stay ahead of the curve. The market still does not seem in synch with the Fed on the outlook for either growth or inflation. From the Fed’s perspective, growth will likely slightly underperform in 2005 but outperform in 2006. However, it is clear from statements by key Fed officials they are still more concerned about inflation than growth. At the same time, the market seems much less convinced underlying growth in the real economy is resilient enough, because of the hurricanes and an impending correction in the housing market. Numerous investors have predicted the Fed would stop at 3.50% or the Fed would not increase rates beyond 4.00%. The risk to the FFR is skewed to the upside relative to what has been priced in the futures market. With an expansionary fiscal stance and a restrictive monetary stance, the USD should do well.
· Thought 2. The ECB will struggle as much as the Fed to stay ahead of the curve. Whether the Fed stays ahead of the curve is critical for the USD. But, it should be considered in relative terms: if the ECB and the BOE also fall behind the curve, why should the USD weaken? In fact, the ECB will struggle at least as much to stay ahead of the curve as the Fed. It is far from clear EUR/USD will rise if the ECB also falls behind the curve. In other words, in terms of the implicit weights on output and inflation in a ‘Taylor Rule’, the Fed may have a higher implicit weight on inflation now than earlier in the year, while the ECB may have a higher implicit weight on growth. If the Fed falls behind the curve, the USD might suffer as well, but an inflation scare in the US will not necessarily lead to USD weakness.
· Thought 3. An inverted yield curve in the US does not necessarily suggest a recession. There is uncertainty concerning what a prospective inversion in the yield curve in the US might mean for the US economy, or whether a US recession would lead to a weaker USD. I don’t share the view that an inverted yield curve now is a reliable predictor for future recessions. Even if we do enter a recession, it is far from clear the USD index will weaken, both EUR/USD and USD/JPY could rise, leaving the fate of the USD index ambiguous. If anything, a stubbornly low long bond rate is a stimulus.
· Thought 4. USD/Asia will continue to drift higher, forcing the stale short positions to unwind. The risks to USD/JPY and USD/Asia are biased to the upside. Two key factors are (i) a hawkish Fed and (ii) high oil prices. Further, the yield deficit and improving risk tolerance among Japanese investors will likely overwhelm foreign capital inflows into Asian equity markets. Specifically, with the cost of hedging (determined by short-term rates in the US) high relative to the yield on the US 10-year, it will be tempting for Japanese institutional investors to reduce their hedge ratios. 115 is very achievable for USD/JPY over the coming weeks. If a shift in hedging strategy starts, it could lead to a surge in USD/JPY beyond 115. All of USD/Asia, with the possible exception of USD/CNY, could be dragged higher, as long as Asian central banks fail to keep up with the Fed. The stale USD/AXJ shorts, which were motivated by the view USD/Asia should fall to normalise the US C/A deficit, may be forced to unwind.
Bottom Line
The evolution of USD from a funding into a high-yield currency is one of the most significant developments this year. In my view, the Fed is likely to tighten more than most believe, and the US cash yield is entering levels so high, relative to other returns on fixed income assets, that the USD will be supported. In relative terms, it is not certain the USD would weaken against the EUR if inflation rises in the US. The USD will likely perform well against the JPY and EUR, but the EUR may outperform the JPY because of petrodollar reflows, which may be friendlier to EUR than to the JPY.
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United Kingdom: Those Hoping for More Rate Cuts May be Disappointed
Melanie Baker (London) and Vladimir Pillonca (London) and David Miles (London)
Recent data, despite some eye-catching headlines, do not have straightforward implications for monetary policy. Those counting on a 25bp rate cut in Q4 may be disappointed.
The recent national accounts release left quarterly Q2 GDP growth unrevised at 0.5%Q, but year-on-year growth was only 1.5%Y in Q2 (versus 1.8%Y on earlier estimates). This compares to trend UK GDP growth of close to 2.5%Y and marks the lowest year-on-year growth rate since 1993. Overall, the pattern of subdued consumer spending growth is not being offset by stronger growth elsewhere. The September CBI distributive trades release meanwhile — showing the balance of retailers saying sales volumes are up versus a year ago against those saying down — fell to the lowest level in its 22-year history (-24).
At first glance such data appears supportive of view that the Bank of England will cut interest rates again in Q4. Although we agree that there is a significant chance of a further rate cut, it is not our central case. We argue that upcoming rate decisions will be finely balanced and that the implications of recent data are not as clear cut as might first appear.
There still is little, if any, spare capacity in the economy. We used the revised GDP data to see if there is evidence that spare capacity has increased appreciably in recent quarters. But it hasn’t, according to the statistical models that we use. These suggest that there is at most slack amounting to 0.5% of potential GDP as of Q2. But some of our measures suggest output remains slightly above its potential level. All this suggests that the degree of slack in the economy remains low. Our assessment of current inflationary pressure arising from the pressure of demand on supply is unchanged.
Discretionary income growth accelerates. Our measure of ‘household discretionary income’ (see below) grew in Q2. The acceleration in growth to 3.0%Y in Q2 can be largely attributed to continued robust growth in incomes but also to slower year-on-year increases in mortgage payments. Although limited history means that we cannot back-test this data, this series suggests that the consumer saw their (nominal) spending power increase significantly in H1. Although the desire to save and recent rise in petrol prices suggest that consumers are unlikely to increase their pace of spending in the near term in response to robust income growth, it does suggest that prolonged falls in consumer spending look unlikely.
Debt servicing looks less onerous. Debt servicing (mortgage interest payments plus interest payments) as a percentage of household income declined in Q2. Relatively stable house prices and mortgage rates have likely helped, combined with continued income growth (real disposable income grew 1.1%Q in Q2 2005). Again, such data suggest that fears of a consumer spending recession may be overdone.
MPC may want more data. The CBI survey result, at face value, implies a spending ‘collapse’. The indicator is at a 22 year low. However, the long run mean of that series appears to be unstable — comparisons with earlier years may be misleading. Further, August and September last year were strong months of retail sales growth and year-on-year comparisons should improve in October. For example, flat retail sales on the official measure in September and October would leave year-on-year retail sales growth at -0.2%Y (the lowest since July 1992) and 0.5%Y respectively. The CBI distributive trades survey is very volatile month-to-month and MPC members may want more consumer related information before making a decision to cut rates. Income growth and continued low unemployment suggest the underlying fundamentals for spending are relatively sound. So while recent actual levels of retail spending — itself less than half overall consumption — have clearly been weak, the outlook for total demand is less bleak. Nonetheless major retailers including Next, Kingfisher and John Lewis are saying that trading conditions are the worst they’ve seen since 1989.
Consumer spending likely to pick up, the question is when? The household saving ratio continues to climb. In Q2 it reached 5.0%, up from 4.1% in Q4 2004. We had been forecasting the savings ratio to rise, and our central expectation is that it will increase further in the next few years. A slower housing market, focus on pensions and higher debt levels are all reasons for consumers to want to save more. This much-needed adjustment requires consumer spending to grow less than disposable income. However, this ‘adjustment’ should be temporary, assuming the labour market and income growth continue to hold up relatively well.
Recent pain on the high street puts the Bank of England in a tricky position. Further rate cuts in response to temporarily weak high street sales might prove unwise, with inflation already significantly above target. We expect annual real consumption growth to remain subdued into next year, below 2% on average (see Consumer Demand and Saving in the UK — Where Are We Heading D Miles, M Baker & V Pillonca, May 6, 2005), but expect some improvements in recent high street sales to materialize in the next couple of quarters. The MPC need to look ahead at where overall spending will be over the next year or two. On balance we suspect they will attach enough weight to the view that spending will pick up to leave interest rates at 4.50%. But it may be close.
Important Disclosure Information at the end of this Forum
Poland: PiS and harmony?
Oliver Weeks (London)
The victory of Law and Justice (PiS) in parliamentary elections was anticipated by final opinion polls but came on the back of an alarmingly anti-liberal campaign and record low turnout. Slightly stronger-than-expected support for smaller populist parties ensured that the likely coalition with Citizens´ Platform (PO) will fall just short of a two-thirds constitutional majority. We expect coalition talks to be deliberately drawn-out, but still see scope for further PLN appreciation and rate cuts. The long term future of the coalition, and the prospects for Euro entry, look much less secure.
Coalition talks likely to be lengthy. We expect the formation of a PiS-PO government, but with considerable delay. PiS´s priority for now will be to repeat its last minute surge in the presidential elections due on October 9 and 23, where PiS´s Lech Kaczynski currently trails PO´s Donald Tusk. For the next three weeks the two parties will largely remain focused on competition rather than co-operation. PO has already successfully forced Jaroslaw Kaczynski to nominate another Prime Minister to avoid damage to his brother´s campaign from the possibility of twins in the two top state offices. We regard PM nominee Kazimierz Marcinkiewicz as one of the more market-friendly PiS figures. However coalition talks will be difficult while his long-term position and the ultimate role of the Kaczynskis is unclear. Relations have also clearly been damaged in the short term by the PiS´s aggressive last minute attacks on PO´s liberal tax plans. President Kwasniewski has announced the first session of parliament will be on October 19. He then has up to 14 days to confirm a Prime Minister, who then has another 14 days to win a no-confidence vote. The final outline of the government may not be clear until early November.
Eventual modest fiscal tightening likely. The likely delay further complicates the task of tightening the 2006 budget. The official state budget draft has been confirmed by the outgoing government at PLN 32.5 billion, implying a general government ESA deficit of 3.4% of GDP on Finance Ministry estimates, or 5.4% of GDP once pension transfers are included. A full breakdown is not available and the conventional discovery of ´shocking´ revenue shortfalls and spending overshoots by the incoming administration seems likely. There are certainly legitimate questions on details so far released, notably on EU co-financing, excise tax rises and NBP profits. Early fiscal commitments from PiS for tax relief for children, families, entrepreneurs and housing will add to the challenges of pork bills introduced in the last few months of the last parliament (largely supported by PiS). Nevertheless we think there is reasonable scope for agreement on cuts in administrative areas that Finance Minister Gronicki, without a parliamentary majority, was unable to touch. With the PO´s more aggressive tax cut plans also off the agenda it seems feasible to achieve a further PLN 1-2 billion of fiscal tightening in 2006, with a further slight contraction in 2007.
Rate cuts still realistic. The MPC´s inaction this week was no surprise in the context of an undefined government led by a party that has promised (implausibly) to abolish the Council, and was loudly pressing for large cuts. We continue to think that the likely combination of modest fiscal tightening and zloty strength can prompt another two 25 bp rate cuts as the political outlook clears. In a considerably less dovish statement than a month earlier the Council did highlight that recent zloty strength was so far largely in line with inflation report assumptions. However balance of payments trends continue to suggest that PLN appreciation can go further. Although we expect the current account deficit to widen (from a current marginal surplus) as investment demand picks up, the outlook for FDI, foreign remittances, and corporate foreign borrowing, remains very strong, we think. While unlikely to squash output recovery we expect zloty strength to limit inflationary risks from energy prices. September inflation is likely to tick up to 1.7% year on year but we expect headline CPI to remain in the lower half of its 1.5-3.5% target range in 2006, even as output growth accelerates.
Longer term political turbulence likely. The longer-term outlook seems less rosy to us. The tension between PiS´s interventionist inclinations and PO´s liberalism suggests this may not be the first Polish democratic coalition to survive a full term. PiS´s Finance Ministry nominee, Cezary Mech, is particularly aggressive towards the NBP. The positions of Prime Minister and Finance Minister may also remain precarious while the heavyweight politicians stay behind the scenes. PO´s last minute loss of support does not suggest a mandate for radical economic reform. PiS´s strong Euroscepticism would be a significant obstacle to progress on the Maastricht criteria even if the government does hold together. Despite the improving fiscal position we continue to see very little chance of Euro adoption this decade.
Important Disclosure Information at the end of this Forum
Asia/Pacific: Coping with a Strong Dollar
Andy Xie (Hong Kong)
Summary and Investment Conclusion
Asia needs to raise interest rates quicker to contain the inflationary pressure in the supply chain, the added inflationary pressure from a strong dollar, and the financial speculation due to excessive monetary growth. I believe India and Korea, in particular, must raise interest rates to contain financial speculation. Thailand, Malaysia, the Philippines, and Taiwan should raise interest rates to keep real interest rates substantially positive and contain inflationary expectations, in my view.
The Fed appears worried about CPI and asset inflation, especially property inflation, and may keep raising interest rates in 2006. This may imply a strong dollar and a weak US economy. The weak dollar scenario may return when the US’s CPI and asset inflation are contained and the Fed begins to cut interest rates, which I believe is one year away at the minimum. During the meantime, Asia needs to adjust policies to contain the risks associated with a strong dollar.
First, financial speculation poses a serious macro risk as a strong dollar could cause a sudden outflow of hot money. India is especially vulnerable to this risk. A current account surplus may be the source of liquidity for financial speculation in Korea. This surplus is vulnerable to a sudden downturn in US demand. On balance, I believe that both countries should raise interest rates in the new environment.
Second, a strong dollar could worsen inflationary pressure from high commodity prices. Thailand, Malaysia, the Philippines, and Taiwan look especially vulnerable in that regard. I think they may have to raise interest rates quicker to stop inflationary expectation from escalating.
The Case for a Strong Dollar
The US may be seeing a shift to a ‘strong currency, weak economy’ scenario from the ‘weak currency, strong economy’ scenario of the past two years. Fed officials have been expressing uneasiness about the inflationary trend and alarm over the froth in the property market. It appears that the Fed’s priority has shifted from growth to inflationary concerns.
In particular, the Fed now recognizes the linkage between the low US savings rate and high US property prices, which suggests that the country’s current deficits will not come down without a correction in the US property market. Hence, the Fed may have to target property prices to decrease the imbalances in the US economy.
In summary, until its other objectives are met, short-term economic weakness may not dissuade the Fed from raising interest rate. The financial markets have operated on the assumption that the Fed puts most weight on the short-term economic outlook when making its decisions. I believe this belief that the Fed will not pop any bubble has served as a put option on downside risk in financial markets and has contributed to the mushrooming of asset bubbles (see Bubbles All Around US, August 29, 2005).
The Fed may now be on track to remove this ‘Fed put’. This would have serious consequences for risk premiums in asset markets around the world. Asia has been most exposed to the hot money phenomenon due to rising risk appetite in a low interest rate environment. The Fed’s actions could affect Asia significantly along the way.
The weak dollar scenario may return when the Fed starts to cut interest rates again. This is unlikely to happen until the Fed has tamed CPI and asset inflation and removed the ‘Fed put’ in financial markets — which I believe is a year away at the earliest.
Containing Financial Risk from Hot Money Reversal
A strong dollar has substantially increased the risk profile for developing Asia. The region has seen massive inflows of hot money in the past two years due to the exceptionally low interest rates in the US. Strong momentum has also played a part, with inflows lifting the region’s markets, thus attracting more hot money. I believe the region is probably experiencing another wave of inflows now.
However, history suggests that hot money flows into Asia tend to reverse during periods of rising US interest rates. Momentum can offset the rising rates initially, but not forever. Asian policymakers should not relax because the money is still coming even after 11 rate hikes by the Fed. In particular, Asian central banks should be wary of rapid monetary growth, which increases the risk of a financial crisis during a hot money reversal.
India may be the most vulnerable to a sudden reversal of hot money. It appears that the investment funds that target India are relatively new and hence more vulnerable to redemption when the mood changes. India’s M1 is growing at 18%, the fastest in Asia and probably the world. The liquidity may be contributing to stock market speculation now and over time could increase inflation. A heavy investment bias can de-link monetary growth from inflation through rapid capacity formation, as is the case in China. India, however, has a low investment bias. I think rapid monetary growth will almost certainly lead to more inflation in future.
India should raise interest rates now to limit the downside from financial speculation and contain future inflation, in my view. The current binding policy rate is merely 1% above the current inflation rate. India may need to raise interest rates by 200-300 bps to contain the financial and inflationary risks to the Indian economy.
Korea’s M1 is growing at 14.1%, the second fastest in Asia. The cause is its current account surplus, I believe. The gap between its policy rate and the inflation rate is 1.25%, higher than India’s but probably still too low. Korea is less vulnerable to a sudden hot money reversal, but it is vulnerable to global demand weakness, which would decrease its current account surplus.
Rising US interest rates have increased the risk of global demand weakness. The speculation in Korea’s stock market is not yet enough to damage the economy significantly, but it could do so if left unchecked. I believe that Korea should raise interest rates as a precautionary step to decrease the financial risk in the economy.
Money supply is relatively subdued elsewhere. China saw rapid monetary growth previously and now has an overhang problem. The other economies do not face excessive monetary growth and can take monetary policy decisions based mainly on inflationary concerns rather than financial stability.
Preventing Rising Inflation Expectations
Inflation rates have been creeping up everywhere due to rising energy prices. Weak Asian currencies add another element to inflation. Also, there is considerable inflation in the pipeline as government subsidies and shrinking corporate margins have so far absorbed the rising costs of energy and other raw materials.
The deflationary pressure from globalization and the credibility of central banks have prevented inflationary expectations from rising despite rising inflation rates, which is why monetary authorities have been able to be so relaxed. However, if the trend of inflation creeping up continues into 2006, inflationary expectations may pick up, which would force central banks to raise interest rates quickly to restore credibility.
The Philippines, Malaysia, Taiwan and, especially, Thailand look vulnerable in this regard. The combination of negative real interest rates and large current account deficits could trigger a sudden rise in inflation expectations. All four economies appear to be behind the curve. They may get away with being behind. For example, should oil prices decline by 50%, their interest rates would no longer appear too low. However, prudential macro management requires that these economies raise interest rates as soon as possible and significantly, I believe.
Asia has been associated with low inflation since the Asian Financial Crisis because the region has a high savings rate. However, cost-push and hot money inflows have created an unfavorable inflationary picture for the region. If monetary authorities are not careful, inflation expectations could surge suddenly and force them to tighten excessively. I believe that Asian central banks should raise interest rates to keep real interest rates sufficiently high as a precaution.
Important Disclosure Information at the end of this Forum
Japan: Positive Ground in 3 Months
Takehiro Sato (Tokyo)
Rising possibility that nationwide core could hit positive YoY territory by November
The nationwide core CPI fell 0.1% YoY for August, improving 0.1pp from last month. It looks to cease to decline in YoY terms this October, and rise to positive YoY territory by this November at the latest due to following reasons. Alternatively, this could happen as early as October given that oil prices have continued to hit record highs.
The outlook of each component for the nationwide core index is as follows.
(1) Utility charges will automatically rise by about +1.5% in Oct-Dec to reflect higher oil prices in Apr-Jun.
(2) Gasoline prices have continued to rise in September, with of another rise in October quite likely.
(3) The rate of YoY decline in rice prices looks to contract towards the end of 2005.
(4) Wireline phone rates look to improve YoY in both November 2005 and January 2006 reflecting sample changes last November and the basic charge drops this January.
Meanwhile, the downside risks for the above scenario are (1) sample adjustments for cellular phone rates reflecting deregulation, (2) the downturn in rice prices due to the bumper crop and (3) lowering of the healthcare treatment compensation rate. However, since it looks unlikely that event risk such as we saw last November in the wireline phone rates will emerge this year, we think the core rate is all but certain to turn positive by November.
Monetary policy scenario
We anticipate a reversal of quantitative easing next spring (most likely at the end of April) given this core CPI trend. The stage is set. The first requirement set by the BoJ suggests that the core CPI rate must reach its threshold as an average over multiple months, not just in one month. We think this means at least three months. If the nationwide core CPI turns positive in November, the Bank will have evidence of a three-month trend by March 3, 2006 when January 2006 data are released at the earliest. However, we do not anticipate the Bank as a temperate policy manager pushing through a policy change to monetary tightening for the first time in five years at that point, which is just ahead of the fiscal-year close, even if the other two requirements are met. We therefore expect the timing to slip to April or later. The BoJ will release its Outlook Report at the end of April that adds F2007. This report should resolve the other two requirements since policy board members are likely to envision even more bullish economic and price trends. We think end-April 2006 is the likely time for policy reversal within this context.
There is still a risk of an accelerated reversal. The Bank might act prior to the fiscal-year close if the core CPI rate turns positive from October contrary to expectations and robust economic and stock market momentum continues in January-March 2006.
As for the procedure itself, we expect a direct return to zero-rate targeting without incremental reduction of the quantitative target range when the reversal comes. In other words, we think the Bank will immediately replace ‘volume’ targeting with ‘rate’ targeting. This might seem drastic but is likely to happen since it enables the BoJ to restore interest rate targeting and avoid management of the cumbersome ‘current accounts balance’ indicator without fundamentally changing the ZIRP environment . We believe the restoration of zero-rate targeting will eliminate the core-CPI policy exit rule and the policy duration effect.
Though no rate hike
We do not foresee a rate hike, however, until the April-June 2007 quarter at the earliest. This implies waiting until the GDP deflator turns positive, putting nominal GDP growth back ahead of real GDP growth, and there is no doubt that deflation has ended.
