Wednesday, September 30, 2009

The Uprising!

"It is too late to complain. You should have complained in the beginning. When at least you had a chance."


Monday, September 28, 2009

Wars, Poverty and Collapse: Marc Faber

The underlying problems of the financial crisis have not been attended to

Friday, September 25, 2009

The Federal Reserve Audit Is Coming!

H/t: Washington's Blog

Thomas E. Woods, Jr. - a PhD historian, senior fellow at the Mises Institute, and bestselling author - is testifying on September 25th to the House Committee on Financial Services in support of HR 1207, the bill to audit the Fed.

In his prepared remarks, Woods blasts the Fed:

"There is no good reason for Americans not to know the recipients of the Fed’s emergency lending facilities. There is no good reason for them to be kept in the dark about the Fed’s arrangements with foreign central banks. These things affect the quality of the money that our system obliges the American public to accept.

The Fed’s arguments against the bill are unlikely to persuade, and will undoubtedly strike the average American as little more than special pleading. Perhaps the most frequent of the claims is that a genuine audit would jeopardize the alleged independence of the Fed. Congress could come to influence or even dictate monetary policy.

This is a red herring. The bill is not designed to empower politicians to increase the money supply, choose interest-rate targets, or adopt any of the rest of the Fed’s central planning apparatus, all of which is better left to the free market than to the Fed or Congress. It seeks nothing more than to open the Fed’s books to public scrutiny. Congress has a moral and legal obligation to oversee institutions it brings into existence. The convoluted scenarios by which merely opening the books will lead to an inflationary catastrophe at the hands of Congress are difficult to take seriously.

At the same time, as we hear this objection repeated time and again, we might wonder just how independent the Fed really is, what with its chairman up for reappointment by the president every four years. Have these critics never heard of the political business cycle? Fed chairmen have been known to ingratiate themselves into the president’s favor close to election time by means of loose monetary policy and the false (and temporary) prosperity it brings about. Let us not insult Americans’ intelligence by pretending this phenomenon does not exist...

If there is any truth to the idea of Fed independence, it lay in precisely this: the Fed may reward favored friends and constituencies with trillions of dollars in various kinds of assistance, while keeping the public completely in the dark. If that is the independence we’re talking about, no self-respecting American would hesitate for a moment to challenge it.

A related argument warns that the legislation threatens to politicize lender-of-last-resort decisions. Again, this is untrue. But even if it were true, how would that represent a departure from current practice? I hope we are not asking Americans to believe that the decisions to bail out various financial institutions over the past two years, and in particular to allow them to become depository institutions overnight that they might qualify for assistance, were made on the basis of a pure devotion to the common good and were not political at all. Most Americans, not unreasonably, seem convinced of another thesis: that Goldman Sachs, for instance, might be just a little bit more politically well connected than the rest of us...

If our monetary system were really as strong, robust, and beyond criticism as its cheerleaders claim, why does it need to rely so heavily on public ignorance? How can it be a sound banking system that depends on keeping the public in the dark about the condition of its financial institutions?

Let me also make clear that supporters of this legislation are strongly opposed to a watered-down version of the bill – which, incidentally, would only increase public suspicion that someone is hiding something.

If the Federal Reserve Transparency Act passes and the audit takes place, the American people will have achieved a great victory. If the legislation fails, more and more Americans will begin to wonder what the Fed could be so anxious to keep hidden, and the pressure for transparency will simply intensify. A recent poll finds 75 percent of Americans already in favor of auditing the Fed. The writing is on the wall.

The Federal Reserve may as well get used to the idea that the audit is coming. That would be a far more sensible approach than the counterproductive and condescending one it has adopted thus far, in which the peons who populate the country are urged to quit pestering their betters with all these impertinent questions. The Fed should take to heart the words of consolation the American people are given whenever a new government surveillance program is uncovered: if you’re not doing anything wrong, you have nothing to worry about.