We justify this view on the basis that rate hikes should be implemented to address inflation risk. Revisions to the CPI benchmark in August 2006 could lower the core CPI rate by 0.1-0.2pp. We also anticipate downside from sample changes for mobile phone rates and reductions in social insurance medical payments mentioned earlier. These factors might limit core CPI increases or even push it back under 0%. Additionally, we think core inflation rate momentum excluding energy and other special factors (baseline) will be nearly flat YoY in contrast to boosts for the core rate from higher gasoline and kerosene prices and electricity and gas rate increases. This environment will not offer much support for a rate hike. The BoJ risks losing its autonomy too via revisions to the BoJ Law if it repeats the same failure from five years ago. We expect the Bank to proceed very cautiously given its keen awareness of this risk. |
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User ID: 28326
10/5/2005 9:10 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
"If the Nation can issue a dollar bond it can
issue a dollar bill. The element that makes the
bond good makes the bill good also. The
difference between the bond and the bill is that
the bond lets the money broker collect twice
the amount of the bond and an additional
20%. Whereas the currency, the honest sort
provided by the Constitution, pays nobody but
those who contribute in some useful way. It is
absurd to say our Country can issue bonds and
cannot issue currency. Both are promises to
pay, but the one fattens the usurer and the
other helps the People."
THOMAS EDISON |
| 19.47™
User ID: 6933
10/7/2005 10:41 AM
 | | Re: Watch, Its happening ,the global economic change. | Quote |
bump |
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User ID: 30915
10/12/2005 3:51 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Companies have not been in such shape since the Depression
$88 billion in debt may become junk
By CAROLINE SALAS
Bloomberg News
More than $88 billion of U.S. corporate debt is teetering on the edge of investment grade and soon may join the record amount of bonds downgraded to junk this year.
ADVERTISEMENT
Hertz Corp., the world´s largest car rental firm, and radio broadcaster Clear Channel Communications are among 46 companies that probably will be categorized as noninvestment grade, according to credit-rating company Standard & Poor´s.
A surge in debt-financed takeovers and concern that higher oil prices will hurt profit growth is eviscerating credit quality in the $5 trillion market for corporate bonds, according to some strategists.
Investors face greater risks, while companies once considered safe and now classified as so-called "fallen angels" may see borrowing costs rise.
Not since the Depression of 1929 has corporate America received so many black eyes. General Motors, the world´s largest automaker, Sears Holdings Corp., the biggest U.S. department store chain, and Eastman Kodak Co., the largest photography company, led 27 borrowers whose $499 billion of outstanding debt obligations suffered the ignominy of being downgraded to junk.
And if history is any guide, there will be no rebound soon. "You don´t see companies get downgraded and work their way up, by and large," said Greg Peters, head of U.S. credit strategy at New York-based Morgan Stanley.
Peters should know. His firm helped the finance unit of Ford Motor Co., the second-largest U.S. automaker, sell $750 million of bonds in March that S&P lowered to BB+, or junk, on May 5. Bonds rated below BBB- at S&P or below Baa3 at Moody´s Investors Service are considered junk.
Twice the default rate
Fallen angels default at almost twice the rate of companies that never had investment-grade ratings, and seven of 10 stay junk, S&P said in a March study analyzing 24 years of data. The junk bond market is about $1 trillion in size.
"The credit cycle has probably already peaked," said Steve Kellner, head of credit portfolios at Newark, N.J.-based Prudential Investment Management´s fixed-income group. The firm manages $163 billion in fixed income, including $13 billion in junk bonds.
S&P last week put the debt of GM and Ford under review for another downgrade because of concerns about North American losses and high gasoline prices. GM is rated BB by S&P, or two levels below investment grade.
The combined $320 billion in bonds sold by GM and Ford sent the dollar value of fallen angels past the $202 billion record set in 2002, which included the WorldCom downgrade.
The number of companies that became fallen angels this year is eight more than the same period of 2004. Hertz, which is the target of a leveraged buyout, and San Antonio-based Clear Channel, the biggest radio broadcaster, have the lowest investment-grade credit ratings, and may be lowered to speculative grade, S&P said.
618 companies on the brink
Overall, 618 companies are on the verge of having their ratings cut, compared with 318 that are poised for an upgrade, S&P said.
The firm has tracked the data for less than a year.
Companies with the highest junk ratings pay about 90 basis points, or 0.90 percentage point, more in yield than companies at the lowest end of investment grade, according to Merrill Lynch & Co. index data.
The difference represents an extra $900,000 in annual interest expense for every $100 million borrowed. The gap averaged about 104 basis points in 2004. |
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User ID: 30915
10/12/2005 4:02 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
THE STARK REALITY OF AMERICA´S FINANCIAL MELTDOWN
PART 1 of 2
By: Devvy
October 10, 2005
NewsWithViews.com
Thucydides pointed out that hope is a very expensive commodity; therefore, it makes more sense to be prepared.
While financial disaster looms over the heads of Americans, bird brains in Congress waste their time diddling and playing their usual partisan games with conservatives busy fighting amongst themselves over Bush´s latest Supreme Court nominee. Here´s a hint as to why he picked Miss Harriett: Bush is stacking the court with no care of the long term consequences. There is more than enough solid documentation and verifiable evidence to prove prior knowledge of 9/11, the Karl Rove/White House scandals are percolating with everyone wondering what the grand jury will come back with and that Bush lied about the threat of Saddam and WMDs. While Bush cheerleaders willfully choose to remain in a state of denial, millions of others demand the truth. Miss Harriett knows where all of Bush´s skeletons are buried and John Roberts knows the tricks of the trade. In my humble opinion, that´s why Roberts was fast tracked and a "token" female with no bench experience, but lots of loyalty to Bush was chosen over more qualified candidates.
The Democratic - Communist Party will go all out in an attempt to recapture Congress in the ´06 elections. The Republican Party which has also adopted the communist manifesto will engage in their usual tactics to stay in power. With vote fraud controlling the agenda, we the people will have very little to say about the outcome unless there is a massive voter revolt over electronic ballot machines between now and November 2006. While popular political pundits and talk show hosts who get paid a king´s ransom to keep the real issues away from the people, reality is coming at unsuspecting Americans like a guided missile. Betrayal is a difficult pill to swallow, but I would rather know the truth than get blind sided.
There is no money in the U.S. Treasury. The debt is now $7,978,002,527,274.56 and accumulating interest every second of the day.
The engineered, unconstitutional invasion of Afghanistan and Iraq are costing a whopping $7 billion dollars a month. Bush wants to further drive us into poverty with a ten year commitment of $570 billion dollars. Never in my life have I seen such insanity - not even under Clinton.
How do you spend $7 billion dollars a month when there is no money in your bank account?
Congress borrows it from their private bankers and slaps this unpayable, massive debt on your back. They have doomed our children and grand babies to little more than serfs of modern times. There is absolutely no authorization in the U.S. Constitution for this type of rape of the American people´s pockets. Think these crooks in Congress care? Think again. Congress has become little more than a cabal of crooks operating under their own rules. War is profit driven and business is booming - for the international banking cartels. All they need are more soldiers to sacrifice in deliberately engineered wars to feed their lust for power and enrich them beyond imagination.
In a column September 27, 2005, David Uren wrote: Reserve Bank of Australia: RBA warning of ´meltdown.´ "Further rises in oil prices, the collapse of a major bank or an unexpected jump in inflation could be all it takes to send the increasingly fragile global financial system into meltdown. The Reserve Bank of Australia warned yesterday that the current calm in financial markets could be the prelude to a storm that could wreak havoc in the world economy. The RBA believes the boom in markets for shares, bonds and housing in many countries is unsustainable. The warning came as share prices in Australia reached a new high point, while a rush to invest in Australian bonds is pushing down long-term interest rates. "The preconditions are in place for quite abrupt swings in sentiment and a disruptive snap-back in pricing," the central bank says in its latest review of the health of the financial system."
Since NAFTA was unconstitutionally ratified back in ´94, many of us have been trying to warn the American people about the lunacy of a "global economy." We have warned about the domino effect and that the U.S. will go right down the road to poverty right along with all the other countries whose corrupt governments (G-8) have dragged their economies into "global interdependence." Well, the fruits of their labors are now ripening. The banking cartel won´t lose anything, but the American people will lose everything.
Gold is on the move and those who understand what this means recognize the danger signs that are being screamed at the American people, who sadly, either don´t have access to the truth or don´t understand the subject and why it is so important. Below is an excerpt from a recent LeMetropole Cafe posting. I am a subscriber to this outstanding forum of very savvy individuals who know the financial markets, who fully understand the absolute corruption of our government, their incestuous relationship with the banking cartels and pull no punches in telling Americans what IS coming down the pipeline:
"The rationale of Quid Pro Quo and the notion of For Every Action There is An Equal an Opposite Reaction have not suddenly lost their validity. The power /money structure in the US has graduated to a financial market modus operandi which has led Americans to believe that nothing can ever really go wrong with their stock and real estate investments. There is little fear of economic loss out there no matter what happens. Can you blame many Americans for feeling that way? After Katrina their combined real estate/stock market investments made an all-time high and are still going up.
"The problem is these feel good economic times are based on deceptions, which will disappear sure as shootin’. The US economic levees will break, just like the flood ravaged levees in New Orleans did, because of these purposeful illusions. They will probably do so without warning and the results will be catastrophic as The Court of Last Resort (as in the case of Katrina, the US Government) will not only not be there to bail the markets out, but will be a significant part of the problem.
"Now is the time to pay attention and be prepared for the US economic levee to eventually break. The odds of it happening in the not too distant future are far more likely than the forecasts of those who accurately predicted the New Orleans levee to break in case of a hit by a Category 4 hurricane. The simplest way and lowest risk manner for investors to take out economic levee risk protection is to load up on gold and the gold shares (silver too). The historic gold move up is only in its infancy. Gold prices between $1,000 and $3,000 per ounce in the years ahead are both likely and probable. Many of the gold shares are up 300% to 1,000% off their 2001 lows, yet a number of them are 60% to 70% off their late 2003 highs – even though the bullion price is $25 higher than it was in late 2003. Have said my piece to try and be of help. Just make sure you are too early when the US economic levee breaks, not 5 minutes, or a day too late."
Most Americans have no idea how much of our debt is being held by foreign governments. However, they are getting tired of buying up our debt which puts the dollar in even more jeopardy because the only thing behind our "dollar" is more debt. One more comment from LetMetropole Cafe that is important because it is right on point:
"OK, the deal is this the way I see it. Because these fools have done away with free market principles, and the hideously bought US financial press has let them get away with it, US financial markets are staring at the abyss. These Orwellians have used massive amounts of derivatives, lies and intervention to tranquilize the US financial markets. The key to maintaining this order was to keep the price of gold in check. You can read about this ad nauseam in the Café library and by reading Reg Howe’s "Gibson’s Paradox and the Gold Standard" at www.GoldenSextant.com. Unfortunately for the Orwellians, they are running out of viable options. For example, lower interest rates could be disastrous (revealing true economic weakness) and so could higher interest rates (stopping the US economy and real estate market dead in their tracks). So how did we get here?
"You can thank the second most overrated man in US financial market history for that, Robert Rubin, architect of the US Strong Dollar Policy, which, in fact, was nothing more than a scheme to manipulate and suppress the price of gold. Number one dunce is Chairman Greenspan, who betrayed his long held free market principles in order to elicit Wall Street and the Washington Polls butt kisses for so many years.
After Robert Rubin, who sweet talked the English and others in the sycophant establishment banking world to go along with him over the gold selling farce, there is a little known bureaucrat who stoked the fires. His name … Dale Henderson, Federal Reserve economist, who wrote a paper in 2000, "Can Official Gold Be Put to Better Use?"
"Ironically, most of the American public, even knowing this, would say fine on these shenanigans – as long as my real estate goes up in value and my IRA holds its own. Well, I got news for you Joe and Jane America. The US financial system has cancer. Go for the cure now and save what you have, or let it go and die. Of course, since the US financial press will not allow the likes of a GATA even to be heard, the prognosis for the average American investor is market death. It will be the Titanic all over again … no warning. They will lose most everything in the years to come. There will be small riots and SCREAMS of "HOW COULD THIS HAVE HAPPENED?" (End of excerpt)
To say that gold has been manipulated as well as the American people is an understatement, but the manipulators are losing control.
Click here for part -----> 2
© 2005 Devvy Kidd - All Rights Reserved
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Devvy Kidd authored the booklets, Why A Bankrupt America and Blind Loyalty, which sold close to 2,000,000 copies. Devvy appears on radio shows all over the country, ran for Congress and is a highly sought after public speaker. Your complimentary copy of the 32-page report may be obtained from El Dorado Gold. Devvy is a contributing writer for www.NewsWithViews.com.
Devvy´s website: www.devvy.com
E-mail is: devvyk@earthlink.net |
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User ID: 30915
10/12/2005 4:05 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
THE STARK REALITY OF AMERICA´S FINANCIAL MELTDOWN
PART 2 of 2
By: Devvy
October 10, 2005
NewsWithViews.com
"The bell tolls for the US Dollar because it is doomed. Like the Dodo bird, the US Dollar will, within the foreseeable future, disappear into the history books in the chapter on "Extinct Species." --Alf Field, Le Metropole Cafe
Here are a few items you may have missed due to a busy schedule.
August 12, 2005 Bush acknowledges the collapsing US economy The US administration aims to spend $286 billion on the development of the American transport system
"US President George W. Bush released a remarkable statement a short time ago. The remark has not been highlighted in the world media yet, although there is every reason to do so. Bush virtually acknowledged that the USA was experiencing a serious economic crisis. Moreover, the US government was taking immense efforts to avoid a massive outbreak of social uneasiness, the American president believes...the White House is desperately looking for measures to find employment for crowds of unemployed American citizens and hungry migrants, which threaten to enrage the rest of the States."
This is an e-mail exchange between individuals I know who have been trying to sound the warning bell for a long time:
"September 24, 2005: Hedge funds, derivatives, and the average Joe - I´m forwarding two CNN Money stories from last Friday, which are symptomatic of behind-the-scenes panic at hedge fund/derivatives catastrophes which have already happened but which haven´t reached the surface yet. Sanio (top German financial regulator) told German media last week, as he headed to the Bear Stearns/Morgan Stanley parley in New York on dangers of hedge fund/ derivative breakdowns, that "another LTCM is inevitable" given failure to institute regulatory control since the LTCM meltdown of 1998.
"Check out today´s (Sept. 26) Financial Times, for a similar warning..."Hedge Fund Derivatives Disaster Lurking behind Delta and Northwest. Commenting on the unserious reaction by the financial community to warnings of a hedge fund collapse by German bank regulator Jochem Sanio, the FT warns of a derivative disaster lurking behind Delta and Northwest Airlines bankruptcies."
What is going to happen to the trillions of dollars in pension funds when this meltdown reaches hyper speed? How many Americans who have their life´s savings in the stock market or other investments really understand what´s happening right now? Tens of millions of Americans and everything they have ever worked for is in dire jeopardy and that is no exaggeration:
All eyes on hedge funds/Scandal at Bayou, weakening returns. September 22, 2005/By Amanda Cantrell, CNN/Money staff writer
".....Meanwhile, several funds have come under the scrutiny of federal regulators this year for allegedly defrauding investors. Two principals of KL Financial, a $200 million, West Palm Beach, Fla., hedge fund, fled the country after the SEC sued them in March for lying about their funds´ returns and issuing bogus reports to investors. More recently, Daniel Marino, the chief financial officer of Bayou Management LLC, admitted to years of cooking the books in a suicide note, though he never killed himself, according to media reports.
"Marino and Bayou´s founder, Samuel Israel III, are now being investigated for falsifying returns to cover up trading losses, and state officials in Arizona seized $100 million in funds believed to belong to Bayou´s investors, according to court documents. Federal prosecutors filed a suit alleging that Bayou´s managers raised $300 million from between 1998 and 2005 by lying to investors about the fund´s returns and other issues."
September 28, 2005/Overdue Credit Card Bills Hit Record High By Jeannine Aversa, AP Economics Writer
"Surging energy prices, low personal savings and the higher cost of borrowing have combined to produce a record level of overdue credit card bills. The American Bankers Association reported Wednesday that the percentage of credit card accounts 30 or more days past due climbed to an all-time high of 4.81 percent in the April-to-June period....The previous high of 4.76 percent came during the first three months of the year, in keeping with a generally steady rise over the past several years.
"The personal savings rate dipped to a record low of negative 0.6 percent in July. The negative percentage means that people did not have enough left over after paying their taxes to cover all of their spending in July. As a result, they dipped into savings to cover the shortfall."
Individuals who can´t make even the minimum payment on their credit cards can´t spend. They have no disposable income left for anything other than basic survival. People who file for bankruptcy are credit strapped and can´t spend because they have no disposable income left for anything other than basic survival. Those of us who know what´s here and maturing, aren´t spending - especially on cheap junk manufactured by slave labor in communist countries like China.
Too much of our economy is based on "fun times" and entertainment. When it gets down to basic survival vs. fun spending, guess where that consumer dollar will go? It will go for rent and food, not casinos, movie tickets or ski trips this winter. The poor will continue to slip into deep poverty and the middle class will be driven into their first taste of poverty in order to subsidize - via more and more taxation - the poor, unconstitutional wars, foreign aid and more unauthorized spending through borrowing. Right behind the feds are the states picking your pocket and most of it is done through borrowing or more bonds. Debt slapped on top of more debt, yet the voters seemingly don´t mind as they continue to reelect the same communists, fascists and socialists to their state legislatures.
If you haven´t read ´Borrowing, Spending, Counterfeiting´ by Congressman Ron Paul, I highly recommend you do so. This column was written back in August in response to the transportation bill that was signed by Bush - legislation passed solely to create more jobs via government subsidizing (more communism) and a very transparent effort to keep Americans from seeing the real destruction of our key job sectors as a result of these insidious trade treaties. Bankruptcy filings are at record levels in this country. A new federal law goes into effect October 17, 2005 which will make erasing debts more difficult. By the end of September, filings were running 13,000 a day; year-to-date filings of 1.36 million are up 14% from last year. This cannot all be laid at Katrina´s door, believe me. Those in the industry know better:
"The headlines this weekend are truly shocking. For the third quarter of 2005 Natural Gas rose 80%, gasoline 44% and crude oil 13%! If you read many of the mainstream news comments about the energy market you will come to the conclusion that two very wild and mischievous twin sisters, Katrina and Rita were responsible for all of this, with a bit of blame also going to insurgents in Iraq who keep blowing up pipelines. So while it is painful to pay such sky-high prices for natural gas and gasoline we can rest assured that as soon as the storm damage to the energy industry infrastructure on the US Gulf Coast is repaired, and things get more stable in Iraq, Americans can go back to gas guzzling with their SUVs at a buck a gallon for gasoline. Unfortunately, that will not be the case. The current energy crisis has been more than 35 years in the making. Recent events have only acted as catalysts to what was already an accident waiting to happen." Adrian Douglas "Running on Empty - The Anatomy of an Energy Crisis"
Oil is black gold. Oil runs the industrialized world. We can all see the impact of the high cost of this liquid gold at the pump is having on our daily lives. The cost of everything is increasing; high fuel prices are curtailing Americans in their spending habits which is bad for the economy. However, it goes much deeper than that. On October 5, 2005, Michael Ruppert, author of Crossing the Rubicon, gave a speech in NYC for the Petrocollapse Collapse conference. There are those who make their living at convincing you peak oil is a bunch of hooey. In Crossing the Rubicon, Ruppert uses an old Saudi saying which goes something like this: "My father rode a camel, I ride in a car, my son rides in a jet and his son will ride a camel." Chilling coming from a country that supplies so much of the world´s oil.
I have a copy of Ruppert´s entire speech which is only available to members on his site From the Wilderness. As it is copyrighted, I can use just a couple of paragraphs of this powerful presentation: Government, Financial And Political Awareness Of Peak Oil Prior To 2005.
"MAY 2001 – THE NATIONAL ENERGY POLICY DEVELOPMENT GROUP This secret task force, which fought all the way to the Supreme Court to keeps its records and deliberations secret from the public, is for me the place where the deepest darkest secrets of both the September 11th attacks and government´s awareness of Peak Oil lie buried. The task force convened just as the first 20 out of 25 wells drilled in the Caspian Basin came up dry holes. In “Crossing the Rubicon” I discuss the meager seven pages of NEPDG records released after lawsuits which confirm the group´s obsession, not with oil discovery, conservation (economic stagnation) or energy substitutes, but with where the known oil was, who owned it and apparently who had to be dealt with to get it.
"The public report of the NEPDG told us, just four months before the 9/11 attacks: “ America in the year 2001 faces the most serious energy shortage since the oil embargoes of the 1970s. “Estimates indicate that over the next 20 years, US oil consumption will increase by 33 percent, natural gas consumption by well over 50 percent, and demand for electricity will rise by 45 percent.
“US energy consumption is expected to increase by about 32 percent by 2020. Between 2000 and 2020, US natural gas demand is projected by the Energy Information Administration to increase by more than 50 percent. Yet we produce 39 percent less oil today than we did in 1970, leaving us ever more reliant on foreign suppliers. On our present course, America 20 years from now will import nearly two of every three barrels of oil — a condition of increased dependency on foreign powers that do not always have America´s interests at heart.
"February 2005 – SAIC Report Of Robert Hirsch. Science Applications International Corporation is one of the most elite military and intelligence technology companies in the world. It controls a significant part of the Internet and is one of the core companies in the field of data mining technology used by the US government to spy on potential enemies – us. In 2004 the US government commissioned SAIC to look at Peak Oil and to recommend various strategies for dealing with it. That report – published this summer – revealed some of the immediacy of the pending collapse. While refusing to take a position as to when actual peak would occur, the report -- PEAKING OF WORLD OIL PRODUCTION: IMPACTS, MITIGATION, & RISK MANAGEMENT – made the picture pretty clear.