The superstitious reverence that Americans have been taught to have for the Federal Reserve is unworthy of the dignity of a free people. The Fed enjoys a government-granted monopoly on the creation of legal-tender money. It is not an unreasonable imposition for Americans to demand to know about the activities of such an institution. It is common sense."

Tuesday, September 22, 2009

IMF: "We Want To Go Back To The Good Old Times".

The IMF had the choice between:
  • "a bite the bullet-strategy", let the economic crisis grow worse by letting bad companies go bankrupt thereby creating at the end a healthy economy, alternatively
  • "try to revive (with tax payers money) the old system- strategy" by throwing good money after bad thereby risking a new financial crisis in the nearby future.
Mainstream (Wall street, US Politics, IMF, G-20) wants the second option. They are in power and are yearning for the revival of their power and commissions.
This blogger and many others want capitalism to do its work: clean and flush the system, get rid of all the rotten apples in the financial industry, cut the ties between Wall street and US politics, etc and start over again. the irony is that it will happen in any case; maybe not now but in a few years time.

Wall street is at the moment busy packaging financial instruments as if nothing has happened. With this they are putting us all at risk.

IMF pushes for securitisation business revival

The Economic Times India

A year after the Lehman crisis and the subsequent crumbling of the global financial system, triggered by the cracks in regulatory structure in the securitisation business, the International Monetary Fund (IMF) has suggested restarting of the same business.

The Global Financial Stability Report (GSFR) released by the IMF on Monday said a failure to restart securitisation would come at the cost of prolonged bank funding pressures and a diminution of credit and a continuing need for central banks and governments to take up the slack.

The GSFR points out we should learn from the past and enhance transparency, especially as regards to off-balance sheet exposures while restarting the securitisation measures. The disclosures should concentrate on materially relevant information and not overburden securitisers or investors with irrelevant data.

Dr Ashok Haldia, former secretary of Institute of Chartered Accountants of India (ICAI) pointed out if this suggestion is implemented, it will be in the interest of every stock holder in the financial system. ”If there is greater disclosure on the off balance sheet items and the stakeholders are not bombarded with irrelevant data , every one will be in a position to take informed decisions,” said Mr Haldia. The securitised products itself should be simplified and standardised in order to improve liquidity ensuring prices better reflect actual transactions.

The report also suggested that the securitiser compensation should be revised toward a longer-term horizon so that the originator of the debt will take more due diligence while giving out loans. This put together with the initiatives already taken by United States of America and Europe to introduce a minimum 5% retention requirement for the originators—who gives the loan—will ensure that someone takes responsibility for diligent underwriting and monitoring.

The strategy for timing and manner of unwinding crisis measures should include managing market expectations and having a clear communications on both when to start and how to execute unwinding strategies.

DK Joshi, principal economist at credit ratings agency Crisil, pointed out that the central banks in many economies including that of India are currently sending out signals to prepare the market for a reversal of the expansionary monetary policy measures. Still the timing and modalities of these decisions would need to be balanced against the condition of financial markets and specifically how illiquid or fragile that may still be.

According to the report, the reversal of the expansionary monetary policy across sectors and across national borders should be co-ordinated to avert chances of a arbitrage opportunities. For government’s financial sector measures, priority should be given to exiting from support programmes that have a significant distortionary impact on financial markets and involve large contingent liabilities for the government.

Friday, September 18, 2009

Wall Street Executives To Decide On Bonus Policies of Wall Street Executives: Breakthrough Thinking!

Great thinking! The FED, owned by the big Wall Street banks will decide on the bonus policies of the executives of the same Wall Street banks. "Sweeping curbs" as the Wall Street Journal calls (spins) it.

But do they really think the world is that stupid?

Apparently they do.

To find out a bit more about the American psyche, please read the following article written by Matt Taibbi in his blog "The Smirking Chimp":

"It’s a classic peasant mentality: going into fits of groveling and bowing whenever the master’s carriage rides by, then fuming against the Turks in Crimea or the Jews in the Pale or whoever after spending fifteen hard hours in the fields. You know you’re a peasant when you worship the very people who are right now, this minute, conning you and taking your shit. Whatever the master does, you’re on board. When you get frisky, he sticks a big cross in the middle of your village, and you spend the rest of your life praying to it with big googly eyes. Or he puts out newspapers full of innuendo about this or that faraway group and you immediately salute and rush off to join the hate squad. A good peasant is loyal, simpleminded, and full of misdirected anger. And that’s what we’ve got now, a lot of misdirected anger searching around for a non-target to mis-punish… can’t be mad at AIG, can’t be mad at Citi or Goldman Sachs. The real villains have to be the anti-AIG protesters! After all, those people earned those bonuses! If ever there was a textbook case of peasant thinking, it’s struggling middle-class Americans burned up in defense of taxpayer-funded bonuses to millionaires. It’s really weird stuff. And bound to get weirder, I imagine, as this crisis gets worse and more complicated."

Depressing stuff indeed and they will get away with it until the second downturn and the total demise of the American financial world. If you still would like to read the Wall Street Journal article, click here

Wednesday, September 16, 2009

China Goes Berserk Over Gold.

This is a man one can subscribe to: Simon Black, colourful, travels the world and gives feedback on different countries, in this case China and its population which is busy developing a gold mania. May gold go to the moon!

By the way: Got Gold?

Subscribe to Simon Black's web site and newsletters by visiting:

Sovereign Man

Notes from the Field

Date: September 16, 2009
Reporting From: Shanghai, People's Republic of China

Gold is quickly reaching the mania phase in China, and there are clear signs of it on the ground.

About a month ago, we reported that for the first time ever, the Chinese government is promoting gold and silver as investments. And by "promoting," we meant cramming it down people's throats.

We knew this was ground-breaking news at the time-- a clear indication of long-term demand growth, as well as a sign that the government will be accepting higher inflation in the future.

Ironically, this story was little noticed in the gold industry at the time, mostly because the information was only being circulated in China (in Chinese, for that matter). Fortunately, my friend and China insider Christine Verone was able to get me the scoop, and we ran it here first.

Since that report, three things have happened;

First- the mainstream media has latched on to the story about Chinese gold... Forbes, Moneyweek, Reuters, the blogosphere; it's out there now, and adding a bit of extra buzz to the gold market.

Second- the government has stepped up its promotional campaign, and Chinese consumers have responded on cue. Gold demand has grown dramatically just this year, particularly as savvy local investors are starting to view Chinese stocks suspiciously.

Third- and perhaps most importantly, Christine literally made history by becoming the first foreigner EVER in China to be certified in any professional capacity by a Chinese commodity exchange.

I'm looking forward to all the great information that Christine will be able to share with me about Asia's gold markets when she's not tied up making deals in Mongolia or working with bankers and offshore trusts in Singapore and Labuan. In the meantime, the two of us had quite an interesting tour of Chinese gold shops.

You can buy gold in China at any bank-- even tiny banks in tier-3 cities sell gold. More importantly, however, the government is setting up official Chinese Mint stores all over the country.

On the inside, they look like jewelry shops-- armed guards, glass viewing cases, etc. But instead of diamond crusted earrings and white star sapphires, you see bars. Lots of bars.

The government mints bars in sizes ranging from 5 grams (which are so tiny they're actually cute) to 1 kilogram. The prices are updated instantly-- they have a Bloomberg screen which tracks the spot price, generally indexed to the Renminbi price in Shanghai rather than New York or London (another sign of Chinese financial independence).

The bars are all serialized and 9999 purity, the same as you would get from Switzerland. They are also certified by the gold exchange, which validates the quality. There is no tax, and the premium runs 10 renminbi per gram, or roughly $30 (US) per ounce.