“Waiting until world oil production peaks before taking crash program action leaves the world with a significant liquid fuel deficit for more than two decades…”
“…If mitigation were to be too little, too late, world supply/demand balance will be achieved through massive demand destruction (shortages), which would translate to significant economic hardship…”
"Ladies and gentlemen, there is a plan to deal with Peak Oil. It has been formulated for some time and it is being carried out right in front of our very eyes this minute. It contains none of the aspects you would like to see or hope to initiate but it is irreversible, etched in stone, and nothing is going to deter it. While I have met with Congressman Roscoe Bartlett of Maryland and while I applaud his singular and sincere efforts on the subject I hold no optimism that he will have any influence on public policy. He is truly a good man, I believe. But one member of the House of Representatives who chairs no relevant committees and who does not enjoy the total support of either his party’s leadership or the White House can do little except educate and warn the public. We cannot look to Mr. Bartlett, however good his intentions, to solve anything for us. We are witnessing government response to Peak Oil now." (End of quote)
On top of all discussed in this two part series, you need to factor in the economic Armageddon which will happen when he first wave of baby boomers retire in less than three years. There is no getting around this one. Congress doesn´t have the political stomach to make the hard choices, they are simply going to let the whole mess get dumped right into our laps to deal with, but most won´t be prepared. It wasn´t raining when Noah built the ark, but the massive, deadly storm is already beginning to rain on America.
As Dr. Edwin Vieira pointed out in one of his brilliant columns earlier this year- don´t look to Congress to save your assets and everything you have ever worked for - it isn´t going to happen. We are very far down the road and I am trying to help people understand just how vulnerable they are to losing everything. If you want to learn more, please contact Harvey Gordin for a complimentary copy of a 32-page report that you need to read. There is no obligation. Get the truth and take the necessary steps to protect you and your family and don´t put it off until tomorrow. Tomorrow is already here. Get out of debt as quickly as you can and take steps to protect your assets. Long term survival is now top priority. |
| Anonymous Coward
User ID: 977
10/12/2005 4:05 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Op´s article is a repost, but bump never the less since it is very important as it effects all of us. The one thing that the author of the article doesn´t address is the fact that if the US economy goes down so does everyone elses. Where will the Chicoms make their money if there are not American comsumers to buy their cheap garbage? Could Europe, South America and the rest of Asia be able to support that kind of production? Maybe this is why the American economy is so manipulated, to do anything possible to avert the crash scenario from the thirties. Most likely the US will sink into a deep recession that will grind on and cause serious hardship for the lower class population. As usual the filthy rich will have advance warning and position themselves accordingly to minimize loss and maximize gain. No doubt China is fast becoming a world power player but what kind of conflict will take place before they attempt to become the worlds supreme power is anyones guess. More proxy wars are guaranteed to happen before the worlds two largest powers collide...it´s never if but only a matter of when. |
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User ID: 30959
10/12/2005 8:02 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Hong Kong ... ...
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It´s time to take seriously a US-led global recession Lau Nai-keung
2005-10-06 07:37
I think it is time that we should take a serious look at the possibility that the US is going to take us down towards a worldwide recession in one or two year´s time.
It is well known that the US is the world´s biggest economy, taking up about 30 per cent of global GDP, but it is now also the world´s biggest debtor country. According to the most authoritative person on this subject, the US Comptroller General David Walker, who audits the federal government´s books, the tab for the long-term promises the US Government has made to creditors, retirees, veterans and the poor amounts to US$43,000 billion, US$145,000 per US citizen, or US$350,000 for every full-time worker.
And this figure does not even take into account all the personal debts such as credit card bills and mortgages. With a low interest rate of 1 per cent running for the past three years in a row, savings plummeted to just 1.8 per cent last year, below 1 per cent since January and at zero in the latest estimate from the Bureau of Economic Analysis. In 2000, household debt broke 18 per cent of disposable income for the first time in 20 years. Credit card debt alone averages US$7,200 per household.
The US Government indebtedness is financed this way: The US now runs a trade deficit roughly 6.5 per cent of its GDP and the gap is widened every day. Its citizens are spending ever more on foreign goods, and with the US dollar as the international currency, the US Government just prints money to finance the deficit. And with this money, central banks in the surplus countries purchase most of the US Treasury bonds as currency reserve.
By now, Japan is the largest creditor of the US Government, and the Chinese mainland has been a fervent buyer for the last few years. As for Hong Kong, most if not all of our reserves are in US dollar denominated assets. The US Government in turn uses this foreign borrowed money to finance as much as 90 per cent of the federal deficit which stood at US$412 billion last year. The federal deficit is expected to be running at about US$2 billion a day at the moment.
Put it simply, the Americans have been living way beyond their means for much too long. On top of this, the Bush Administration is cutting tax at least three times while fighting an expensive war in Iraq, which has already cost the country US$700 billion, and currently progressing at US$5.6 billion per month. Now the US economy is dependent on the central banks of Japan, China and other nations to invest in US Treasuries and keep American interest rates down. The low rates keep American consumers snapping up imported goods.
Any economist worth his salt knows that this situation is unsustainable. This includes the country´s economic guru driver Alan Greenspan, who recently warned his countrymen that the federal budget deficit would hamper the nation´s ability to absorb possible shocks from the soaring trade deficit and the housing boom. Now he may have to add two more worries: soaring oil prices and cyclones.
The US is now clearly in huge trouble, economically, socially, politically, and internationally. The Bush Administration bungled big in cyclone Katrina´s aftermath in New Orleans, and then a minor rerun from Rita in Houston, and this will trigger the general outburst of people´s dissatisfaction with the government, leading to great internal turmoil lasting for many years. In all likelihood, long-term interest rates are going to rise, and the greatest property bubble the world has witnessed is going to burst in the next one to two years.
The countdown is in progress, and there is no way that anybody can do anything to reverse it either by short-term measures such as fiscal and monetary policy, or through long-term reform of tax policy, entitlement programmes and even the entire federal budget. This is as inevitable as gravity, and it will take place under a new and inexperienced chairman of the Federal Reserve Board. I do not want to sound alarmist, but I see very bad omens.
To make things simple, let us just examine some key economic issues raised by some economists:
What if the dollar plummets? Do stocks follow? How about pensions?
What if interest rates soar? How would all the new homeowners, who stretched to buy with adjustable and interest-only loans, cover their mortgages?
How would consumers with record credit-card debt make their payments? Would they stop buying? Stop taking vacations? What will happen if they go bankrupt? New rules going into effect later this year make it harder on such debtors.
How would a government, which depends on the taxes of a strong economy to operate, keep all its promises?
To us, the good news is that when the country is in deep trouble, the US will not have the energy to pick on China. Even when it is necessary to start another war to divert people´s attention, it would pick one much smaller in size and weaker in strength, like Iran. This will provide a much more amicable environment for China to make good use of its "period of strategic opportunity" till 2020 for the country to pass through a turbulent zone between per capita income of US$1,000-3,000.
But in the short term, now the US not only sneezes, and all symptoms indicate that it is going to suffer from a SARS-like trouble, the whole world should take extra precaution not to get infected. One thing is for sure, some time in the not too distant future, every central bank and institutional investor is going to dump US dollar and US Treasury bonds. Once, when a country like South Korea dumps the dollar, the still unsold US Treasuries in the asset column of Asian central banks - US$2,000 billion according to some estimates - will collapse. The cheapened dollar will cause a sudden jump in the US inflation, which forces the Fed to jack up interest rates. A giant leap in inflation will cause a severe recession, or perhaps a depression, in the US. These countries´ exports to America will dry up, which in turn will spread the global economic downturn like wildfire.
After the stampede, everybody is going to get hurt, not least the central bank of China, and the Hong Kong Monetary Authority, which are major US creditors and with the US as their number one export market. The recent currency reform of the RMB is most timely, and it is about time we should do something about the Hong Kong dollar. At the same time, China should make extra efforts to rekindle internal consumption, and diversify its market really fast before the great US bubble bursts.
(HK Edition 10/06/2005 page2) |
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User ID: 32373
10/16/2005 7:19 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
U.S. Investment Income Close to `Tipping Point´: John M. Berry
Oct. 13 (Bloomberg) -- The U.S. may be approaching a dangerous ``tipping point´´ in its international transactions.
At the end of last year, foreign investments in the U.S. were worth $2.5 trillion more than this country´s investments in the rest of the world. Yet last year, those U.S. assets abroad remarkably still earned $30 billion more than the foreign assets here.
That stunning disparity in returns is one of many reasons why the huge U.S. current account deficits of recent years have been so readily financed. The sagging net investment position wasn´t being compounded by an ever higher interest bill -- as is the case with the mounting U.S. government debt.
This year the game has changed.
Net U.S. investment income turned negative by $455 million dollars in the second quarter, marking a swift deterioration from a $15 billion surplus in the first three months of 2004.
If this trend continues -- and there´s no reason to think it won´t -- the U.S. will be paying a steadily rising net amount to foreigners, and those payments will both increase the U.S. current account deficit and worsen the country´s net investment position.
In a recently published analysis, economists Pierre-Olivier Gourinchas of the University of California at Berkeley and Helene Rey of Princeton University warned this situation could have serious consequences for the U.S.
The Dollar´s Credibility
``Reaching the `tipping point´ where the U.S. for the first time since the second World War ceases to have a positive net return on its net assets could be seen by the market as a significant blow to the credibility of the dollar,´´ the economists say.
``In a context where the external net worth of the U.S. is negative and the return on its net assets also turns negative, market participants could start demanding a higher premium on their dollar assets.´´
That the U.S. has been able to sustain financing for its international deficits up to this point is primarily due to the American dollar being the world´s principal reserve currency, the center of the global monetary system.
Gourinchas and Rey´s analysis traces how over the past half century U.S. investments abroad came to pay far greater returns than foreign investments here. The paper, published by the National Bureau of Economic Research in August, is ``From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege.´´
`Exorbitant Privilege´
The phrase ``exorbitant privilege´´ was coined by French Finance Minister Valery Giscard d´Estaing in 1965. He used it to describe ``the ability of the U.S. to run large direct investment surpluses, ultimately financed by the issuance of dollars held sometimes involuntarily by foreign central banks,´´ the authors say.
In those days, economists regarded the U.S. as ``the Banker of the World,´´ lending for long and intermediate terms and borrowing short, they say.
``Since then, the U.S. has become an increasingly leveraged financial intermediary as world capital markets have become more and more integrated. Hence, a more accurate description of the U.S. in the last decade may be one of the `Venture Capitalist of the World,´ issuing short term and fixed income liabilities and investing primarily in equity and direct investment abroad,´´ Gourinchas and Rey write.
U.S. Balance Sheet
Initially, U.S. assets shifted from long-term bank loans to direct investments, such as the purchase of foreign companies, and in recent years, toward equity investments. Meanwhile, foreign investment has favored low-yielding safer assets, including bank loans, trade credit and debt, particularly Treasury securities.
``Hence the U.S. balance sheet resembles increasingly one of a venture capitalist with high return risky investments on the asset side,´´ the economists say. ``Furthermore, its leverage ratio has increased sizably over time.´´
Nevertheless, all the advantages that accrue to the U.S. as the provider of the central currency in the global monetary system can´t forever offset the impact of the country consuming more than it produces. What if a ``tipping point´´ has been reached?
Gourinchas and Rey say their analysis ``does not imply that the current situation can be maintained indefinitely.´´
The Possible Repercussions
``Foreign lenders could decide to stop financing the U.S. external deficit and run away from the dollar, either in favor of another currency such as the euro, or just as dramatically, require a risk premium on U.S. liquid assets whose safety could not be guaranteed any longer.
``In either case, the repercussions could be quite severe, with a decline in the value of the dollar, higher domestic interest rates and yields, and a global recession,´´ they caution.
``In a world where the U.S. can supply the international currency at will, and invest it in illiquid assets, it still faces a confidence risk,´´ they say.
Should confidence be lost, the value of the dollar could plunge, and a world financial crisis could ensue. At that point, even the U.S. could be forced to stop living beyond its means.
To contact the writer of this column:
John M. Berry in Washington at jberry5@bloomberg.net |
| FHL(C)
User ID: 35125
10/23/2005 7:36 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Fair use:
21st-Century Bank Run
Watching a $4 billion company fall apart in a week.
Photo: Bank run, 1931-style.
October 17, 2005
By Daniel Gross
Slate
If you want to know what a modern bank run looks like, consider the case of the giant commodity trading firm Refco. It went public in mid-August, but in the course of the past week it has gone from $4 billion stock-market darling to carcass. The proximate cause of the meltdown was the surprise disclosure on Monday, Oct. 10, that an entity controlled by CEO Phillip Bennett had owed $430 million to the company. A week later, trading of the stock has been halted and vultures are picking over Refco the way hyenas gnaw on the remains of wildebeest.
Refco was no boiler-room operation. It´s been around and successful for a long time. (Scandal connoisseurs will recall that Refco was Hillary Clinton´s commodities broker.) And it had been getting more and more respectable. First, Thomas H. Lee, the highly respected private equity investor, agreed to take a big stake in Refco in the summer of 2004. Then gold-plated underwriters Goldman Sachs and Credit Suisse First Boston brought it public two months ago.
Refco was a model 21st-century business—a highly digitized, high-tech services company that traded complicated financial instruments on behalf of customers all over the globe. But its meltdown shows that its real assets were not its New Economy algorithms and brainpower. Rather, this extremely modern company depended ultimately on the kind of assets that built American capitalism in the 19th century: trust, integrity, and the personal reputation of executives.
Continue Article
Nothing material changed in Refco´s financial situation when it announced that Bennett had secretly owed money to the company, or when it provided more details the next day about how Bennett had hid the debt. If anything, the company´s situation improved, since Bennett paid the money back and quit the same day. The company also took further proactive action, hiring Arthur Levitt, former chairman of the Securities and Exchange Commission, to help clean things up. Refco was solvent. It had tons of cash on hand. Nobody was worried that it wouldn´t be able to pay its rent, salaries, or utility bills.
But it was already too late. Refco was in the business of facilitating trades that are conducted essentially through a digital handshake. The actual exchange of cash—the settlement—takes place within a few hours or a few days. Any company operating in this environment relies on liquidity—the ability to access vast stores of credit instantaneously and cheaply—and on the willingness of other institutions to act as counterparties, to wait a day or two before receiving payment.
Once the trouble was announced, Refco´s customers wondered whether it was wise to do business with a company whose internal controls were so weak that it didn´t know its own CEO was hiding a nine-figure debt. So, the demise was swift. (Here´s the nasty five-day chart.) Within two days of the announcement of the discovered debt, Refco had to shut its nonregulated capital-markets subsidiary because it lost liquidity. In other words, people no longer trusted Refco to make good on trades. Customers began to yank funds, clients started to steer business elsewhere, and employees began furiously to look around for new gigs.
In abandoning Refco so rapidly, the market proved that creditworthiness is not an absolute attribute that can be proved by showing you have a certain amount of cash on hand, or that your equity-to-debt ratio is above a certain level. Rather, it´s relative. Companies may boast excellent credit ratings from agencies like Standard & Poor´s. But ultimately, creditworthiness is in the eye of the beholder. It´s something that people say you have, based on personal experience, reputation, and marketplace behavior.
And that´s how Refco found itself transported back 150 years. Dun & Bradstreet has been in the business of providing credit ratings since the 19th century. Its predecessor companies, including R.G. Dun & Co., employed correspondents in every major city and town who would send word to headquarters about the reliability of various businesspeople. Much of it was gossip, which is part of what makes Harvard´s collection of R.G. Dun & Co.´s massive leather ledgers such great reading. The correspondents may not have had access to merchants´ balance sheets, but they did know whether, say, a dry goods merchant in Albany, N.Y., had stiffed a supplier on a $10 bill, or which glass manufacturer in Brooklyn could be trusted for $1,000 of credit.
But Refco´s downfall isn´t simply an occasion for a history lesson, or an object lesson for people who make their living in the commodity pits. The entire global economy runs on the lubricant of easy credit extended among companies. And much of that credit depends on trust and reputation. An auto-parts company that gives its customers 30 days to pay it and has 30 days to pay its suppliers can function quite well. But if a few suppliers become worried that the company might have difficulty paying its bills, and demand to be paid in 10 days, that company could go bankrupt in a matter of days. These days, you don´t have to be a bank—or even a liquidity-dependent finance firm—to suffer a run on the bank.
[link to www.slate.com]
[link to freewordofgod.yuku.com] |
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User ID: 37347
10/29/2005 8:06 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
In November 2002, Ben Bernanke stated the following:
"The U.S. 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. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation." (Full Speech)
Even if Mr. Bernanke did not have such strong views on inflation, the markets are dictating that in fact we are heading towards an inflationary period. In the past 2 weeks we have seen the CPI index jump the highest it has in 23 years, as well as seeing the PPI index jump the highest in 15 years. Inflation, my friend, is here. |
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User ID: 39095
11/4/2005 8:27 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Gary North, of the newsletter Reality Check, sees my eyes bugging out of my head about this national debt thing, and condescendingly pats me on the head like I am an idiot (did I mention he is also a real good judge of character?), and reassures me that this is chicken feed. "The on-budget debt is merely the tip of the iceberg. The off-budget debt -- mainly Medicare -- is now in excess of $65 trillion, according to Prof. Kent Smetters, who testified before a Congressional committee in February, 2005. In fiscal 2006, this figure will rise to $68 trillion."
Getting back to the national debt, Mr. North says "The debt-o-meter will roll over at least once more during the present Administration. A recession will get it to roll over twice. I am betting on twice." So he figures that not only will we have a recession, which means that The Mogambo will be fired at the first opportunity in a general downsizing ("Scram, bozo!"), but that the national debt will balloon by another $2 trillion in three years? Yow! Yow! Yow!
- GDP was reported up at 3.8% at an annual rate, which is actually up from last quarter, when growth was 3.3% or something. Simultaneously, the Gross Domestic Product deflator, which is the inflation figure that you use to discount the rise in nominal GDP (sales in dollars), rose to 3.1%, up from 2.6% in the previous quarter! My God! All the ethically-corrupt wonks in Washington, working like the demons from Hell that they are, can´t find some way to keep the inflation statistics any lower than this??? Note the use of three question marks, which is a clever literary device I am using to indicate sneering incredulity with a distinct undertone of contempt.
The part that makes my mouth hang open in stupefaction and lets a rivulet of drool slide down my chin is that this means that the 3.8% reported gain in adjusted-GDP, combined with the 3.1% deflator, means that the economy was/is growing at a nominal 6.9%? Hahahaha! Don´t make me laugh! I am here to tell you that nominal GDP is NOT growing at 6.9% AND that inflation is a hell of a lot more than some piddly 3.1%, or even 4.7%, as is reported in Barron´s and the Economist magazine. Ergo, the real, inflation-adjusted economy is not growing at all, and is, in fact, stagnant at best and, even worse, is almost certainly contracting.
- We now know that the Bush administration is, officially, the most irresponsibly profligate of any administration in living memory, as the Cato Institute reports that "The increase in discretionary spending - that is, all non- entitlement programs - in Bush´s first term was 48.5% in nominal terms. That´s more than twice as large as the increase in discretionary spending during Clinton´s entire two terms (21.6%), and just higher than Lyndon Johnson´s entire discretionary spending spree (48.3%)."
Bush has now allowed the increase in federal spending to exceed even that of Lyndon Johnson, the previous record-holder, as the most irresponsible spending dolt. But it was not just Bush, as it was the Congress that proposed, and the White House merely duly authorized, the jillions and gazillions of dollars in spending (and deficit-spending) in the past few years. And that is just the on-budget stuff! If you include the non-budget items, and all the offshore shenanigans, and the Social-Security and Medicare mess, then you will get a number so big (audience shouts out "How big, Mogambo?") that you will find yourself screaming screaming screaming in your sleep and your children will run in, dressed in their cute little footie pajamas, and ask "What is the matter?" and you will tell them, with tears in your eyes, "The Mogambo was right! We are freaking doomed!"
And of course a lot of this humongous mountain of money found its way back to the government. Sure enough, the Treasury reports that federal revenues rose in the last fiscal year by 14%, which translates into an additional $274 billion flowing into the government. In case you are keeping score, corporate taxes increased by 47%, and individual income taxes increased by 15%. Which they spent on creating more entitlement programs!
- Robert Kiyosaki, writing and essay entitled "Why Savers Are Losers" on Finance.Yahoo.com, says "My poor dad believed in saving money. ´A dollar saved is a dollar earned,´ he often said. The problem was he didn´t pay attention to changes in monetary policy. All his life he saved, not realizing that after 1971 his dollar was no longer money. You see, in 1971 President Richard Nixon changed the rules of money. That year, the U.S. dollar ceased being money and became a currency. This was one of the most important changes in modern history, but few people understand why."
Oooh! Oooh! I know this one! I raise my hand, because I know why! It´s because of the inflation that you get as a result! So I am waving my arm around like it´s caught in a damned whirlwind and my eyes are pleading "Ask me why! Please ask me!", but he pretends that he doesn´t notice me, and so finally I yell out "Ask me, you stupid idiot!" which was, apparently, the wrong thing to say, as he immediately turned away from me and went on to say "In spite of all these increases in prices, the federal government´s economists say, ´Inflation is low. It´s under control.´ " Aha! So it IS about inflation, just like I said! Feeling real smug and self-satisfied, I cross my arms and have this stupid, smarmy grin on my stupid face as he continues, "They are allowed to say that because the government is charged with only monitoring inflation in consumer prices -- not asset prices." Exactly right! So I jump up, startling the hell out of poor Mr. Kiyosaki, and say "Exactly right! We have had roaring inflation in stocks, and bonds, and houses, and the size of government for freaking decades! All financed by the damned Federal Reserve, always creating more money and more credit! But they never talk about that! NoooOOoooo! They never want to talk about that! They only say things like ´Go away Mogambo, you hateful and stupid little man!´ and then they send over a goon squad from the CIA to ´talk´ to me, but it never does any good, and that is why they are all out to get me!"