We went into several stores and saw Chinese people buying like crazy... all with cash. The most popular denominations were 10 grams and 50 grams-- and I'm surprised the mint shops didn't sell out at the rate those bars were flying off the shelf.

Christine has some great contacts at the shop across the street from the Westin Hotel-- if you take a taxi there, ask for the WEE-stin (that's how they say it) and you will see the shop on the opposite corner. Ask for Gao Ping, he speaks great English.

Given the ultra low cost, storage options (that I will get into later), and ease of transport, China is a great place to buy and store gold... especially if you find yourself there for business already.

And remember, one of the best ways to buy gold is through a self-directed IRA so that you can get the tax advantage as well.

More tomorrow, I'm off to catch a flight.

Right-click here to download pictures. To help protect your privacy, Outlook prevented automatic download of this picture from the Internet.
Simon Black
Senior Editor, Sovereign Man

Friday, September 11, 2009

IAAF: Before you jump, can I have a look in your panty?

So the IAAF started something with their gender test on Caster Semanya. How dare they leaking medical information to the press in Australia and UK! But let's have a look at the IAAF themselves and where this decision comes from. Right from IAAF's web site, herewith a picture from the President, Ueber-Man with 15 children, Mr Lamine "Testosterone" Diack (Senegal):

Trust him, together with the co-vice President of the IAAF, Professor Doctor Helmut "Ordung Muss Sein!" Digel, (German) and expert on gender, born in 1944 (times of joy) who undoubtedly has to break the news to Caster:

"Vee are verry sorry, but ve have decided that you are a mistake and your mosser and faser made a mistake by raising you as a fiemale, Ja. Haben Sie das verstehen. Ja? You are a Male! Zis will most probably zistroy your life, but we have ze rules and ve must always obey ze rules."

Look, Mr IAAF "Testosterone" and "Ordung Muss Sein", while you are zistroying lives, can we please discuss your double standards? Can you please check every athlete? Because not every female with hidden male organs looks the same. I list a few "Hummers" which you missed,, either because you did not have the balls (;)) to stand up to them or you felt intimidated by important countries and missed them for political reasons:

Crystl Bustos, Team USA Softball

Jarmina Kratochviloca, 1985, 800 m.

Lindsay Davenport, USA, tennis, Olympic & grand slam winner

Cheryl Haworth, USA Weight lifting

Carmello Anthany, USA, WNBA

Anikka (Nick) Sorenstam, golf

How could you have missed these "ladies"? Is it because the majority comes from the USA? And should you reject her femininity because it is f.i. 18% out of "normal", can you please check male athletes also to see if they are >18% too feminine or maybe >18% too male?

Good luck to you all!

Obama to make 'major' financial speech Monday: All Is Well, We Saved You, Please Go Back To Sleep.

Do not hold your breath: the speech will be an advertising show: no problems, all is well, we saved you.

Obama to to give his most boring speech on Monday


WASHINGTON (AFP) – US President Barack Obama is to give a "major" speech on the economy Monday, one year after the collapse of Lehman Brothers sparked a global financial crisis, the White House said.

"One year to the day after Lehman Brothers collapsed and precipitated a financial crisis that reverberated across the globe, President Obama will deliver a major speech on the financial crisis at Federal Hall in New York City at midday on Monday," a statement said Thursday.

"He will discuss the aggressive steps the administration has taken to bring the economy back from the brink, the commitment to winding down the government's role in the financial sector and the actions the United States and the global community must take to prevent a crisis like this from ever happening again."

Obama will deliver the speech at Federal Hall, one of the most important sites in America's democratic history, where George Washington took the oath to become the first US president, just doors from the New York Stock Exchange.

His address will come a year after the shocking collapse on September 15, 2008, of banking giant Lehman Brothers, which sent a shockwave through the global financial system.

It was followed by a severe credit crisis, government interventions to help secure markets, and downturns that pushed some of the biggest economies in the world into recession.

Since then, developed and developing countries have come together to address the crisis, in part through the so-called Group of 20, which will meet days after Obama's speech on September 24 and 25 in Pittsburgh, Pennsylvania.

Obama is expected to advance new financial regulatory measures and place the issue of unemployment, which has largely continued to rise in the United States even other indicators show improvement, at the heart of the summit's discussions.

Istithmar going bankrupt?

Dubai World logoImage via Wikipedia

From Hero to Zero. Another one. One of the worlds major property developers and part owner of Cape Town's V&A Waterfront is under water. Prepare for the worst. We read in Bloomberg:
“Istithmar is in serious trouble,” said Rochdi Younsi, head of Middle East research at New York-based Eurasia Group. “At Istithmar, there’s a feeling that jobs aren’t secure and it wouldn’t be a surprise if the firm just disappeared.”

Major shareholder V&A Waterfront bankrupt?

Istithmar Said to Halt Investment; Dubai Weighs Sale


Sept. 11 (Bloomberg) -- Istithmar World, the Dubai sovereign wealth fund, is halting investments as part of a restructuring effort after spending more than $25 billion this decade on stakes ranging from a yacht marina to luxury retailer Barneys New York, according to people familiar with the plan.

The process may result in a sale of the fund or its assets, they said. Istithmar, run by David Jackson, said this week that co-chief investment officers John Amato and Felix Herlihy would leave the firm. Jackson’s job is under review, the people said.

A restructuring by Istithmar and its parent Dubai World may mark the most public reversal of fortune for a state-controlled investment firm since global credit markets seized up in 2007. Sovereign wealth funds, fueled in part by oil revenue, have become sources of capital around the world for companies, including Citigroup Inc. and Morgan Stanley.

“They need to decide whether to keep Istithmar as a sovereign wealth fund or to clip its wings, roll it up and have it cease to exist independently,” said Victoria Barbary, a senior analyst at Monitor Group in London. “With Dubai World’s broader problems, it would not be surprising if Istithmar was rolled up.”

Istithmar and Dubai World have struggled this year on investments, including Barneys, which may be facing a restructuring or bankruptcy, according to people familiar with the retailer, and CityCenter, an $11 billion project in Las Vegas. Abu Dhabi, the wealthiest member of the United Arab Emirates, provided a $10 billion bailout this year for Dubai as the emirate struggled to meet payments on $80 billion of debt used to finance real-estate projects.

Debt Load

Winding down Istithmar may help Dubai reduce its debt load, the people said.

“There are no plans to merge IW,” Abdelaziz Al Mazam, head of marketing and public relations at Istithmar World, said in an e-mail. “IW is one of Dubai World’s key subsidiaries, actively managing a portfolio of investments worldwide, and will continue to be a key subsidiary into the future.”

Istithmar spent more than $25 billion on investments this decade, according to the Monitor-FEEM SWF transaction database. Among its investments are Yacht Haven Grande, a marina complex in the Caribbean, the W Hotel Union Square in New York and GLG Partners Inc., a hedge fund that has lost more than 61 percent of its value since the deal was announced in June 2007.

“Istithmar is in serious trouble,” said Rochdi Younsi, head of Middle East research at New York-based Eurasia Group. “At Istithmar, there’s a feeling that jobs aren’t secure and it wouldn’t be a surprise if the firm just disappeared.”

Monday, September 7, 2009

South African Absa bank offers 110% mortgage.

The South African housing market is a declining market even with an inflation rate of 6,7%. The chance of an economic stagflation and subsequent mass unemployment is big, so the reasons for the decision to borrow 110% to low income earners must be a desperate attempt "to do some good" for the black population. It is also called "political point scoring". In 5-10 years time the borrower will be completely under water with an enormous loan. The pressure from consumer organisations and Unions is on and so the banks are taking enormous risks but doing a disservice to the borrowers. Who are they kidding? The ONLY winner will be.....the mortgage commission agent of the bank: the borrower is under water, the bank has to partially write off the loan, the government might have to bail-out the banks and the tax payer foots the bill.
The good times will not come back unless we stop the denial, which is: spend within your limits.