At the irritating sound of my whiny voice, he looks over at the security guards clumped around the sides of the auditorium, makes some kind of sign with his hand, and flicks his head towards me. I see them converging on me, and I can feel their little rat-like eyes burning into me, and I know I should run, but I can´t! I stand spellbound as he continues "The consumer price index (CPI) is the pressure gauge the government watches because they want to make sure the consumer is happy finding bargains at Wal-Mart, which is easy because China is forcing consumer prices down."
At that moment, two big, beefy stooges with their stupid little security guard uniforms and their stupid little security guard badges are hauling me down the hall, and I am screaming back "Wal-Mart? You say Wal-Mart?"
So he never got a chance to hear my clever rebuttal, but apparently this Kiyosaki guy ain´t heard the news that Wal-Mart´s prices are not quite the bargain they once were!
- Lawrence Roulston of ResourceOpportunities.com wrote on Kitco.com about his experience at a gold show, and it was entitled "Meltdown or Muddle?" Naturally, since I think I am so witty, I remark "Well, if it was a meltdown, then there would be a puddle, not a muddle! Hahaha!" But nobody laughed, as usual, and I sneer at these puny Earthlings and how their primitive brains cannot comprehend the sublime, subtle humor of the Mogambo (SSHOTM). After a little embarrassed silence, Mr. Roulson finally breaks the tension by going on to opine that the biggest concern preying on people´s minds is "the outlook for the US economy. Government debt, consumer debt, escalating government deficits, the war in Iraq, terrorism, the wilting dollar, and now the devastation on the Gulf Coast, are all serious issues. But, will these factors lead to an economic collapse?"
He implies that it is easy to be like the cowardly Mogambo, going all to pieces over this stuff and screaming that the sky is falling and hiding under the bed in fear, but he reminds us that "It is important to look beyond the headlines and superficial analysis and think through these issues" and in particular to "go back a few years and re-read the doom and gloom forecasts from so many commentators. Granted, some of the events that were forecast have come to pass. Yet, in spite of the mounting difficulties, the US economy continues to grow and prosper. It is not the level of growth that many people would like to see, but it is a very long way from the apocalypse that was forecast by so many."
That´s right! The doom and gloomers are wrong! I am a doom and gloomer. Ergo, with airtight Aristotelian logic that is unassailable (and believe me I have tried), I have been, alas, wrong. Especially about the housing boom, which I missed completely because I made the same mistake that is so common amongst us out here on the edges of reality and sanity, and I am talking us poor, pathetic creatures who can barely contain our fear and anger and fear (which I mention twice because it is central to my new legal defense), and sense of sheer panic, so that we can´t sleep, and haven´t slept for weeks and weeks because it is freaking us out so bad, and now we are paranoid and insane with, as I indicated previously, fear.
And we are wrong because we doom-and-gloomers always make the same big mistake (SBM) that we always make. In fact, it is SO common (audience shouts out "How common, Mogambo?") that it even has a name: Same Big Stupid Mogambo Mistake, which is usually referred to by its acronym, SBSMM in the official literature. And if SBSMM is NOT mentioned in any official literature that you read, then that proves that they are censoring what you are reading, and that they ARE out to get me. And you, too!
But this is not about how I am a paranoid lunatic, but about making mistakes. So what IS this big mistake, this SBSMM? The big mistake is: We always completely underestimate the government´s response! And there is ALWAYS going to be a government response, because when something goes bad, or starts going bad, or may start going bad, or is not going good, or is not going good enough, then there is ALWAYS a government response!
And if you are at all familiar with the results of previous government responses (total failures) then you know why we doom-and-gloomers are so doomy-and-gloomy, and always will be, too.
For example, Jim Puplava, speaking on his Financial Sense Newshour, does not mention the fact that nobody is as doomy or as gloomy as I, but he does demonstrate that he is hip to the government-response thing. He says, "We will put price caps on energy. We will put windfall profits tax into effect. We will raise taxes. We´ll raise interest rates. We will increase government interference in the economy. In other words, we will add all the wrong ingredients to the bonfire and make the fire grow. Unfortunately, that is the lesson of history."
- The Economist magazine writes "A central bank cannot prevent oil prices giving a one-off boost to inflation, but it can try to prevent this feeding into higher wages and prices. To ensure that the rise in inflation is only temporary, central banks need to increase interest rates at least in line with inflation. If central banks hold interest rates unchanged as inflation rises, this would imply lower real rates and hence an easing of monetary policy."
I jump to my feet and exclaim, "And this is exactly what we are seeing, dudes!" They go on like they didn´t hear me, but notice how they steal my thunder when they say "Global monetary policy is still unusually lax by historical standards. In America, despite 11 increases in interest rates since June 2004, real rates are still negative and below any reasonable notion of the ´neutral rate of interest´ at which monetary policy is neither stimulating nor restraining the economy. In other words, the Fed will need to keep pushing up interest rates into 2006." Well, this morning they raised the Fed Funds rate by another quarter of a percent for the twelfth time in a row, so maybe the Economist knows what it is talking about, unlike the stupid Mogambo!
But did they say "unusually lax"? Hahahaha! I would have said "preposterously low" or "insanely low" or "stupidly low" or "pounded down to almost insignificance by a bunch of brain-damaged weenies at the Federal Reserve as they desperately try and extricate the economy from the ruination and damnation inflicted on it by these same Federal Reserve morons, what Aubie Baltin, PhD, derisively calls "Socialist Neoclassical economists", who ruined our money with their ridiculous and stupid economic theories which have been discredited over and over and over again." But I can see how this is too wordy, so let´s stick with their terse "unusually lax."
But it is not just us Americans suffering from inflation! Interest rates are rising around the world, as one country after another is being forced to do something about inflation in prices, which is what always comes after an inflation in the money supply, which they are all STILL encouraging! This is bad, bad news (BBN) for two reasons that I can think of without thinking or getting up off my lazy butt, which suits me fine: 1) Financing the purchase of anything gets more and more expensive, and 2) all the hundreds of millions and billions of people who bought any American debt, any of that immense ocean of debt that we have issued over the last few decades, are now looking at losses, and they will incur more and more losses for a long, long time into the future (because bond prices fall as interest rates rise) until interest rates stop rising, and these people are going to be angry every minute of every day as they watch their wealth melt away. So they are sitting on losses, both real AND incipient, made all the more huge and overwhelming by the amount of leverage that they used to buy the bonds in the first damned place!
I am not worried about the Europeans getting angry, or the Japanese. It is the Chinese that I am worried about, as I have seen too many Kung Fu movies not to know that when you have a lot of Asians around, sooner or later there is going to be a lot of fighting, hands and feet flying around, punching and kicking the hell out of everybody and everything, and you had better know what you are doing when mixing it up with those dudes!
Already the Chinese consume half of the cement used in the world, a third of all the coal used in the world, 40% of the world´s steel, a fifth of the world´s copper and aluminum. And they also make half of the world´s shoes, most of the video games that are rotting our brains out, 80% of all the toys sold in America, and most of everything else you can name, from cell phones to computers and furniture and beyond!
As further proof, The Mogambo notes from deep within his secret bunker way out in the spooky and haunted woods that these Chinese guys are going to have a strong currency and we are going to have a weak one, and they are going to have a lot of rich and middle-class Chinese people with money to burn, and they are going to want a lot more things that taste good. And that takes farmland, and that means that foreign nationals are going to, as I figure it, come over here and buy up all the farmland with their strong currency, sort of like the US used to do back in the days when we were younger and stronger and had a mighty currency, and we strode around buying up whole swaths of land and resources anywhere we wanted to in the whole world, and kicked the local population off the land or made virtual slaves of them, if we could, and used the land and resources to make stuff for us Americans, to the impoverishment of the indigenous population, and we laughed at them "Hahahaha! We are the Yankee, capitalist-pig exploiters of your environment and your stupid economy!"
So I am predicting, in that fearless-yet-foolish way that is always my downfall and dismay, that cropland in the USA will be, one of these days, enormously expensive.
And there may be some divine retribution in there somewhere, as alert reader Richard P. quotes Morris Cerullo, the president of World Evangelism, as saying that a coming world-wide financial crisis "will be so long and so severe that even the rich, who are usually exempt from such things, will be affected." Even more surprisingly, and the reason I bring this up, is that he has also predicted that "wars in the future will be over farmland and not oil fields."
- Mike Shedlock of GunsAndGunpowder.com is still concerned about the problems at General Motors, and rhetorically asks "Is that the extent of GM´s problems?" Well, since he asked, I was going to casually mention that 1) I obviously don´t know what "rhetorically" means, and 2) I have written extensively to both GM and Ford about naming a snazzy new car after me, maybe something like the "Mogambo Supercar Supreme-o." But I never heard from them, and they did not snap up the generous Mogambo offer (GMO), which proves that THEY were idiots, NOT me, as so rudely alleged in most of their civil cases against me, nuisance lawsuits initiated so that I would stop bothering them about the Mogambo Supercar, which they deny the existence of TO THIS DAY! I mean, I tell Mr. Shedlock to call General Motors up on his cell phone and ask GM about the Mogambo Supercar, and they will say "What in the hell are you talking about?" which will PROVE it´s true!
But apparently Mr. Shedlock has heard this story before, and ignores my challenge. Instead, he elects to say "Let´s summarize all of the problems I can think of off the top of my head: 1. Falling sales. 2. Enormous debt. 3. Union strife. 4. Delphi and supplier problems. 5. Cost disadvantages versus Toyota to the tune of several thousand dollars per car 6. Poor management. 7. Poor quality versus foreign competition.8. Lack of industry vision. 9. Medical benefit problems. 10. Pension woes."
So I am standing there, waiting for him to at least MENTION the whole Mogambo Supercar tragedy, and what a fiasco it was, and how it is I who is the real victim here, and not the bunch of incompetent boneheads running the joint, and not the equally incompetent boneheads who kept buying GM and Ford stocks and bonds, and using these stocks and bonds(and forgive me for turning away, but I cannot help but laugh at the sublime Theater of the Absurd humor, even in the face of such a profound tragedy) to fund their own retirements! Hahahaha!
And far be it from me to mention that Ford ruined both the Mustang and the Thunderbird, and General Motors ruined the Firebird and the Oldsmobile, so what in the hell can you expect from losers like that?
- Alert reader Norman Z sent me the note that David Dodge, who is the chief honcho dude at the Bank of Canada (the Canadian central bank), supposedly said "The world should expect an abrupt and disorderly economic correction in (by) 2007." Now, I cannot verify this report, but I say that I could not agree more, which I cleverly indicate by saying "I could not agree more." And if you want to see what happens to the price of gold when "an abrupt and disorderly economic correction" happens, then you are about to get a real lesson.
Nick Chase, author of The Contrarian´s View newsletter, has a warm place in my heart because not only does he have nothing good to say about Ben "Bonkers" Bernanke, the new chairman of the Federal Reserve, but he is also very hip to what the ramifications are of so much money and credit being created. As another feather in his cap, he also agrees with Mr. Dodge, in that "In 2006 will come the hangover after the party.... the bear market will return with a vengeance."
- The Gold Report reports "Dubai wants to be the Switzerland of the Arab world and a world financial center. So they´re doing the smart thing." As evidence of that, they note that Dubai will "launch a gold futures exchange on Nov 22, with South Africa´s Standard Bank among 50 founding members. gold and silver options contracts would be launched in the first quarter of 2006."
- Bob Wood, of Kaizen Managed Assets reported that Jim Cramer, the manic stock picker on his own CNBC television show called Mad Money, "has deftly staked out positions on both sides of the debate. While pounding the table on his own show every day for which stocks he wants you to buy right now, I caught his appearance on the Colbert Report. Cramer said he was a long term bear on the domestic stock markets. You read that right. He´s bearish long term on U.S. stocks."
- To show you the arrogance and intellectual impoverishment of business in America, get a load of this: "Auto supplier Delphi Corp. said Friday it has beefed up severance packages for top executives in order to encourage them to stay on as the company prepares for a major restructuring that could include bankruptcy." Hahahaha! These are the same guys who mismanaged the company into the toilet, but they are giving themselves more money to encourage themselves to not run away like rats deserting the ship, even as the employees, retirees, stockholders and bondholders are in the process of being screwed royally! Hahahaha! Delphi could have saved itself the money, as who in the hell would hire any of these blockheads anyway? Hahahaha!
- Bill Murphy of LeMetropooeCafe.com is really suspicious of the action in gold here lately. He says "The gold Cartel knows their ill-conceived scheme to manipulate and suppress the price of gold is going down. The price of gold is going to take off in the months and years ahead." So the way to capitalize on this slimy mess is to buy gold whenever the price is manipulated lower like this. I will point out, in case you are wondering, that this strategy has worked like a charm for years, and everybody who bought when the price inexplicably fell like this made a nice profit when the price of gold subsequently rebounded, as it always does nowadays. And I am pretty damned sure that it will continue working like a charm, too.
The surprising thing is that Mr. Murphy says that the guys on the Comex "have rarely ever seen anything like it", but that Goldman Sachs, alone, is doing all the monster selling that took gold down so dramatically here lately.
And Mr. Murphy sees the Bush Administration in this mess up to their eyeballs, as the White House knows that "If the US stock and real estate markets go against them in a significant way, they know they are done for", and a rising gold price is always seen as a reason to sell stocks and bonds and houses. Ergo, White House complicity in rigging the gold market!
- From Doug Noland we learn that there is plenty of inflation out there to rattle the nerves of the faint-of-heart (me). He writes "For the week, the CRB index was little changed, with y-t-d gains of 13.5%. The Goldman Sachs Commodities index rose 0.3%, increasing 2005 gains to 40.1%."
And price increases are getting more ubiquitous too, as Mr. Noland remarks that "The National Association for Business Economics did their quarterly survey of members, and they report that their index of prices charged by member companies rose to the second-highest in the survey´s whole 24-year history."
And it doesn´t stop there, as the Commerce Department´s latest PCE price index of inflation, which is the inflation measure supposedly favored by Alan "Jerkface" Greenspan, shot up 0.9 percent last month. Apparently this is the largest biggest rise in that index since February 1981, 24 freaking years ago.
But, you will be glad to know, that if you exclude food and energy, then the index only advanced a mere 0.2 percent. Hahahaha! To show you how far removed from reality this stupid PCE number is, over the past year it has risen just two lousy 2 percent! Hahaha! Prices have increased just two percent in the last year? Hahahaha! And this is Greenspan´s favorite inflation indicator? With an idiot like that in charge of the Federal Reserve, now you know why I say that we are freaking doomed!
Ugh.
****Mogambo sez: These temporary low prices for oil and precious metals are your chance to walk over and pick up some bargains, as all the things that are bedeviling us and our stupidly over-priced currency are not going to get better, but they are going to get worse and worse and worse. From the Financial Times we read "The Organisation for Economic Co-operation and Development forecast warned that the continued deterioration of the US current account deficit posed a risk to the US and to the global economy, at a time when the US deficit has risen above 6 per cent of gross domestic product and is forecast to rise to 7 per cent of GDP next year."
If this doesn´t seem important to you, then perhaps it will after they go on to say, "Few other OECD countries have ever managed to sustain imbalances of that magnitude without eventually experiencing sharp downward pressure on the value of their currencies."
That means that the price of oil, gold and silver will be pressured to rise and rise and rise for the rest of your life, as the dollar will continue to fall and fall in value for the rest of your life. And since you can buy oil and precious metals cheaply right now, thanks to these obvious manipulations of the market, buy them all, and rejoice at your good luck! Whee!
Nov 01, 2005
Richard Daughty |
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User ID: 14456
11/9/2005 9:47 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Hedge funds facing the chop
Jane Padgham, Evening Standard
19 May 2005
UP to 1,600 hedge funds will go bust over the next two years, possibly triggering a stock market crash. As rumours sweep the City that several are in trouble after a series of big bets went badly wrong, the Centre for Economics and Business Research reckons the 10% annual failure rate among the 8,000 funds will be maintained.
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´We predict a further 20% of hedge funds will close over the next two years, since economic conditions are likely to be at best average for the funds,´ said CEBR chief executive Doug McWilliams.
´In theory, this could act like a big bank going bust and trigger a series of knock-on failures worldwide and a stock market panic.´
A wave of collapses would see central banks slashing interest rates to prevent a credit crunch. That is precisely what happened in the autumn of 1998 when the Federal Reserve took the knife to US rates to head off panic over the failure of Long-Term Capital Management, a US-based hedge fund into which major banks and investors had poured large sums.
But there is a danger panic could grip markets faster than central banks could act. ´We do not think that this is the most likely outcome. But fear of it happening is one reason why we expect interest rates worldwide to be rather lower over the next two years than is the consensus,´ said McWilliams.
The hedge fund industry is already in turmoil after unprecedented losses in recent weeks. Rough estimates suggest it is 8% poorer today than three months ago, although some funds are much worse off. Sources close to the industry revealed today that London-based Cheyne is down by about 5% while Ferox, also based here, is said to be nursing losses of 7%.
Major banks are unlikely to have been immune and Deutsche Bank has seen its shares dive on unsubstantiated fears that it has bankrolled hedge funds. The biggest blow came earlier this month when Standard & Poor´s downgraded General Motors and Ford bonds to junk levels, and US investor Kirk Kerkorian seized the opportunity to buy shares. Bond prices fell and share prices rose, the opposite of what fund managers thought would happen.
Getting to the bottom of this media-shy industry is hard. But Warren Spencer, president of Bear Stearns, a leading broker for the industry, said this week that fears were overblown.
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Anonymous Coward
User ID: 545
11/9/2005
9:23 pm EST Re: I think most people do not understand just how bad things will be this time next year!
Okay, so it´s a regular day and I´m meeting with my attorney who handles all of the aspects of my business just to review some papers for me to sign. It´s no big deal, but then I pop the question: "How´s business?"
His reply was that it´s too good and he can´t take any additional work until next February or March. He´s a long time local lawyer and has been practicing small business, tax and bankruptcy law here for over 20 years. We started the small talk and his answers were shocking. To the point where if you drink martinis, make them doubles right now.
He is averaging 60 bankruptcy hearings per month from now until at least February. Rumor has it that in the last week before the new laws took effect (his words) there were over 18,800 filings in the Tampa Federal District alone. 99% of those were Chapter 7´s. I said, well, that´s going to hit the bank´s bottom lines. He replied with the answer that floored me:
He expects some banks to go under.
Here´s how he explained it to me, and he´s extremely knowledgeable on this subject. Banks are allowed to issue "credit" based on a percentage of actual cash reserves on hand, not investments, or derivatives, but actual cash reserves. All of these bankruptcies have to be written off as bad debt. This write off, although offset by generous tax laws, does not offset the capital requirements. He said that unless Congress drastically re-writes the banking regulations, which is unlikely, we will see massive bank problems next year. It works like this:
As the bad debts are written off, that debt and a higher percentage of cash, have to be added to the reserves because the new banking and bankruptcy laws require a higher cash reserve on hand. There are few avenues for the banks to increase these reserves. The quickest route (already happening, see Gayla´s thread:Washington Mutual scraps free ATMs for everyone ) is to increase user fees on all accounts . He expects all debit card transactions to have an additional user fee ranging from 1-5% of each transaction! Then inactive or low yield savings accounts will have reduced returns so instead of a Christmas savings account having a 2.5% return, look for 1-1.5% or just a complete shutdown of the program. He also said that credit card users will get slammed the hardest.
In his view, the credit card users will now get charged transaction fees for any usage under $100 (the majority of transactions) and rate increases of 3-7% based on the type of transaction. Those aren´t annual fees, those are monthly "special transaction" fees they will propose. Because of the cash crunch, the Federal Reserve will have to approve the new terms. The new bankruptcy law caused such a rush, you could see cash reserve hits nationwide on all banks and credit card issuers between $150 to $300 BILLION by the middle of next year. Those issuers who cannot meet the cash reserve requirements will default and be taken over by the FDIC. He also expects credit card usage to decline between 30-40% by the end of next year.
The next people who will feel the pinch will be those who take out Auto Loans and mortgages of any type. The banks who underwrite mortgages might increase the minimum capital requirements for financing from the freewheeling whatever they can get now to 10-25% of the actual value of the mortgage. Say goodbye housing boom. He estimated that all loans should experience an additional 1-3% increase in listed rates plus massive increases in processing fees so they can rush to raise cash and stay solvent. Since banks can not get "loans" from the Federal Reserve to raise cash (because that becomes a liability, not a cash reserve option) he expects several regional banks to fail and maybe even a large one.
After he said all this, I was somewhat pale. I asked him point blank, just how bad does he think it will get. He said, his words, not mine, that some parts of the country will make 1932 look like the good old days.
I highly reccomend EVERYONE make your financial preps and start studying the balance sheets and loan profiles of your financial institution. If they look shakey, at all, or like they have 30% of their assets or more tied up in credit cards or consumer loans, you might want to switch to a more stable institution. |
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User ID: 40535
11/11/2005 8:01 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
for those how can read, this is so easy to understand,
The Straining Straps of the Straightjacket
Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Archives
Nov 9, 2005
- I hope you don´t mind talking to me through the mail slot in the door, but I am not in the mood to open the damned door right now, as I am being driven crazy crazy crazy by alarm bells and alarm buzzers going clang clang clang and buzz buzz buzz respectively, and the Mogambo Economic Seismograph (SES) is literally flopping (plop plop plop) on the table from the financial tremors being detected.