An average house in the low income bracket should not cost more than 3,5 times the average income of the people in the same bracket. This seems to be an internationally accepted "rule of thumb". So if the maximum income to qualify for a loan is R 11.000 the house should not cost more than R 40.000 as only then there is more or less equilibrium in the market. I'll bet you the houses with subsequent mortgages will go for between R 100-150.000. Income will not go up so the house prices have to come down. Absa is keeping the bubble alive. The eternal losers: the low income earners.

South African Absa defrauds low income earners.

Business Day

MORTGAGES of 110% are now available to low income earners, ABSA said today as it adjusted its lending criteria.

“Absa has become the first bank to provide relief to low income earners by offering 110% bonds with a monthly income up of to R11,000,” the bank said in a statement.

“The turn in the economic cycle is becoming evident and as such we need to review our customer offerings.

“Although the South African economy still finds itself in recession after contracting for three consecutive quarters up to mid-2009, it is important to note that to date, the interest rates have been reduced by 500 basis points (bps) since December 2008 and are projected to drop by a further 50 bps later in the year,” said Luthando Vutula, managing executive of Absa Home Loans.

He said this meant consumers were experiencing relief and with lower inflation and household payments there should be a notable reduction in loans in arrears. “In light of this, and a slight improvement in property market, our loan to value caps will be aligned with the prevailing market conditions.” He said ABSA would continue to weigh up the consequences of its decisions and the impact these could possibly have on its customers.

The bank added that it was providing up to 95% mortgages to Absa customers who need a bond of up to R1.5 million if they used Absa internal channels.

A mortgage of 90% was offered if they used external channels such as mortgage originators.

Houses from R1.5 million to R2.7 million would still require a 10% deposit and houses more than R2.7 million a 15 percent deposit,” Vutula said.

Vutula said it was important to note that the normal lending criteria would still be taken into account. “We encourage all of our customers to remain astute and discuss their home loan needs with us.

“It is only through meaningful interviews and accurate affordability analysis that we will be able to establish a sound needs analysis and offer the best solution,” he said.

Residential Repossessed Assets (RRA) and Absa distressed properties would also be available for customers to consider. “Absa customers will get 100% on these home loans in order to make it possible for more of our customers to own their own homes,” he said.

At the beginning of the year Absa reviewed and revised all of its agreements with mortgage originators, Vutula noted.

“These agreements remain unchanged,” he said.

Despite lower interest rates, the economy was expected to remain under a lot of pressure until the end of the year, which would continue to impact employment, household income and the property market, he said.

In view of these developments Vutula encouraged consumers to keep expenses under control and look to buy properties that were affordable, based on their financial position.

“When there is extra cash available it’s easy for people to be tempted to splurge, however, let’s encourage our customers to remain prudent and save a few rands for that much talked about ”rainy day”.

He added that ABSA continued to encourage home owners to deposit surplus cash into their mortgages.

Earlier this month Standard Bank said it had recently increased its risk acceptance rate in its home loan, and credit card divisions.

Credit Rating Agencies Took "Bribes" for Higher Ratings

I regard this post from Washington's Blog as one of the most depressing of this month. How could this happen and how could financially supervisory agencies in the USA let these rating agencies get away with this?

Is this the drug of too much money? Was everybody living in Nirvana?

The consequences of mismanagement by rating agencies in the US will be enormous: companies which do not deserve AAA+ ratings and got assistance from financial institutions should never have received this assistance.

The opposite is also true for (perhaps now bankrupt) companies which never received a good rating but were initially financially sound.

If this was allowed to go on for 20+ years than there is no hope for the financial world of the USA.