It wasn´t always this way. Why, I sort of remember this morning when I got up, smiling as the sun was coming up and little birds were singing sweetly to me from the treetops. And this morning the wife was still asleep so she wasn´t already yelling at me, "Are you going to get up off your lazy butt and do something around here today?" (No).
But then my idyllic morning was shattered when the alarms starting going off after I learned that Total Fed Credit shot up by $3.955 billion dollars last week, which is scary enough in itself, because this means that all of this instant increase in credit was used to create more debt for somebody, and with the reserve multiplier of almost 100! I notice that you did not say "Yikes!" at that, so you are probably very hungover and thinking only of how your head hurts, and your stomach hurts, and your hair hurts, and there is a bad taste in your mouth, and somebody has peed in your pants, and you are therefore blissfully unaware of what this means. So, showing off my mathematical and calculator wizardry, I finally manage to turn the calculator on. With a self-satisfied smugness, I key in the number $3.955 billion with surgical precision, and then multiply that by 100, and after a few tries, I announce that most of the answers I got were $395.5 billion. That is how much potential new debt was created LAST FREAKING WEEK! In one week!
So the next thing I know, I am trying to explain to this stupid policeman that the obvious reason that I am riding my bicycle down the road this early in the morning, wearing nothing but an adult diaper and a wedding veil while screaming "It´s time for stupid Americans to wake up and prepare to be economically killed, you morons!", is that all this torrent of new debt means we are even MORE freaking doomed! And especially since all this new debt means all this new money in the system, and all this new money means all this new inflation in the money supply, and all this new inflation in the money supply means price inflation is coming to kill our money, our economy and us. To make sure that he comprehended the crucial importance of this basic fact, I even helpfully pointed out to him, as tactfully as The Mogambo can, that if he can´t get it through his thick Neanderthal skull that my heroic actions, sort of like Paul Revere only more comfortably dressed, are fully justified, then he was just another stupid fascist pig cop. The next thing I said was, "Before you hit me with that nightstick again, are you telling me that you agree with the stupid idea that a nation can go into so much debt, and then print the money to pay the debts, that we will all end up rich?"
A few more whacks to the head with that damn baton of his finally convinced me that my original assessment was right; he WAS a another stupid fascist pig cop, and yes, he DID believe a country could borrow its way to prosperity and wealth, because he works for the government, and the government said so, and so that was good enough for him.
Fortunately, he also believed that he was going to have to change my diaper before throwing me into his squad car, because being knocked senseless like this makes me poop, a lot, and he could see the evil gleam in my eyes that I was going to make this just as messy and unpleasant as I possibly could. So he let me go home if I promised to be a good boy from now on, and I said I would. But I lied.
And I was justified in my lying, as I did not even bring up the fact that the Fed bought up, for itself, a big glopping handful of government debt last week, too. If you run to look up the exact definition of "handful, glopping, big" in your copy of the Big Mogambo Dictionary Of Economic And Financial Stuff (BMDOEAFS), you will see it equals $2.243 billion, which is precisely the amount of government debt that the Fed monetized last week alone. So that is why I used the precise term "big glopping handful."
This is the part that really bothers me, in that we taxpayers now owe the banks, which is a bunch of private banks with owners and insiders and stockholders who all agree that I always have to use the drive-up window because I am not allowed in the bank lobby ever again since, well, perhaps I´d better not to dredge up painful old memories. But this is not about how I screamed at some halfwit teller about how she and the stupid banks, as part of the Federal Reserve system, are destroying our money, and our country, and how the bankers are going to Hell, and how she is going to Hell, too, and how her ugly, stupid little children are going to Hell right along with her, and how if I had children as ugly as hers I would not put their photograph on my stupid desk, but it did not matter because they are all going to burn in Hell for their crime of destroying our money and our economy and our country and us by creating so much money for their own damned profit! Like I said, I don´t want to bring it up, but here they are again, doing the same damned thing!
So the banks created, at their whim, another $2.243 billion dollars which they used to buy government debt, so that we stupid taxpayers can stand around drooling down the front of our shirts as we now owe the banks another $2.243 billion. And we not only owe them the sum total of 740 freaking billion dollars of government debt that the damned banks have amassed, but also the interest on every dime of it! And for the rest of our lives! And the banks bought the asset for themselves by literally creating the money out of thin air and then giving it to themselves? My God! We are THAT stupid, and yet we have nuclear weapons? No wonder everyone is against us!
- That the world is now so full of corruption is beyond doubt. GATA has clearly exposed the grubby manipulation in the gold market, and Ted Butler has exposed the fraud and manipulation in the Comex silver market. Now we have it in the financial markets, as revealed by an essay by Daan Joubert, who teaches a course in ´Technical Analysis at the Treasury of a major South African bank´, in his "essay of the week" on the InvestmentRarities.com site. Mr. Joubert has been taking a look at intervention in US markets and has decided that our stock market behaves irrationally to external events.
"There can be only two possible explanations: Americans are truly irrational, unable to reason logically and easily swayed by propaganda and the herd instinct, or there are some powerful forces at work to intervene in and steady US markets."
He then, naturally, introduces us to Executive Order 12631, signed by Ronald Reagan on March 18, 1988, whose title is Working Group on Financial Markets, but popularly known as the Plunge Protection Team, whereby the government, powerful financial people and institutions work, like termites from beyond Hell, behind the scenes to prop up the stock market, or the bond market, or the housing market, or the banking market, or the antique furniture market, or the comic book market, and any other market that they think they need to prop up, to keep those markets from ever, ever, ever going down.
Sure enough, when you look at the data, every time there is what is clearly a cascade of selling as people suddenly realize that the Mogambo was right ("We´re freaking doomed!"), mysterious buyers suddenly enter the markets out of nowhere, brandishing dumpster-loads of money and buying, buying, buying everything in sight, and the market goes, miraculously, back up! The same thing happens in the bond market, to a lesser degree.
When you stop and think about this, reading it over and over again, you will see why I have cleverly used the word "dumpster" when describing a large container of money used in this manner. I would normally have used the term "colossal cesspool-load of money", because that is the kind of giggly, rude childishness so characteristic of The Mogambo. But the whole "cesspool" concept is, although highly descriptive and apropos, so yucky and it puts me off my feed, and being so close to lunch, that is the last thing I want.
He cautions us that "What is presented here is not ´proof´ in the scientific sense that the government is intervening in US markets through the efforts of the WGFM and implemented by private sector intermediaries (but) judging purely on the evidence, with no preconceived ideas of what can and cannot happen, there can be little doubt that intervention is taking place - unless, the markets have become totally irrational."
And this whole corruption and government fraud just gets worse and worse, as we read in the Oct 31, 2005 Financial Times that the "Treasury Moves To Alleviate Bond Shortage", whatever in the hell that is supposed to mean.
The article was written by Jennifer Hughes, and she starts off by saying "The US Treasury is this week expected to set out its latest thinking on the creation of a special securities lending facility to relieve exceptional market shortages of Treasury bonds." Hahahaha! The whole freaking world is literally awash in U.S. Treasury debt, and yet I am supposed to believe that there can be a shortage of it? Hahahaha! People always think that just because I look like and idiot, and act like an idiot, and sound like an idiot, that I am an idiot. And, as much as it embarrasses me to admit it, I am an idiot, but not so big an idiot that I could possibly believe, even drunk and half-conscious laying on a barroom floor, that there could be a shortage of US Government bonds! Hahahaha!
Perhaps things become clearer when she writes "The creation of such a backstop facility by the Treasury would mark a significant shift of the government´s role in the bond market. The Treasury would work towards a proposal that would, in effect, make it the market´s lender of last resort. Any plan would be aimed at easing strains on the repurchase, or repo, market - where securities are borrowed in exchange for cash - by issuing extra securities on some occasions when the original supply has become scarce."
In case you are not up to speed on the repo market, she helpfully adds, "In a repo agreement, one party lends Treasuries to another and agrees to take them back on a set date. In effect, it helps those selling bonds short to borrow the notes they need to do so; it also allows traders to raise short-term loans using bonds as collateral."
So I know what you are thinking. You are thinking that it is almost lunchtime, and you are not in the mood to hear about some dumb repo market where rich people and powerful institutions somehow screw me out of my money. But hold on there! The reason that this is coming up at all is that "The issue has arisen following a number of significant ´fails´ which have disrupted the market. A fail occurs when bonds are not delivered or returned as agreed."
AhhhhHHHHHhhhhh! Now it all becomes clear! Some of the slimy guys playing the repo market are scumbags who reneged on a bet, and now the players who are still in the game are getting more picky about what they are doing, and asking for higher interest rates to compensate themselves for the extra risk they are taking on, since so many of these repo deals are going bad and sticking somebody with losses! Now, the damned government, and in this case the damned crooked Treasury department and that arch jackass John Snow, is wanting to guarantee those bets! Someone gets stuck with a busted trade, and the damned Treasury Department will make up the losses!
Not only that, but as Gerald Lucas and George Goncalves at Bank of America point out, it would lead participants to "game" the market. "The Street - both dealers and buyside accounts - knows that, if rates are pushed to the Treasury´s threshold, more supply will hit the market and cheapen the term rates," they said.
I will not go into the idea that this cheapening of short rates puts the yield curve back in, um, steepness, so that players (and banks) can borrow short and lend long and make a big ol´ huge profit, which is politely known as the "carry trade", and which has the effect of (they hope) lowering long rates and, as I already said, make a big ol´ huge profit for themselves. How clever! And how embarrassing that we would let them get away with it!
- Disobeying doctor´s orders, I watched Alan "See No Evil" Greenspan as he testified before the Congressional joint economic committee, and of course I was straining mightily against the straps of the straightjacket I am now forced to wear, but I could still swear and spit at the television screen every time I disagreed something that this horrible little man said, which meant that by the time it was over the TV and the floor all around it was gooey and sticky, which only proves that I need more practice in spitting for accuracy (SFA).
The whole thing these days is "containing inflationary expectations." The point that we obviously HAVE price inflation is never discussed, and now the only thing that matters is that the Fed, somehow, control people´s expectations! Hahahaha! Where is this written in the charter of the Fed? Hahahaha! This stupid bit of nonsense is so preposterous that I cannot even fathom anybody but the morons on CNBC falling for it.
And fall for it they did. CNBC had three dimwits, including Steve Liesman (the resident "economist" at CNBC), Rick Santelli (cub reporter), and some talking-head from some bank (guest doofus) all talking excitedly about this "inflation expectations" thing, never once mentioning 1) that price inflation is a fact and rising inflation is a fact, 2) that the damnable Federal Reserve is still pumping out money and credit at record speeds (monetary inflation), which means that price inflation is going to get worse and worse and worse, or 3) the effect that this would have on The Mogambo, or how local television stations are already setting up cameras outside my house because THEY know that pretty soon I am going to go freaking berserk in a blaze of self-righteous outrage.
To show you what a lying nitwit this Greenspan is, he said, "Thus, although spending continued to rise rapidly last year, the deficit in the unified budget dropped to $319 billion, nearly $100 billion less than the figure for fiscal year 2004 and a much smaller figure than many had anticipated earlier in the year." Hahaha! Just in new federal debt alone, the deficit was over $500 billion! And yet some cockamamie "unified" budget, a concoction of lies, distortions and "off-budget" expenditures, shows a deficit of only $319 billion? Hahahaha! And this deceitful jackass is the chairman of the Federal Reserve? Hahaha! No wonder people are trying to kill us; we´re morons with nuclear weapons!
Greenspan also said "Inflation expectations have decreased, and accordingly, the inflation premiums embodied in long-term interest rates around the world have come down." Huh? Bond prices are falling, interest rates are rising, and yet this blowhard jerk thinks that inflation premiums have come down? Hahahaha! Then what in the hell went up that made rates go up? Hahahaha! What a moron!
He did, in an odd instance of candid honesty, say "Nevertheless, the suppression of cost growth and world inflation, at some point, will begin to abate and, with the completion of this level adjustment, gradually end." So he admits they are suppressing cost growth and world inflation? And he admits that the ruse must end? And then what happens? I´ll tell you what happens next: We die a horrible economic death!
But this "managing inflation expectations" is completely lost on Stuart Thomson, who is a fixed-income strategist at Charles Stanley Sutherlands in Scotland. Since we are dealing with a Scotchman, or Scotchperson, or whatever in the hell they call themselves these days, I was slugging single-malt Scotch and trying to peek up his kilt to see if he had underwear on, and thus finally put that mystery ("What does a Scot wear under his kilt?") to rest, when suddenly he said something that answered that timeless riddle; his underwear was obviously too tight . What he said was that he thinks that T-bonds are a good deal because Treasury 10-year yields ended last week at the highest yield since the Federal Reserve started raising interest rates in June 2004, and that this means that, for bonds, "it´s a good buying opportunity. The market has been seduced by the Fed´s aggressive commentary.´´ Hahaha! As the market-commentator Half-Monty explains, "What are rising interest rates, after all, but a measure of money leaving the bond market?"
Apparently Mr. Thomson doesn´t agree with me, Half-Monty or the Economist magazine, either, which, in the November 5 issue, said that the "price of ten-year American Treasury bonds fell," and that "Bonds elsewhere are also losing their appeal."
To see why, all one has to do, since we are already looking at the Economist magazine, is take a look at the money supply figures, and one is stunned to see that money is being created at double-digit rates all over the place. This monetary inflation means that future price inflation is already written in stone. Bonds always react negatively to rising price inflation (although they seem oblivious to monetary inflation. Weird!) . And a negative reaction to rising inflation is always bad news for the prices of bonds. Unless your underwear is too tight, it seems.
Someone in the front row raises his hand and asks "So how much more money is being created around the world?" Good question! As I dutifully start adding it up on my fingers and taking off my shoes to continue this exercise in addition, Richard Russell, of the Dow Theory Letters, either gets tired of waiting, or is aghast at the thought of me taking off my stinking shoes and exposing my stinking feet to his sensitive nose, and hurries to supply the answer: Australia 9.8%, Britain 11.2%, Canada 9.8%, Denmark 16.3%, Sweden 5.6%, Switzerland 6.3%., United States 6.6%, and the Euro area 8.5%!
And all of this money is owed to the banks, as only banks can create money out of thin air. So you may be asking yourself "Well, if the banks are owed all of this money, and people cannot pay their debts, what does this mean for the shares of banks and money centers?" I was ready to give you some vague, noncommittal answer to conceal the fact that I have no idea, when up comes Jim Willie CB, he of the Hat Trick Letter, who saves my bacon and says that the "battle of the titans is shaping up. The BKX bank index is in the process of breaking down. It represents some of the largest and most powerful money center banks in the United States. Just two weeks ago, a warning was given that the BKX was in danger of breaking below critical support at 95. That level was broken last week."
Well, I can see that he is stealing the show, but before I could get a word in, here comes Robert Prechter, of Elliott Wave fame, who says "Banks are leveraged so greatly that the slightest retrenchment in property prices will precipitate an unprecedented downward spiral of evictions and property sales, and then will come the bank failures."
But property prices are dependent on interest rates. So, can the Fed stop hiking rates? Hmmm! Another good question! If inflation is starting to surge everywhere, and now other countries are already raising their interest rates in response, then NOT simultaneously raising American interest rates would make the dollar tend to fall, would it not? And doesn´t money tend to exit a country where the value of the currency is falling? If so, then Greenspan must raise rates, too! Right?
And here comes Martin Weiss again, whose sneer insinuates that I am a big stupid idiot, because OF COURSE interest rates are going to rise! But instead of yelling at me and calling me ugly names for belaboring the obvious ("It´s the Mogambo Way!" I retort), instead he merely says, "We have a bulging budget deficit, a sinking trade balance, and wild, debt-driven speculation among banks, consumers, and even governments. We have some of the biggest bull markets of all time in commodities such as oil, gas, copper and many more. And, as you just saw this week, we also have the biggest monthly jump in prices in a quarter-century! All of these forces are pressuring interest rates higher. And all are coming together at the same time. But right now, interest rates are still not far from their 45-year lows!"
And these rising rates are starting to affect the housing bubble, and in that regard Steve Sjuggerud reports that "Bill Gross is confident that a major change in the U.S. economy is just around the corner." And he uses the words "almost inevitable." What´s "almost inevitable?" According to Bill Gross, it´s 1) a housing bust followed by 2) a weakening U.S. economy. I knew you were not going to believe me, so I am going to actually quote Mr. Gross directly when he says "Let me state categorically that [this] sequence is barely questionable, almost inevitable, 99% unavoidable, and in modern parlance - a ´slam-dunk.´ "
Why is it a "slam-dunk"? Well, Mr. Gross writes that "The Fed found that housing booms peak, on average, four-to- six quarters after that country´s Federal Reserve first starts to raise interest rates. Subsequently [after the peak], real house prices fall for about five years, on average, and their previous run-up is largely reversed." And how much did the house prices fall? About 15% over the five years after the peak. And that was BEFORE we had the enormous run-up in housing prices! So look for a much bigger fall than some piddly 15%!
- From Reuters we read that "U.S. consumer credit unexpectedly dipped by $59.4 million in September in its first monthly decline since November 2004." The guys who estimate these kinds of things expected a rise of $6 billion. What makes this so remarkable is that "September´s decline is only the fourth monthly decline since September 1998, according to Fed records." Whether or not this has anything to do with the new bankruptcy laws is anybody´s guess, and it is academic anyway, as the fact that less money was spent speaks for itself.
One reason for this may be explained by Stephanie Pomboy, at MacroMavens, who says ´´Food and energy outlays have accounted for 42% of growth in spending over the past year," and that "90% of the growth in consumer spending over the last quarter has come from food and energy. So it would seem that we should be fretting the fact that food and energy are now crowding out discretionary spending to a degree that has always been associated with recession.´´
Or perhaps this slowdown in the rise of consumer debt can be explained by Peter Schiff of Euro Pacific Capital, who explains one of the fundamentals of debt: "Current consumption financed by debt, ultimately leads to far less future consumption. Ironically, it is savings, the deliberate act of under-consumption, that maximize lifetime consumption, as savers, rather than struggling to repay debts, enjoy the extra consumption financed by compound interest." So if you borrow more, you consume less, but if you lend more, you consume more! So, since this is obviously true, maybe we are in the future, and now we have, as he explained, "far less future consumption" because we are, as we just found out, in the future! Weird, huh?
- The famous Dr. Kurt Richebächer says that he has discovered that "For many years, we have waited for Mr. Greenspan to ever mention the word ´credit´ in his speeches and congressional testimonies. Though hard to believe, in all his 18 years at the helm of the Federal Reserve, this word has never come over his lips."
For the record, the name Mogambo did not come over Greenspan´s lips, either, although you can bet your sweet butt that the name Alan Greenspan came over MY lips a lot, mostly with some rude adjectives attached, e.g. mutant moron jackass from Hell that is killing our money and killing our country by creating so much damned money and credit all the freaking time, and that is why I am so scared that I am holed up here under the couch cradling an AK-47 in my arms and sobbing gently. Okay, so I got a little carried away, and I´m sorry.
But you will soon know why I am acting that way, and if you want to know what happens when so much money and credit have been created and that leads to inflation, then take a look at the riots in France, where things cost so much compared to what the poor and unemployed get in state assistance that it keeps 40% of that sub-population below the poverty line! Exacerbated by a 20% unemployment rate among that population, of course. But it all comes down to, as it always does, the buying power of money, and how the lack of it causes hardship
And pay attention, too, because these kinds of rioting things are just getting started all over the place, and they will be here in America before you know it. And why do I say something so dramatic? As a kind of multi-sensory lesson, I hit the "Play" button on the video machine, and instantly the screen is filled with Dr. Richebächer saying "During the second quarter of 2005, after 11 rate hikes, total credit in the United States has surged by $2,937.8 billion at annual rate. This compares with a simultaneous annualized increase in nominal GDP by $716.8 billion as the broadest proxy for spending growth. According to these two figures, debt grew four times as fast as GDP. For perspective: During the three postwar decades until the early 1980s, this debt-to-GDP ratio was 1.4:1."
Debt has been growing at four times the growth in GDP? Which means that the Federal Reserve has created huge amounts of money, gigantic amounts of money, obscenely overwhelming amounts of money, four times as much money as the entire growth in entire country´s GDP? Wow! See? See why am I running to the Mogambo Bunker in fear and panic? I slam the door in your face before I could explain further, but Dr. Richebächer fills in the gaps; "Credit expansion in the United States has grossly run out of reasonable proportions to economic activity. Putting it bluntly: It is completely out of control."
And when that happens, pretty soon the people get out of control, too!
- Alert reader Robert A. M. writes "One item of interest is that real estate prices have been falling here in Lima." So you say to yourself, "Lima, Ohio? Who the hell cares about real estate in Lima, Ohio, unless you own property in Lima, or were planning to move there for reasons that normal people cannot even fathom, except maybe to escape the cops, or your hateful little family who thinks that some stupid judge can make me give money to them every freaking month like I am made out of money or something?" Well, I have no idea what it is like to be normal, either in OR out of Lima, Ohio, but it turns out he was talking about Lima, Peru.
So he was querying some of the locals, and "I asked my sis-in-law about whether you could buy gold freely here. She told me ´How the hell do I know? Nobody here has money to buy gold!´ So, even though things are very different here (worse, mainly), nobody here thinks about gold. I guess people think about survival first, then investments." Maybe that´s why stock markets don´t perform well in depressions!
So why in the hell is he in Peru in the first place? "Like I told my smarty-pants Wall Street type brother-in-law in Baltimore, I am so paranoid that I look for eggs in not only different baskets, but different countries, investments, and even different dimensions if possible." This may be the best unsolicited advice you ever got.
- To prove that not all central Bank governors are complete morons, Alan Bollard of the New Zealand central bank recently "took the extraordinary step of calling an urgent briefing on Friday to warn new home owners to start saving now and beware of huge mortgages."
Mr. Bollard said that in New Zealand, unlike America, they obey the laws of physics and economics, and that the economy can´t handle the continuing rise in house prices. Furthermore, he warned the government that a spending spree will just make things worse! Well said, dude!
Which brings up something my buddy Phil S. sent me, who is in the habit of periodically sending me things that he thinks will interest me or help me, mostly in the work-ethic vein (e.g. "Sober up, you stupid little bastard!") or the personal habits vein ("Take a bath, you stupid little bastard!") But he sent me one here recently that shows why we are screwed. The quote is from Milton Friedman, who opines that "The government solution to a problem is usually as bad as the problem." In fact, he was being nice. A government solution is almost ALWAYS as bad as the problem, something that is known, as we now know, as far away as New Zealand!
- To those who keep calling me up on the phone and either wanting me to pay back the money I owe (no), or explaining to me that if I would just stop being such a jerk that I would recognize that inflation cannot exist unless wages rise, I now respond in typical Mogambo fashion (TMF); "Screw you."
But I have to admit that it makes sense that if things cost more, but you don´t make more, then sales will slump, and producers will cut prices, and thus price inflation will not be sustained. Well, to these people I suggest that they put Martin Weiss, of the Money Report, on speed-dial, as he reports that "U.S. hourly wages have just registered their biggest year-over-year surge since July of 2003, and their biggest month-to-month surge since February of 2003! In other words, the cost of labor in America - the last missing ingredient to fuel a classic inflationary spiral - is now beginning to jump."
Talking about rising wages prompts Hans H. Kahn and Daniel Tessler, of the Au Capital Letter, to chime in with "The most significant fact in the economic world today,´ they said, "is that countless millions of workers have entered the cash economies of their developing countries in the past twenty years or so and now compete in world markets for the first time. Behind them are hundreds of millions more. They are competent, motivated, and increasingly well-trained, well-managed, and well-equipped. Their threat is that their rising incomes will come to represent virtually all the growth in world demand and that they likely will be able to meet virtually all of their own demand internally." So to those nay-sayers, including that arch-bonehead Wayne Angell, who is actually a former Fed big shot of some type, who say that inflation is not happening and cannot happen unless American wages are increasing, I now say, in TMF, "Screw you, boneheads! Wages ARE increasing like gangbusters all over the damn place, you stupid little twerps! And even if American wages fall, the wages of those foreign devils will keep rising in relation to a dollar that keeps falling in value! So if you think that inflation will not rise unless American wages rise, then step over here a little close to me so that I can slap your stupid faces for you until you smarten up! Morons!"
Messrs Kahn and Tessler are horrified at my outburst, which I have edited extensively to remove the obscenities and vague death threats, which always causes the FBI and the CIA and the Homeland Security people to heighten their surveillance of the Mogambo Fortress Of Impregnable Solitude (MFOIS). But I know that Kahn and Tessler will always have a warm spot in my mighty Mogambo heart (WSIMMMH) because they said "Alan Greenspan will be seen eventually to have been our most profligate and intellectually corrupt central banker ever."
Richard Russell says that he also has opinion of Alan Greenspan. "It makes me angry when I see supposedly intelligent analysts and economists stating that the Greenspan Fed has done ´a great job´ in containing inflation. What in God´s name are they talking about? In the 18 years that Greenspan has reigned on the Fed, the purchasing power of the dollar has been cut in half. That´s right -- in half."
- Ambrose Evans-Pritchard on the Telegraph.co.uk site wrote an interesting essay entitled "Soaring Price of Gold Predicts Bout of Carnage in Bond Markets" in which he reports that "A new study by H.C. Wainwright & Co looked at gold as a predictor of inflation. After reviewing data back to 1951, it found that gold is an uncannily accurate predictor of inflation one year ahead -- and a crystal ball for future interest rates and bond prices. If so, there may be carnage in the bond markets in 2006, since gold is now screaming inflation."
The study, released by the World Gold Council, found that gold is a much better forecaster of inflation than oil, which indicates what will happen to prices next month, but not next year. But they say "gold provides a much earlier warning. The optimal correlation (0.73) between changes in the price of gold and changes in 10-year T-bond yields is about 12 months." Using that interesting fact to advantage, you can, theoretically, time the bond market, as "gold is a powerful predictor of nominal interest rates, both long and short. It is free from many of the errors of measurement that bedevil the official indices of inflation."
This years-long telltale rise in gold is being desperately offset by central bank sales, and this same H. C. Wainwright & Co. reports that "Three European central banks may have played a role in the latest dip, selling 398m ounces in the last week of October, according to the ECB in Frankfurt." They are getting desperate, folk!
- I see by the clock on the wall that it is time for me to pound the table for silver, because it is the most under-priced asset on the freaking planet. And beyond that, the startling fundamentals are screaming "Buy silver! Buy silver!" And we also have Ron Rosen, of the Ron Rosen Precious Metals Timing Letter, figuring that "silver bottomed on January 26, 1976." Why is this significant? They explain: "The 30-year cycle in silver is repeating." So silver is at the bottom, and will rise for the next 15 years! Whee! See what I mean? What an investment!
- Since I am always talking about inflation or thinking about inflation or screaming about inflation or predicting the End Of The World As We Know It because of inflation, things will get worse, as we realize when George Ure of UrbanSurvival.com reports a "19 - 30% increase in farm inputs (seed, fertilizer, soil prep, sprays, front end labor)." This is a shocking number. A reader of his, a farmer, wrote to say "What we are getting for wheat presently (less than $3 a bushel) is the same price or a little lower than what we received back in 1975. Expenses have gone up 50% or more just in 2005."
- If you have celebrated the recent fall in gasoline prices, then I suggest that you take off that stupid-looking party hat, sober up, walk over to the telephone and buy oil and oil stocks, because James Howard Kunstler, in his Commentary on the Flux of Events, writes, "Since the hurricanes shredded our Gulf of Mexico oil and gas capacity, Europe has been sending us 2 million barrels of crude oil and ´refined product´ a day from its collective strategic petroleum reserve. Now, the important part of all this is that last week the International Energy Agency (IEA), Europe´s energy security watchdog, declared that it would now end the 2 million barrel a day shipments to the US."
He doesn´t even mention the part about how our government opened the taps of the Strategic Petroleum Reserve to flood the market with oil, or the fact that the government is going to have to, soon, buy more oil to replace what was released from the SPR.
And speaking of the IEA, they also calculate that global oil demand will increase by 1.75 million barrels per day in 2006, mostly due to increased demand from China and India. This is an increase in demand of approximately 2%, while supply is expected to increase by a smaller amount than that. It doesn´t take a PhD in economics to realize that demand rising faster than supply means higher prices. In fact, it takes no education at all, as all you have to do is stand within earshot of me, and you can hear me yelling "Buy oil and oil stocks!" And if you stand not only within earshot, but also downwind of me, you can smell me, too, but that doesn´t say anything about oil, but only why I am so lonely. And blue. Lonely and blue. And angry. Very, very angry all the freaking time, because our money and our economy are being destroyed all the freaking time.
In short, says Mr. Kunstler, "We can look forward to watching the price of gasoline, heating oil, diesel and aviation fuel kick back up through Thanksgiving and on into the heart of the Christmas shopping season. At the same time, homeowners will be getting their first substantial heating bills of the season."
Ugh.
***Mogambo sez: If I was ever bullish on gold and silver and oil, then those are the "good old days" when I was not hyperactive, because I am now so addled with anger that I am leaning out of the windows, throwing rocks at people to get their damned attention and yelling that everyone should be buying some of all of them, but they are ignoring me, and that makes me even MORE bullish, because I know that the longer they wait to get their nasty little butts in gear, the bigger will be the rush when they wake up out of whatever catatonic stupor they are in, and try to get in on the gold rush, and the silver rush, and the oil rush after the trains have left the station. Idiots!
Nov 8, 2005
Richard Daughty
email: scgcjs@gte.net
Daughty Archives
The Daily Reckoning |
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User ID: 40535
11/11/2005 8:02 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Messrs Kahn and Tessler are horrified at my outburst, which I have edited extensively to remove the obscenities and vague death threats, which always causes the FBI and the CIA and the Homeland Security people to heighten their surveillance of the Mogambo Fortress Of Impregnable Solitude (MFOIS). But I know that Kahn and Tessler will always have a warm spot in my mighty Mogambo heart (WSIMMMH) because they said "Alan Greenspan will be seen eventually to have been our most profligate and intellectually corrupt central banker ever."
Richard Russell says that he also has opinion of Alan Greenspan. "It makes me angry when I see supposedly intelligent analysts and economists stating that the Greenspan Fed has done ´a great job´ in containing inflation. What in God´s name are they talking about? In the 18 years that Greenspan has reigned on the Fed, the purchasing power of the dollar has been cut in half. That´s right -- in half."
- Ambrose Evans-Pritchard on the Telegraph.co.uk site wrote an interesting essay entitled "Soaring Price of Gold Predicts Bout of Carnage in Bond Markets" in which he reports that "A new study by H.C. Wainwright & Co looked at gold as a predictor of inflation. After reviewing data back to 1951, it found that gold is an uncannily accurate predictor of inflation one year ahead -- and a crystal ball for future interest rates and bond prices. If so, there may be carnage in the bond markets in 2006, since gold is now screaming inflation."
The study, released by the World Gold Council, found that gold is a much better forecaster of inflation than oil, which indicates what will happen to prices next month, but not next year. But they say "gold provides a much earlier warning. The optimal correlation (0.73) between changes in the price of gold and changes in 10-year T-bond yields is about 12 months." Using that interesting fact to advantage, you can, theoretically, time the bond market, as "gold is a powerful predictor of nominal interest rates, both long and short. It is free from many of the errors of measurement that bedevil the official indices of inflation."
This years-long telltale rise in gold is being desperately offset by central bank sales, and this same H. C. Wainwright & Co. reports that "Three European central banks may have played a role in the latest dip, selling 398m ounces in the last week of October, according to the ECB in Frankfurt." They are getting desperate, folk!
- I see by the clock on the wall that it is time for me to pound the table for silver, because it is the most under-priced asset on the freaking planet. And beyond that, the startling fundamentals are screaming "Buy silver! Buy silver!" And we also have Ron Rosen, of the Ron Rosen Precious Metals Timing Letter, figuring that "silver bottomed on January 26, 1976." Why is this significant? They explain: "The 30-year cycle in silver is repeating." So silver is at the bottom, and will rise for the next 15 years! Whee! See what I mean? What an investment!
- Since I am always talking about inflation or thinking about inflation or screaming about inflation or predicting the End Of The World As We Know It because of inflation, things will get worse, as we realize when George Ure of UrbanSurvival.com reports a "19 - 30% increase in farm inputs (seed, fertilizer, soil prep, sprays, front end labor)." This is a shocking number. A reader of his, a farmer, wrote to say "What we are getting for wheat presently (less than $3 a bushel) is the same price or a little lower than what we received back in 1975. Expenses have gone up 50% or more just in 2005."
- If you have celebrated the recent fall in gasoline prices, then I suggest that you take off that stupid-looking party hat, sober up, walk over to the telephone and buy oil and oil stocks, because James Howard Kunstler, in his Commentary on the Flux of Events, writes, "Since the hurricanes shredded our Gulf of Mexico oil and gas capacity, Europe has been sending us 2 million barrels of crude oil and ´refined product´ a day from its collective strategic petroleum reserve. Now, the important part of all this is that last week the International Energy Agency (IEA), Europe´s energy security watchdog, declared that it would now end the 2 million barrel a day shipments to the US."
He doesn´t even mention the part about how our government opened the taps of the Strategic Petroleum Reserve to flood the market with oil, or the fact that the government is going to have to, soon, buy more oil to replace what was released from the SPR.
And speaking of the IEA, they also calculate that global oil demand will increase by 1.75 million barrels per day in 2006, mostly due to increased demand from China and India. This is an increase in demand of approximately 2%, while supply is expected to increase by a smaller amount than that. It doesn´t take a PhD in economics to realize that demand rising faster than supply means higher prices. In fact, it takes no education at all, as all you have to do is stand within earshot of me, and you can hear me yelling "Buy oil and oil stocks!" And if you stand not only within earshot, but also downwind of me, you can smell me, too, but that doesn´t say anything about oil, but only why I am so lonely. And blue. Lonely and blue. And angry. Very, very angry all the freaking time, because our money and our economy are being destroyed all the freaking time.
In short, says Mr. Kunstler, "We can look forward to watching the price of gasoline, heating oil, diesel and aviation fuel kick back up through Thanksgiving and on into the heart of the Christmas shopping season. At the same time, homeowners will be getting their first substantial heating bills of the season."
Ugh.
***Mogambo sez: If I was ever bullish on gold and silver and oil, then those are the "good old days" when I was not hyperactive, because I am now so addled with anger that I am leaning out of the windows, throwing rocks at people to get their damned attention and yelling that everyone should be buying some of all of them, but they are ignoring me, and that makes me even MORE bullish, because I know that the longer they wait to get their nasty little butts in gear, the bigger will be the rush when they wake up out of whatever catatonic stupor they are in, and try to get in on the gold rush, and the silver rush, and the oil rush after the trains have left the station. Idiots!
Nov 8, 2005
Richard Daughty
email: scgcjs@gte.net
Daughty Archives
The Daily Reckoning |
| a mogambo sectarian
User ID: 369
11/11/2005 8:09 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
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User ID: 40535
11/11/2005 8:32 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
The Coming Disaster in the Derivatives Market
by Michael J. Panzner
Author of Stock Market Jungle
November 9, 2005
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear....[They] are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
-- Warren Buffett, Chairman and Chief Executive, from his Letter to Shareholders, 2002 Berkshire Hathaway annual report
For years, experts had warned about the near certainty of disaster. With its unique geography and hurricane-track locale, New Orleans was a city at risk, and it was only a matter of when, not if, a powerful hurricane would eventually roar ashore and overwhelm the Big Easy.
To be sure, steps were taken beforehand to try and minimize suffering and disruption in the wake of such a catastrophe. Levees were built up and secured. Arrangements were made to cope with the mass evacuation of hundreds of thousands. Federal, state and local emergency preparedness officials drew up myriad plans to mobilize people and supplies.
Nonetheless, when the event many feared finally came to pass in late August 2005, much of those efforts seemed for naught. Instead of organization there was chaos. Instead of action, incompetence. Instead of lives saved, the focus was on what was needlessly lost.
For all the awareness, advance planning, and available resources, the reality was that there was little to show for it when the terrible moment of truth arrived. As a result, it will take a long time for the people of that Gulf Coast region, and for the country as a whole, to fully recover from the disaster known as Hurricane Katrina.
Still, if there was one silver lining to the tragedy, it was the lesson that, as a nation, we needed to be better prepared. Ready, in other words, for the inevitable worst. Indeed, in a September 19, 2005, cover story, “The Next Big One,” Business Week noted as much, describing a litany of potential disasters, from earthquakes to pandemics to “dirty-bomb” terrorist attacks, lurking on the horizon.
Curiously though, one threat, a brewing economic hurricane, was not mentioned. That was odd given the magazine’s audience and purview. Nonetheless, it was not a complete surprise, because the disaster that already seems to be unfolding is one few people understand or are even aware of, let alone are prepared for. Once full-blown, however, it is likely to wreak havoc not only in the U.S., but around the world.
No doubt this sounds alarmist, but there are experts who would suggest otherwise. Indeed, such estimable giants of the financial world as Warren Buffett, legendary investor and chairman of Berkshire Hathaway, and Bill Gross, founder and principal of Pimco, one of the world’s largest fixed-income managers, have raised serious concerns about this growing menace.
In truth, while no one can say for certain when the day of reckoning will arrive, it seems a good bet that if some of those who are in a position to know are worried about the derivatives market and the associated systemic risks, you should be, too.
One of the difficulties people have with understanding this particular disaster-in-the making is its complexity and seeming irrelevance to their day-to-day lives. Unlike an earthquake or a car bomb, a derivatives-inspired financial meltdown won’t to lead to leveled buildings or bloodshed, at least initially. Yet, the toxic fallout will likely be as painful, long-lasting, and difficult to overcome as any of the more widely discussed scenarios.
What makes the coming debacle even more difficult to comprehend is that it stems from a long chain of seemingly benign interactions and financial relationships. Indeed, despite the fact that the modern derivatives market has flourished because of big money, complex technology, and highly-paid talent, the culprit when it all goes wrong is likely to be simple: human emotions -- fear and greed -- run amok.
For most people, the term “derivative” has little meaning. In many cases, the mere mention of the word is enough to cause eyes to glaze over. That is partly because these financial instruments are somewhat ethereal. They are, in other words, largely created out of thin air. Practically speaking, they have no value in and of themselves.
They are also hard to understand because, like many intangible concepts that occasionally involve a great deal of theory and calculation, academics have done wonders transforming the complex into the incomprehensible. As is often the case, though, if you break them down into smaller, more digestible parts, they are easier to grasp. That is also true with respect to the derivatives market.
Look closely at how the world works, how people function and otherwise go about their daily business. It is not hard to see that our modern existence is, and is increasingly, about interdependence. We survive because of our ties to each other, whether spiritual, emotional, organizational, geographical, or genetic. We also rely on an extensive network of financial relationships with people and institutions we know, as well as many we don’t.
Moreover, all of us operate within a framework of uncertainty. Life is about risks -- taking them, mostly -- and acting on imperfect information. Some may claim to see the future and perhaps one day that may be proved true. For now, most of us can only guess what will happen tomorrow, or next week, or in a year’s time.
Because we can never know for sure, we make calculations and compromises. Like deciding whether it is better to have a bird in the hand or two in the bush.
This usually involves agreements of one kind or another. Contracts, obligations, promises, and responsibilities -- whether written or oral, implicit or explicit, they are a means by which we work together with others. To secure what we want or need, now or in the future.
And, hopefully, to protect ourselves in ways that suit us best. Buying insurance, for example, is one way we try to alleviate some of the harmful effects of life’s inevitable misfortunes.
Derivatives are, generally speaking, contractual agreements that offer a means for individuals or businesses to restructure or rearrange the risks they may face in future. In many respects, they function like insurance, though with some critical differences, as will be noted later on.
Although they are usually in written form, like most financial commitments, that is not necessarily a prerequisite. Unless, of course, either party wants to be able to trade, exchange, or sell these contracts. In that case, they usually take shape as securities.
In their simplest form, derivatives provide for certain rights or obligations between two parties, or “counterparties.” Most important, the way in which these instruments are evaluated almost always takes into account that they are linked to some other security, commodity, event, or any of a wide variety of agreed-upon conditions. In essence, they derive their value -- hence, “derivative” -- from something else.
In some ways, a marriage proposal has elements in common with a derivative. In that case, a couple decides in advance to come together on a certain day and exchange vows. They promise to live together as man and wife and assume a host of obligations and responsibilities. Essentially, they agree now to make a deal later.
Similarly, the purchase of an airplane ticket, or a ticket for a rock concert, could also be viewed as a crude form of a derivative. Money is handed over today in exchange for enabling a service to take place at some future date.
The most appropriate examples, of course, are those securities that have evolved to form the cornerstones of the global derivatives market: futures, forwards, options and swaps. In simple terms, they are contracts where two counterparties agree to undertake, or to possibly undertake, a transaction or transactions at some point in the future, based on conditions established at the outset.
In practical terms, futures and forwards are alike: both create obligations between two parties. The main difference is that the former tend to have standardized terms and trade on recognized exchanges. Typically, there is a designated middleman, or “clearinghouse,” which acts as the official counterparty to every transaction. That makes it easier to transfer -- by buying and selling -- commitments between the various market participants.
Probably the most widely known derivatives of this type are the futures contracts that trade at places like the Chicago Board of Trade. The CBOT was originally founded in 1848 as a centralized marketplace to help growers and others protect against the risks and often wild price fluctuations inherent to the agriculture industry.
The classic example of why these contacts exist describes a farmer wishing to lock-in a price for his wheat before the actual harvest. To do this, he might strike a deal with a baker, also keen to fix his costs. Both sides could then take comfort in knowing that no matter what happened to prices in the interim, they would be protected and wouldn’t have to worry. Then, on the agreed date, they would make the exchange: crops for cash.
In this arrangement, both sides end up hedging their exposure to the vagaries of the marketplace -- which could be affected by unexpectedly high or low yields, unusual weather, plant diseases, etc. They gain security today at the expense of uncertainty tomorrow. In theory, they have shed at least some of the risks they do not want in exchange for those they do. Net-net, a positive.
The real world, of course, is not so simple, and though the farmer might want to reduce his exposure today, the baker may not have reached that same conclusion yet. What happens then, and what markets and exchanges facilitate, is that other parties -- speculators -- jump into the fray. Often, they are individuals who don’t have any inherent interest in agriculture or the products being traded, other than how they can profit from fluctuations in their prices.
So, in this case, the farmer might end up fixing a price for his wheat in, perhaps, three months time, by selling a futures contract on the CBOT, typically through a broker. By doing so, he commits to deliver a set amount of grain, of sufficient quality, to a location determined by the exchange. He receives today’s price in return.
In contrast, the buyer of the futures contract, who could be a trader on the exchange floor, makes a different decision. He operates on the premise that, at least temporarily, the farmer is wrong. If the speculator turns out to have bet correctly, he can sell the obligation for a profit later on. Maybe even to the baker, or to another trader, though it doesn’t really matter who.
Typically, both sides put up a good faith deposit, or “margin,” which represents a small fraction of the face, or “notional” value of the contract. In theory, this is meant to serve as protection against default. However, it also allows both sides to assume a large commitment without having the full value of the contract immediately on hand.
The ebb-and-flow of prices tends to be driven by the interplay between the two groups: those who have a direct involvement in what happens -- the hedgers -- and those who are merely betting on which way prices are headed -- the speculators. As long as the two camps remain somewhat in balance, it serves as a useful mechanism for divvying up risk in an efficient manner.
However, once out of whack, as appears to be the case in the derivatives market, the potential for instability expands dramatically. History suggests the value and relevance of a market ultimately depends on those who actually need it, not those who only seek to profit from it.
Another other popular form of derivative is an option. Options are different from futures and forwards in that one party has a right, rather than a firm commitment, to initiate a transaction at some future date based on the established terms. Typically, the option is granted by the “writer,” the one who is obligated if called upon, in exchange for a payment up front.
In a sense, these types of contracts resemble traditional insurance products. The writer of the option is like Allstate, Prudential, GEICO or any other company issuing a life or homeowner’s policy, where the holder ends up receiving a predetermined amount if an event takes place (e.g., a fire ravages the property) in exchange for paying a premium or premiums beforehand.
But the terms can vary widely. So can the triggering event and the action that may be taken. A simple example of an option might involve the owner of a parcel of land offering a prospective buyer the right to acquire the property at a fixed price in six months time, for a relatively small payment at the time the deal is struck. This is usually referred to as a “call” option.
In this case, the owner, who is writing the option, is acknowledging that he is willing to sell the property and accept the risk that the market value might rise above the contract or “strike” price and that he can do nothing about it. He also faces the prospect that he may still own the property after the agreement ends. In other words, he might find himself in the same position as when he started, though with some extra income for his troubles.
The option buyer, on the other hand, is essentially locking-in the cost of acquiring the property by making the initial premium payment, thereby reducing the risk resulting from market gyrations while the agreement is in effect. There are many reasons why he might want to make that decision. Perhaps he is hopeful, but unsure, whether he will be able to line up financing to make the purchase.
Or maybe he believes market prices are headed higher, and wishes to have temporary control of the property with a relatively small outlay. In this way, options represent a form of leverage, similar in some respects to the margin on a futures contract, where the holder can potentially receive the upside benefit without having to pay the full cost up front.
Whatever the reason, it is up to the option holder whether he goes ahead and “exercises” the option. Once the premium payment is made, he is generally under no further obligation other than to come up with the money necessary to cover the specified contract price if he wishes to acquire full ownership of the property.
Instead of the underlying asset changing hands, some agreements allow for a payment of the difference between the strike price and the market value, depending on whether it is higher or lower and what rights the holder has. This “cash settlement” feature is also seen in many modern derivatives contracts, especially those involving indexes or “events.” Stock index futures are a well known example.
Swaps are another key feature of the derivatives market. In essence, they involve contracts where two sides agree to exchange one or more payments during an established period based on conditions determined at the outset. Widely used in the credit and currency markets, they enable counterparties to transform undesirable risks or comparative advantages in one market into obligations that, theoretically at least, better suit the needs of both.
One example of this type of agreement is an interest-rate swap. That is where, for instance, a company with an existing loan whose rate fluctuates every six months might arrange with, say, a bank, to eliminate that uncertainty. What happens next is that the financial institution, for diversification or other purpose, assumes responsibility for the varying, or floating-rate, payments, while the borrower agrees to cover the amounts tied to a predetermined or fixed rate of interest.
These four categories of derivatives are by no means the end of it. Indeed, it is safe to say that there are myriad variations, a fact which has likely laid the groundwork for the coming unraveling. Regardless, it is worth noting that instruments such as futures, forwards, options and swaps have played an important role in commerce and finance. In fact, individuals and businesses have used a wide variety of risk-transfer methods for hundreds, perhaps thousands, of years, and no doubt society as a whole has benefited.
Without having some way of gauging or laying off their exposure, people might find it impossible, for example, to provide for their loved ones upon death or to protect their homes and businesses from calamities such as fire. It would also be very difficult for companies to evaluate or make sizeable investments in large-scale or long-term ventures. Derivatives can give decision-makers the flexibility to decide which risks to keep -- and which to try and pass on or trade to others.
In this respect, they have proved exceptionally useful. Arguably, they have become integral to the financial lives of almost everyone, though most people are probably unaware of this fact. Apart from their straightforward use by investors looking to reduce risk or profit from potential trading opportunities, various forms of synthetically-created securities have enabled millions to enhance their economic wellbeing and tap into the American dream.
From educating our children to buying a place to live, from the way we manage our credit and finances, from greasing the wheels of global trade to overcoming the dizzying array of risks and uncertainties faced by businesses large and small, derivatives have played a major role.
One way in particular these instruments have helped is by facilitating a process known as “securitization,” whereby loans, financial instruments, and other assets are bundled together and sold to investors as a package. This has created tremendous economy-of-scale benefits. It has allowed individuals seeking financing say, for the purchase of a home, to tap into a plethora of funding sources in the U.S. and around the world, helping to lower their interest costs. It has also enabled people to obtain products and services personalized to their needs and risk requirements.
Many have recognized the value of synthetically-created financial instruments. Alan Greenspan, long-time Chairman of the Federal Reserve, noted in 2003 that "The benefits…have far exceeded their costs." He also said that the “growing array of derivatives and the related application of more-sophisticated methods for measuring and managing risks had been key factors underlying the remarkable resilience of the banking system.”
Nonetheless, there is a dark side. It is impossible, for instance, to discuss derivatives without noting that these instruments, indirectly or by virtue of their structure (e.g., options), almost invariably employ some element of leverage (i.e., “other people’s money”). Indeed, that has likely been a spur to their increased usage among amateur and professional investors (and speculators) alike, especially in recent years.
With difficult conditions in the wake of the post-1990s stock market bubble, historically low interest rates, and intense competition, money managers have increasingly sought to garner more bang for their buck by using high-octane financial instruments such as futures, options and swaps.
This includes hedge funds, a group of operators that has come virtually out of nowhere in the mid-1990s to aggressively oversee more than $1 trillion in capital, often geared up with borrowed funds. With inbuilt incentives to place riskier bets than traditional old-line managers, this crowd has discovered that derivatives have considerable appeal. Rather than shedding risk, they have been adding to it. Indeed, many have taken to these instruments like ducks to water, though not always with eyes wide open.
Aside from that, because modern financial engineering involving synthetically-created securities has, in many respects, made it easy for even the least creditworthy individuals to borrow money for all sorts of purposes, derivatives have undoubtedly contributed to the breathtaking, but ultimately very risky, expansion of credit that has occurred during the past few decades.
Taken together, the combination of increased leverage and heightened risk-taking has served to stir up a potentially volatile miasma around derivatives, especially the newer, more complex varieties. That makes them exceptionally dangerous if not handled properly.
Conceptually, it is not hard to grasp the basic economics of a garden-variety derivative such as a futures contract. If the market price of wheat goes up between the time a deal is struck and the expiration of the agreement, the buyer wins and the seller loses. That is what is known as a zero-sum game. Nonetheless, whatever a farmer, to use the earlier example, might give up as a result of hedging his output is offset by the reduced uncertainty.
But it is an altogether different story when it comes to analyzing options, or a portfolio of derivatives, especially those with lots of complicated bells and whistles. In most cases, valuation and risk assessment depend on mathematical formulas and computerized models, with many inputs derived from estimates and past data. That is all well and good if the tools are perfect and the history is complete.
Unfortunately, there is little evidence that this is the case. In truth, many experts believe the derivatives market rests on a number of very precarious assumptions that have yet to be tested.
And even then, the history of the derivatives market is replete with high-profile disasters. These include the 1994 bankruptcy of Orange County, one of California’s richest, due to naïve investments in exotic derivatives; the 1995 failure of the 200-year old Barings Bank as a result of unauthorized futures and options trading by a rogue employee; the 1998 collapse of hedge fund Long Term Capital Management on the heels of ultra-leveraged bets gone wrong; and, the ongoing implosion at Fannie Mae, the nation’s largest mortgage lender, because of derivative, accounting and other irregularities.
Up until now, none of these derivative-related hurricanes has breached the high-water levees of the U.S. and global financial systems. But as was the case with earlier, less destructive storms in the American Gulf Coast region, rather than decreasing the odds of a disaster, the relative calm of the past seemed to have inspired a false sense of security.
Indeed, the fact that New Orleans had long been spared despite the inevitable and persistent threat made for considerable complacency. As did the availability of government-sponsored flood insurance and a belief that authorities would step in and save the day if need be. Instead of getting prepared for the worst, people did virtually the opposite: they boosted development in flood-prone areas without thinking twice about it.
Likewise, many view the lack of widespread economic upheaval following earlier derivative blow-ups as a reason to be unconcerned about the current state of the financial system. The seemingly unprecedented intervention of the Federal Reserve Bank of New York in the wake of the LTCM collapse, as well as central bank “accommodation” after the 1987 stock market crash, have also inspired confidence that authorities will not let things get too far out of hand if and when disaster strikes.
Unfortunately, this sense of moral hazard has almost certainly increased the risk and destructive potential of a catastrophic meltdown in the derivatives market.
The reality is, when people erect a raft of new buildings in vulnerable locales, it generally doesn’t increase the odds that a hurricane will strike. That is not the case with respect to risky behavior in the synthetic securities market, however.
When big operators take on a lot more risk than they otherwise might -- they drive faster, perhaps, because they know their car has anti-lock brakes -- it tends to raise the danger stakes for the system as a whole. Millions of dollars of losses can break the bank at a few unlucky firms. Billion -- or even trillion -- dollar failures can bring down the whole house of cards, especially given the dense network of dependent relationships that exists in the global financial arena. As well as the key role that finance-related activities now play in today’s service-oriented economy.
In addition, while an earthquake in a major city would likely cause severe damage and untold loss of lives, it would not necessarily lead to aftershocks 3,000 miles away. In the modern world, however, the “counterparty risk” factor seems to be zooming off the charts. What that means is that a potentially unstoppable domino effect, a “cascade of ruin,” could be set in motion if a global bank or “bulge bracket” Wall Street firm ends up with the derivative short straw.
That potential ripple effect has as much to do with the concentration of exposure at large players such as banks and Wall Street derivatives powerhouses as it has to do with the abundance of overlapping ties to specific developments or changes in asset prices. Many credit-related derivatives, for example, either shadow or are directly linked to indexes that include the debt of certain large borrowers. The fact that the scale of the exposure is obscured by the market’s lack of transparency adds to the potential for a sudden and unexpectedly sharp turn for the worse.
Another point the disaster in New Orleans made clear was that having plans in place to deal with a long-predicted event doesn’t necessarily mean success is assured. One of the biggest holes in the emergency response effort following Hurricane Katrina was the chaos that resulted from poor communications and overlapping jurisdictional responsibilities. Essentially, one hand -- of government -- did not know what the other was doing, and no one was fully in charge, at least in the beginning.
In the modern global financial system, where many participants are either unregulated or are monitored by a patchwork of country or sector-specific regulatory overseers, chances are that a derivatives-related catastrophe will see a similar lack of coordination that will produce a far more devastating outcome than if it was a purely domestic affair.
It is one thing for a central banker to summon the heads of various financial firms into a room to sort out the mess at hedge fund LTCM, as the New York Federal Reserve chief reportedly did in 1998. Despite the fact that the Fed had limited statutory authority in the matter, it is not hard to see why none of those who were asked to attend turned down the “invitation.”
However, if a derivatives time-bomb is set off by the failure of a large London-based hedge fund, will a banker in the Cayman Islands, an investor in Japan, an insurer in Germany, and a regulator in France feel similarly inclined to respond, or even to take the lead? That is assuming, of course, that those affected even understand what is going on or why it may be relevant to their own interests. Overall, there appears to be little, if any strategy in place for dealing with cross-border financial upheaval.
What will likely make matters worse is the fact that the derivatives market has become mind-numbingly complex and remains extremely opaque. Few individuals, let alone regulators, have a solid handle on the aggregate picture, especially globally. And while there is a great deal of activity that is transparent, such as the trading that takes place on recognized venues like the CBOT or Chicago Mercantile Exchange, the vast majority of deals are private, “over-the-counter” transactions that go unreported.
Adding further fuel to the fire has been the liberalization and globalization of financial markets. Because of competitive pressures and the ease with which capital flows between firms, markets and countries, activities that used to be limited to large firms in highly regulated sectors (e.g., banks) are being taken on board by all and sundry. Often in locations where standards are low or oversight is lax.
Hedge funds, insurers, corporate treasuries, the finance arms of industrial companies, and other non-traditional players are increasingly involved in the derivatives market. For the most part, they have less stringent capital requirements and less of a history managing complicated financial risks and broad credit exposure through several cycles of economic activity than banks do.
In sum, there are more inexperienced players taking part, more firms with diverse -- and occasionally inadequate -- capabilities linked to each other, and a maze of overlapping and often competing jurisdictions. This suggests that a simple solution, or even a consensus, will be almost impossible to find if and when the worst-case scenario does come to pass.
Scarier still, it is likely the disease that typically goes hand-in-hand with disasters of the money kind will be transmitted around the world at light speed because of modern technology and advanced communications networks. The far-reaching epidemic that people don’t usually like to discuss in mixed company, let alone acknowledge, when the worst unexpectedly happens: panic and contagion. Throughout history, they have been a recurring feature of convulsing markets and dramatic financial crises.
When people are calm and otherwise thinking clearly, they tend, more often than not, to act rationally. However, when problems arise and even the most sophisticated players become terrified of losing their jobs or their shirts, or they are overwhelmed by the sheer scale of potential risks they are confronted with, they frequently experience a primal fight-or-flight response. Or even temporary paralysis -- like the proverbial deer in the headlights.
During many of history’s broad-scale financial upheavals, such as the period surrounding the 1987 stock market crash and the collapse of Long Term Capital Management, markets became momentarily transformed. Traders stopped buying and selling and even answering phones. Money managers froze or reacted in knee-jerk fashion. Bankers called in loans. And regulators, for the most part, stood back and watched. All the while, many of those who were most heavily exposed were forced to liquidate positions at fire-sale prices.
At those points, fear had taken over -- the kind that says “run” when someone shouts “fire” in a crowded theater.
And, perhaps, the kind that had people shooting and looting, or wandering aimlessly, or cowering in stifling attics above flooded rooms, when essential services failed and the lights went out in New Orleans in the aftermath of Hurricane Katrina.
Once troops and emergency responders moved in, and people in the surrounding regions and elsewhere rallied round, rationality and order returned to that Gulf Coast city. And in the weeks that followed, many of those affected did figure out at least some way to start picking up the pieces and start living again.
We weathered earlier storms in our financial system, too, though no doubt the cost has often been considerable. The risk this time, however, is that conditions are, and will be, more complicated and dangerous than before. While New Orleans was a relatively self-contained locale, whose citizens and government officials could potentially reach outside the area for assistance, a firestorm set in motion by a derivatives debacle is unlikely to leave many parts of the global financial system unscathed.
It doesn’t help that there are unsustainable imbalances in the global economy, either. America faces record trade and budget deficits. Many economically advanced countries around the world have aging populations and underfunded pension systems. Real estate seems to have taken the bubble baton from the stock market, though there are signs that the top is already in. And the world is awash in debt and a vast sea of open-ended obligations and contingent liabilities.
Moreover, if history is any guide, the period of monetary tightening that began in June 2004 will likely blow the cover off at least some shaky operations that had been kept alive by cheap money in the wake of the post-1990s new-era collapse. Odds are, in fact, that one of those will be the match that lights the fuse that ultimately triggers widespread financial turmoil.
Already there are rumbling in the financial world, akin to the small tremors that shake the ground ahead of a massive earthquake. In the spring of 2005, several large hedge funds reportedly lost billions of dollars on complicated credit bets gone wrong. One firm even admitted that it had made a substantial “miscalculation” -- which they only realized, of course, after the fact. Given the increasingly complex nature of the derivatives market, that refrain is likely to be heard over and over again in future.
Certainly, the U.S. and global economies have been remarkably resilient, especially in recent years, and it may be a mistake to bet on the downside. What’s more, there are those who would argue that the financial markets have attracted the best and the brightest, and a gut-wrenching, blood-letting debacle is in no one’s interest. Unfortunately, the odds seem stacked against a happy ending, and the cyclical nature of financial crises suggests it is definitely the wrong time to be thinking like a Pollyanna.
Unfortunately, the reality is, if it all goes horribly wrong, it will not only be Wall Street that suffers. Main Street will, too. In the worst case, brokerage firms and banks will shut their doors. Markets will plunge and many investors will lose everything, Interest rates will shoot sharply higher, taxes will rise, and parts of the economy will grind to a halt, at least temporarily. Those seeking a mortgage, a college education, a job, or even day-to-day sustenance may find themselves left wanting.
At a time when many have abandoned prudence in search of profits, and where those who are knowledgeable about the disaster-to-come in the derivatives market are seeking to protect themselves, it is the timeless wisdom that remains true: forewarned is forearmed.
© 2005 Michael J. Panzner
Michael Panzner is author of The New Laws of the Stock Market Jungle: An Insider’s Guide to Successful Investing in a Changing World and a 20-year veteran of the stock, bond and currency markets. He is currently at work on a book about global financial risks.
Michael J. Panzner
P.O. Box 115
Manhasset, NY 11030 |
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User ID: 40535
11/11/2005 8:33 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Moreover, if history is any guide, the period of monetary tightening that began in June 2004 will likely blow the cover off at least some shaky operations that had been kept alive by cheap money in the wake of the post-1990s new-era collapse. Odds are, in fact, that one of those will be the match that lights the fuse that ultimately triggers widespread financial turmoil.
Already there are rumbling in the financial world, akin to the small tremors that shake the ground ahead of a massive earthquake. In the spring of 2005, several large hedge funds reportedly lost billions of dollars on complicated credit bets gone wrong. One firm even admitted that it had made a substantial “miscalculation” -- which they only realized, of course, after the fact. Given the increasingly complex nature of the derivatives market, that refrain is likely to be heard over and over again in future.
Certainly, the U.S. and global economies have been remarkably resilient, especially in recent years, and it may be a mistake to bet on the downside. What’s more, there are those who would argue that the financial markets have attracted the best and the brightest, and a gut-wrenching, blood-letting debacle is in no one’s interest. Unfortunately, the odds seem stacked against a happy ending, and the cyclical nature of financial crises suggests it is definitely the wrong time to be thinking like a Pollyanna.
Unfortunately, the reality is, if it all goes horribly wrong, it will not only be Wall Street that suffers. Main Street will, too. In the worst case, brokerage firms and banks will shut their doors. Markets will plunge and many investors will lose everything, Interest rates will shoot sharply higher, taxes will rise, and parts of the economy will grind to a halt, at least temporarily. Those seeking a mortgage, a college education, a job, or even day-to-day sustenance may find themselves left wanting.
At a time when many have abandoned prudence in search of profits, and where those who are knowledgeable about the disaster-to-come in the derivatives market are seeking to protect themselves, it is the timeless wisdom that remains true: forewarned is forearmed.
© 2005 Michael J. Panzner
Michael Panzner is author of The New Laws of the Stock Market Jungle: An Insider’s Guide to Successful Investing in a Changing World and a 20-year veteran of the stock, bond and currency markets. He is currently at work on a book about global financial risks.
Michael J. Panzner
P.O. Box 115
Manhasset, NY 11030 |
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User ID: 41103
11/13/2005 6:27 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Disasters Do Happen
Christopher Laird
Often, when I write about the possibilities of a financial collapse, a derivatives implosion, a depression, etc, I hear from some these kinds of objections:
"Hey! I prepared for Y2k. Didn´t happen. I´m not getting all into that disaster mentality crap. The last time I did that, it didn´t happen, and my family and coworkers all laughed at me."
or
"all you gloom and doom types!, you stir up people, and want those things to happen. People like you have been talking about disasters all the time. You are negative.... perma-bears, etc etc."
You know what my reply is? SO WHAT! Are you going to tell me that disasters never happen? That being prepared is not wise? All you are is an optimist that just believes everything will work out all right. You are basically reneging on any action on YOUR PART to prepare, its just easier for you that way. But that does nothing to prove that a real disaster is not coming your way.
If one did come your way, you would just be blindsided.
OK, let´s get a little more specific. I will write about parallels to 1930.... That depression was just an economic catastrophe. People will say that was a long time ago. I say, hey its only 70 or so years ago! Depressions are periodic, a proven economic fact that is always lurking when there are excesses. Just because YOU have not seen one yet, doesn´t mean they are not lurking just around the corner.
How about World War 2? In that war, which really was fought all over the globe, it is said there were at least 100 to 200 million people killed. It raged in China, the Far East, Japan, the Middle East, the Mediterranean, all over Europe, all over Russia. In England. On the vast Pacific..........in the Atlantic. Just for example, there were 20 million Russian deaths alone! Just the German U-boat fleet suffered 30,000 deaths out of 40,000 crew...... not to mention the millions of German battlefield casualties. The US lost hundreds of thousands of troops on the battlefields of WW2. On Iwo Jima Island alone, the US lost 6,825 fighting men!
It was only 60 years ago.....
The present day wars so far are just nothing compared to WW2 or WW1... two gigantic wars in one century...
I suppose that we people who believe in disasters are just imagining all these things??????
No, the real problem here is complacency, and not people like me. It is the people who participate and allow the excesses, and are complacent until the final results of their excesses come home to bite them.....
What disasters are lurking right now, ones that will directly affect Americans?
A dollar collapse.
A war with China
Terrorism
Biological disasters such as bird flu.
Economic Depression....
Financial collapse from derivatives.
Energy crisis.
These are not all of them to say the least.
I often hear people say, "the US has ALWAYS overcome, we always work things out" I hate it when I hear that because those are the famous last words every time a civilization collapses either economically or in a war. Or a plague. Now, of course I am not going to say this all MUST come. I am saying these are lurking dangers. Big difference.
Why do I write about these things? You may know that I am a mathematician, a computer database engineer...I have also studied a lot of History at UCLA before I switched to a pure mathematics major. I could have easily been a double major in history and math. I was an Army artillery Lieutenant. Why do I do what I do? Because I read about WW2 and the great depression, and I know what can happen. I have used my background to study these kinds of things, I am now somewhat of an expert on how they occur. Someone has to do it.
It so happens that I have a gift for bringing together complex financial topics so that people can get an understanding of these things. I like this work. I am good at it. Other writers use the material that I bring forth for their own constituents. Which I think is great.
One reader of mine said
"Laird is the Steven King of the dark financial future."
Smile.
But on a more serious note, I am eloquent in describing the economic dangers that can most definitely affect you, your retirement, your kids future and so on. I take this seriously.
And again, I hate it when I hear the eternal optimist type who just waves his hand and says "we in the US always win in the end". That is just hubris.
This coming week´s edition of the PrudentSquirrel news letter is my best yet, and has lots of provocative material in it. Here is a list of this weeks topics:
Real Gold Price, French immigrant riots help US repatriation of funds, Efficient market paradigm revisited, France, Muslims and the EURO, Financial panics happen fast, USD and Yen
"In the long run, we are all dead."
Keynes
November 10, 2005
Christopher Laird
Editor-in-chief,
PrudentSquirrel Newsletter
www.prudentsquirrel.com |
| Anonymous Coward
User ID: 41121
11/13/2005 7:14 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Is it time to tar and feather FHC? |
| .
User ID: 11215
11/14/2005 9:45 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
The Great Global Buyout Bubble
this year, buyout firms have spent more than $130 billion gobbling up parts of corporate America
November 13, 2005
By ANDREW ROSS SORKIN
NY Times
A YEAR ago this week, Henry R. Kravis, the legendary buyout mogul who invented the modern-day private equity industry, gave a rare speech to a group of investors in a ballroom of the Waldorf-Astoria. In describing how far the business had come, Mr. Kravis, a slight man with a dry wit, recounted how difficult it had been for him to raise $355 million to buy one of his first companies, Houdaille Industries, in 1979.
"The availability of financing was our biggest challenge," he said. "Literally, we had to add up the potential capital sources at that time, which consisted of several banks and insurance companies, and one by one go out and raise the money."
Today, he has the opposite problem. Investors have been throwing money at the red-hot leveraged-buyout industry - so much so that Mr. Kravis now has to turn away some of them, rejecting their cash as a mere "commodity."
Private equity firms, it seems, now own everything: Hertz, Neiman Marcus, Metro-Goldwyn-Mayer, Toys "R" Us and Warner Music, to name a few. So far this year, buyout firms have spent more than $130 billion gobbling up parts of corporate America. And with more than another $100 billion in unspent money this year still swirling around the industry, there is a lot more buying to be done. The boom isn´t limited to America: in Britain buyout firms own so many companies that they now employ 18 percent of the private sector, according to the British Venture Capital Association.
The trillion-dollar question is whether these shopaholics are setting themselves up for a giant fall. If the market begins to show even the faintest signs of strain, this bubble may pop, say many financial analysts as well as private equity players themselves. If that happens, the leveraged-buyout boom and bust that Michael Milken led in the 1980´s could end up looking like a dress rehearsal for the mess to come. As Mr. Kravis said during his speech: "Unfortunately, there is a flip side to having access to plentiful capital. It means that too many people without experience in building businesses have too much money."
The numbers tell the story. Over the last three years, private equity firms have had record returns through a series of quick flips, spurred in part by superlow interest rates that allowed them to borrow huge sums of money. As a result, big institutional investors like pension funds have poured $491 billion into the business, according to Thomson Venture Economics, a firm that tracks data for the industry. If you figure that the firms can borrow three to five times that amount - a conservative assumption - the industry has more than $2 trillion in purchasing power.
But here´s the rub: In the next three years, to reap returns on all those big-name investments they have been making, private equity firms are going to have to sell $500 billion worth of assets. The question is, to whom? Even in the last three years, in as big a bull market as they come, private equity has never sold more than $153.2 billion in a year, according to Freeman & Company. At the same time, the investment firms will have to keep spending. And the low-hanging fruit has already been taken.
"There´s no question this is going to end badly for some," said Colin C. Blaydon, a professor at the Tuck School of Management at Dartmouth and the dean emeritus of its Center for Private Equity and Entrepreneurship. "It´s almost a classic boom-bust cycle. When you see a big boom, people see the returns, go rushing in, stuff more money in than can be dealt with. Suddenly, something will happen that makes people say: ´Oh, my God! Look at the leverage we´ve got on these things. Isn´t this way too risky? Shouldn´t we pull back?´ And then the question becomes: Does it crash like a rock or is there an adjustment down over time?"
ALREADY, there are reminders that the business can turn ugly overnight. Thomas H. Lee Partners, the Boston private equity firm famed for buying Snapple for $135 million in 1992 and selling it two years later to Quaker Oats for $1.7 billion, recently was badly burned on its investment in Refco, the commodities trader that filed for bankruptcy protection last month. While the setback has hardly sunk the Lee firm, it is an illustration of how risky these investments can be.
Firms may have a particularly tough time exiting some of their investments because investors are taking a more skeptical view of initial public offerings backed by private equity. In recent months, several high-profile quick flips have left critics wondering whether buyout firms were using such offerings simply to line their pockets, rather than using the proceeds to support companies.
Earlier this year, the Blackstone Group sold a German chemicals company, the Celanese Corporation, to the public after owning it for less than 12 months. The firm quadrupled its money and all of the proceeds from the offering were used to pay out a special dividend to Blackstone. Mr. Kravis´s firm, Kohlberg Kravis Roberts & Company, also quadrupled its money by flipping PanAmSat, the satellite company it owned for less than a year.
Investor scrutiny of private equity-backed I.P.O.´s forced Warner Music, which is owned by a consortium of buyout firms led by Thomas H. Lee Partners, to scale back its offering significantly: the firms made several last-minute adjustments that kept them from cashing out as much as they had hoped, in part as a way to inspire confidence in the offering.
According to Dealogic, which tracks the industry, initial public offerings backed by private equity firms have performed worse than other offerings; the average first-day return for a private-equity-backed I.P.O. this year is 8.3 percent, compared with 13.9 percent for other offerings. Analysts ascribe some of that discrepancy to concern by investors that private equity firms will later cash out of their position, depressing the stock price. Over time, though, that gap often narrows and some private equity offerings have outperformed other offerings.
Then there is the issue of sky-high prices that some private equity firms have been willing to pay for acquisitions. According to Standard & Poor´s, buyout firms now pay, on average, about eight times a company´s earnings before interest, taxes, depreciation and amortization - or Ebitda, a common measure of cash flow - for companies worth more than $1 billion. That is a significant increase from a multiple of about 6.5 only several years ago. Private equity firms have felt comfortable paying more because debt remains so cheap and banks have been willing to allow the firms to add ever-larger amounts of leverage to transactions.
But if the debt market turns against them - and it is bound to do so at some point - potential buyers or public investors may not be willing to pay the same prices. In the consumer retail sector, where private equity firms have paid prices of more than 12 times Ebitda during frenzied auctions, selling may be especially tough. Tommy Hilfiger and Dunkin´ Brands are both for sale, and some bidders have already left the auction, a sign that the price may be moving too high.
"I´m pessimistic about the economy, interest rates, credit markets, and all that," said Hamilton E. James, president of the Blackstone Group. "I feel people are paying prices that are too full. I think some mistakes will be made. We´ve pulled in our horns a little. We´ve become more conservative about the types of companies we buy, the prices we pay, the exit multiple assumptions and so on and so forth."
Of course, many people in the industry disagree with the premise that there is a bubble ready to pop. They note that private equity is still only a small part of the mergers-and-acquisitions and I.P.O. market, and they say that if they´ve done their homework, they will have made the right bet.
Even Mr. James, the economic bear, is still bullish on the overall leveraged-buyout market. "I have no concern about the markets being big enough to accommodate L.B.O. sponsors getting liquidity for their successful, good-quality portfolio companies," he said. "The very growth of private equity, don´t forget, adds a whole other option: the secondary buyout," referring to a trend in which private equity firms buy and sell businesses to one another.
YOU can´t argue with that. But not everyone can make a brilliant bet, and headwinds can make things more difficult.
The advent of supersized deals also lurks below the surface. For years, buyout firms focused on businesses worth several billions of dollars at most. Today, flush with cash and under pressure to spend it, private equity firms are splurging on huge businesses like Hertz ($15 billion) or SunGard ($11.3 billion). The Computer Sciences Corporation is being eyed for a $12 billion takeover. But selling those businesses or putting them back in the public markets could be even more difficult because of their size.
How will this shake out? Will the bubble pop? For some, absolutely. There will be bankruptcies, restructurings and fire sales. Others, who made the right bets, may be luckier and be able to ride out the bad years.
"In hot markets, you can sell crummy companies," Mr. James said. "In less ebullient markets, the really marginal companies take more than their disproportionate share of the pain. That´s where you´ll see it."
DealBook also covers the news of deals daily by e-mail. A free subscription is available at nytimes.com/dealbook.
[link to www.nytimes.com] |
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User ID: 11215
11/15/2005 10:14 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
[link to www.freep.com]
WASHINGTON -- It´s an eyeball-grabbing number for anyone interested in real estate: Nearly three of four homeowners who refinanced through Freddie Mac between July and October took cash out of the deal and walked away with what was often thousands of dollars of tax-free money.
Cash-outs are hardly new, but the proportion of refinancers -- 72% -- now using the technique to fund consumer expenditures or investments is at its highest level in more than five years.
One key reason for the trend: Compared with the spiraling costs of home equity credit lines, fixed-rate cash-out refis into 30-year or 15-year mortgages look smart now. Some equity credit lines carried starting rates below 4% a year ago. Today, a typical "prime-plus-one" (prime bank rate plus 1%) credit line starts at 8%. If, as expected, the Federal Reserve Board keeps bumping short-term rates upward in the months ahead, equity lines could float into the mid-8% range or higher.
Contrast that with a fixed-rate cash-out. Say you need $100,000 for a down payment on a second home or to fund a business venture. Say also have at least $300,000 in net equity in your house, cream puff credit scores and you qualify for the lowest fixed rates. You should be able to find a 30-year fixed-rate refi in the 6% to 6 1/4 % range, or a 15-year fixed rate in the 5 1/2 % to 5 3/4 % range. Because have loads of equity, your lender should have no objection to a cash-out yielding you the $100,000 you need.
Refinancing with a cash-out right now has another strong point: Long-term interest rates appear to be headed for a slow but steady rise. Locking in 6% money today may look like a brilliant move a year or two down the road, when rates could be significantly higher.
If you do opt for a refi rather than a floating-rate equity line, you will have lots of company. Freddie Mac chief economist Frank Nothaft predicts homeowners will pull a stunning $204 billion from their properties this year alone through cash-out refis of their primary mortgages. During the quarter from July to October, $60.4 billion in equity was liquefied into cash through refis, according to Nothaft.
What are the downsides of cash-outs? A couple are obvious. By definition, they mean you carry more debt secured by your house and that puts your most important asset at greater risk if you lose your job, get sick or run into other financial difficulties.
More debt means higher monthly payments, especially if you opt for a 15-year payback term. Can you handle the extra monthly burden? Do you have reserves or contingency plans to manage your monthly mortgage, credit card and other consumer debt payments?
Another negative: Usually, refinancing costs much more in settlement and loan origination fees than home equity lines, unless you and have your closing charges rolled into the note rate.
To be fair, home equity lines are by no means obsolete in today´s market, where short-term rates are rising faster than long-term rates. There are several very good reasons to consider an equity line: At the top of the list would be convenience and control. Once you´ve been approved for a specific amount on a line, it is totally your call how much you draw down and when you actually receive the cash.
You pay interest only on the amounts you´ve pulled out, not the full amount of the approved limit.
Most lines allow immediate access to funds up to the limit using credit cards or checks. Normally there is no hassle in drawing down new funds.
A $100,000 credit line may be a far more flexible financial management tool for you than a $100,000 lump-sum cash-out refi. If you need to use only $20,000 of the $100,000, that´s all you draw down. The $80,000 balance functions as a cost-free contingency fund -- ready for action whenever you truly need it. Your monthly rate on your $20,000 might be 8%, but the rate on your contingency balance is 0%.
Finally, don´t forget that more banks allow you to have your cake and eat it too: You can convert your floating-rate equity line into a fixed-rate equity loan or second mortgage whenever you choose. You can float your rate like a butterfly for a while on modest balances, then lock in for the long term when you draw down to the limit.
Reply With Quote |
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User ID: 22641
11/18/2005 5:41 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
INFLATION BREWING & GOLD IS SHINING
There was a lot of news this month. Some of these developments affected the markets and some didn’t, but they could in the future and here’s what we’re watching…
First, it was impressive that gold hit an 18 year high while bonds confirmed a major downward reversal. Since both of these markets are very sensitive to inflation, they’re now both reinforcing that more inflation is coming.
In fact, gold has always led inflation and interest rates, and it’s happening this time too. Gold has been rising for over four years, and inflation and interest rates have been following. The rises in inflation, however, have been intensifying lately:
Last month, for example, U.S. consumer prices surged the most in 25 years at a 14.4% annual rate. In the past two months, producer prices soared 22.8% and 8.4% annualized and, along with import prices, both rose the most in 15 years last month. And it’s not only in the U.S… inflation moved up in the U.K. in its strongest jump in eight years, and the story is similar in other countries as well.
The main reason why is because energy prices have been soaring and worldwide monetary policies have been loose. But we don’t think it’s a coincidence that this inflation surge is coinciding with the appointment of Ben Bernanke to replace Alan Greenspan as the next chairman of the Federal Reserve.
The announcement was generally well received, but bonds didn’t like it because prices declined significantly. Since the bond market looks ahead, this weakness suggests Bernanke is going to be an inflationary Fed head. Gold is signaling the same thing.
TOUGH JOB AHEAD
We wouldn’t be surprised, considering his comment that the U.S. has a printing press allowing it to produce as many dollars as it wishes and they could drop money from helicopters if d.came a risk. Okay, maybe he was kidding but there’s no question that the job will be tough for an academic with little policymaking experience, or anyone else.
With debt, deficits and spending soaring at unprecedented levels, the economy has never looked so unbalanced. The Comptroller General of the U.S. says long-term government promises to retirees, veterans and others now amounts to a shocking $350,000 for every full time worker. He also said this past year may have been the most fiscally reckless in U.S. history, and fiscal irresponsibility is the greatest future threat to the U.S. Reinforcing this, former Fed chief Paul Volker feels there’s a 75% chance of a crisis in the next few years. He’s also warning about inflation and so is Greenspan.
Mr. Bernanke is certainly going to be faced with a delicate balancing act, especially with interest rates and inflation rising, the economy slowing, consumers nervous, an ongoing energy problem, a real estate bubble bigger than the 2000 stock bubble, Chinese competition, an expensive war that has already cost $700 billion, hurricane expenses in the hundreds of billions following the costliest natural disaster in U.S. history and so on. It makes you wonder how it’s all going to work out. But for now, inflation, higher gold, commodities and interest rates, and lower stock and bond prices look like they’ll be part of the mix.
SECOND TERM JINX AND WILD CARDS
The markets are usually volatile during a new Fed chairman’s first year. When Greenspan took over in 1987, for instance, the stock market crashed shortly thereafter. It’s interesting to note this is also coinciding with Bush’s second term. We can’t explain why but going back to 1960, there have been four presidential reelections, prior to Bush, and each time a scandal emerged which hurt the president and it was bearish for stocks with the market dropping between 25% and 45%.
Now we have Bush and as his second term unfolds, things aren’t looking good this time either. Libby’s indictment, which is the first for a White House official in 130 years, combined with suspicions over Rove and Cheney’s involvement, the Miers withdrawal, the unpopularity and growing questions over the Iraq war and the Katrina delays have resulted in Bush’s lowest approval rating yet. If history repeats, these problems could intensify along with stock market weakness, which would likely coincide with inflation and higher interest rates… Then there’re the wild cards we also have to consider…
*We believe changing weather patterns will continue to be one of the biggest forces affecting the markets. That was clearly illustrated this hurricane season, which made several records. Not only did it start the earliest ever, but it included three category 5 hurricanes out of only five in this category over the past 70 years. Following Katrina, Wilma came along and it was the strongest and largest hurricane ever registered in the Caribbean. Experts believe this is going to continue. Aside from the personal tragedies and losses involved, this will keep upward pressure on oil and commodities, which also reinforces this inflationary scenario.
*One very disturbing development is the radical turn in Iran. By calling for Israel’s destruction, while defying world opinion with their nuclear program, which is run by Revolutionary Guards, celebrating the 25 year anniversary of the U.S. hostages, as they recall 40 ambassadors and form alliances with terrorist groups, Iran’s new president seems to be deliberately looking for war as he continues insulting the West.
After Iraq, the prospect of another war is uninviting but if Iran continues, an invasion by someone seems almost inevitable. Since Iran has the world’s second largest oil reserves, that would surely drive the oil price higher, fueling more inflation.
*There’s also been a lot of news about bird flu, especially because it’s spreading into Europe. The big fear is that it could turn into a pandemic like in 1918. Scientists agree a pandemic will happen sooner or later and many have asked how that would affect the markets.
We just finished a book about the 1918 pandemic, which killed over 50 million people worldwide. What stands out most is that panic and fear were so widespread, we doubt if anyone even cared about the markets.
Nevertheless, it’s interesting to note that the economy generally came to a halt and the stock market dropped. There’s no reason to believe it would be any different today. We can assume trade and travel would be totally disrupted and people would stay home, which would hurt businesses, stocks and the economy. Plus, prices would likely rise due to shortages, and so would gold because of fear and uncertainty. Considering the current flu hype, even a mini scare would likely affect the markets. --- For now, inflation is the overall dominant economic trend. Deflationary forces have taken a back seat and the tug of war between these two forces has diminished, at least for the time being. Gold and bonds are both reinforcing this and they’re the two best inflation leaders we know of.
THE NEW WAVE
In large part, this inflationary outcome is due to China’s ongoing growth as it evolves into a super power, as well as the growth in India and other emerging countries. The soaring industrial, commodity and energy sectors are areas that have clearly been affected as demand for raw materials and energy increases.
Growing global demand has been the driving force pushing oil up in recent years, rising six fold since 1999, as it reached its latest record high in August when Katrina hit. Strong global demand will keep upward pressure on oil, especially as doubts continue about sufficient supply. This uncertainty at a time when known reserves could be depleted at the current consumption rate, will not only keep upward pressure on the oil price, but on inflation and gold too since gold and oil move together:
China is also creating new demand for gold as an investment as it’s been encouraging its citizens to buy gold. India has always been a major accumulator of gold and their gold consumption is expected to rise 33% this year. Inflation worries in general are also causing money to go into gold. Plus, more demand for gold is coming from the world’s oil exporters, as they buy gold with some of their revenues.
Monetary inflation has also been growing by leaps and bounds over the years:
And monetary inflation leads price inflation, which means we have a double whammy... rising money supply and strong ongoing demand for commodities, which together will translate into higher inflation. It’s already happening and it’s good for gold.
A SECULAR MEGA UPTREND
Gold, the precious metals, commodities and interest rates generally move together in major secular moves. The current bull market is five years old. This means it’s just getting started, in spite of record highs in certain commodities. Secular bull markets tend to last 15-20 years on average and they tend to coincide with wars. In other words, we probably have more than a decade or so to go before this major move is over.
The road to good investing in the years ahead is going to be dominated by gold. Gold rises during economic and global uncertainty, and when the monetary system is unsound. It rises when the reserve currency of the world is burdened and when most countries don’t want a strong currency in order to compete. Gold is basically a barometer for the economy and it’s a safe haven. It’s currently stronger than stocks or bonds and by all indications, this mega trend is going to stay intact. That is, gold will continue to outshine all other investment classes during the current secular bull market, despite normal ups and downs along the way.
-- Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com |
| Anonymous Coward
User ID: 17030
11/18/2005 5:46 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
we are in a bull market and you guyes are talking crap |
| Anonymous Coward
User ID: 14715
11/18/2005 8:04 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
That´s what they want you to believe, we are in the bull market. Get out of stock now, before it is to late. |
| Anonymous Coward
User ID: 17030
11/18/2005 8:15 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
you can also make money when the stockmarket drops !!!!!!!!!!!!!!!!!!!!!! do your dd |
| AC
User ID: 2218
11/18/2005 9:36 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Very soon the house of cards will crumble.It will start with higher inflation then higher interest rates,followed by a slowdown in home sales which will lead to reduced consumer spending .In the meantime the variable rate loans and interest only loans will become painfully due leading to a massive real estate forclosure the likes of which the world has yet to see.A total global recession will follow .But that is the plan by the ruling class to have slave labor they can control. |
| Anonymous Coward
User ID: 4700
11/18/2005 9:43 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
"But that is the plan by the ruling class to have slave labor they can control."
Righhhhttt... A disgruntled, uprising slave class is so much easier to maintain than a content, comfortable population.
The "ruling class" prospers when average joe citizen prospers. |
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