I read recently that the basis for the financial crisis is the uncompetitiveness of the US: well, even blue chip companies might be "junk", but are only kept alive by ratings...and junk companies could well be market leaders if rated correctly. We'll never know.

And it is now easy to predict that the USA will disintegrate because of a lack of trust, as follows: dollar index decline > lower living standards > increase in unemployment > stagflation > riots > elections > search for the strong man who can make a plan work > multi-trillion stimulus > dollar decline > etc......

The Higher The Rating; The Higher the Price

Washington's Blog

You may have heard how the big ratings agencies - Moody's, S&P and Fitch - "sold their soul" by rating toxic assets and mismanaged companies much more highly than they should have been rated.

But as the following discussion shows, the ratings agencies effectively took bribes for higher ratings, just like people who knowingly authenticate forged art so that they will earn a higher fee:

[Finance professor Ed] Kane: One has to remember that these are profit-making institutions. Issuers will would pay more money for a good rating than a bad one, and issuers are very clear what kind of ratings they want. This is a straight-forward way to pay bribes without ever violating the law, it appears, and the credit rating organizations do not take formal responsibility for their incompetence or negligence.

[Prolific financial journalist, Brookings Institution scholar, and the author of more than 30 books on financial market issues Martin] Mayer: One of the untold scandals of this country is that our museums are stuffed with fake old masters because the people who authenticated paintings for the Mellons and Morgans of this world were paid a percentage of the price for the authentication. If they said it was no good, they got a few hundred bucks. If they said it was great, they got $100,000. Same story in the credit-rating organizations.

[Former Federal Reserve attorney and economist Walker] Todd: Right. They also drop the ball. I've been around failing banks and financial crises since 1974, and the rating agencies have dropped the ball almost every time. They were always at best late to the party.

Mayer: John Heimann [former comptroller of the currency] used to say that the function of the ratings agency is to go on the battlefield after the battle is over and shoot the wounded.

Self reflection

I posted the above picture a few months ago but I regard it as one of the best. Click on the pic for a bigger picture.

Sunday, September 6, 2009

Does the world have the courage to deal with its debts?

Ambrose Evans-Pritchard is always a must-read. In this article he analyzes solutions to the debt crisis and the realities the politicians face when dealing with it. At this stage they try to spin the good news as long as possible and try to save time. As if it will help. The day of reckoning will come soon after which they have to come clean with the debt situation.
My take for what is worth: no, countries are not going to pay off their debt, they will default: punish the saver and save the spender.

Does the world have the courage to deal with its debts

Deflation is spreading from the core of the global system to the most unexpected regions of the world. It has even reached Latin America. Prices are sliding in Peru, Chile, Colombia, Paraguay, Bolivia, Ecuador, Guatemala, and El Salvador, to the consternation of everybody.

Enough of the world has already fallen so far into pre-deflation conditions that any misjudgment by the big central banks from now risks setting off a chain-reaction that may prove very hard to stop.

CPI inflation has dropped to –2.2pc in Japan (a modern record), -2.1pc in the US, -1.8pc in China, -1.4pc in Spain, -0.7pc in France, and -0.6pc in Germany.
This was not anticipated by the authorities anywhere, so we should be wary of their assurances now that we face nothing more than a brief dip in prices before rising energy costs bring inflation back into familiar and safe territory. No doubt prices will rebound as the "base effect" of oil prices kicks in. But by how much; for how long?
The sum of economists in the world (outside Japan) familiar with the cultural and psychological dynamics of deflation can fit into one London bus, and most are historians of the 1930s.
If PIMCO guru Bill Gross and hedge fund manager Paul Tudor Jones are right in fearing that the US economy will tip back into a "W-shaped" recession as the sugar rush of fiscal stimulus fades, we may wake up to find that we have baked deep deflation into the pie for 2010 and 2011. The G20's talk of "exit strategies" and rate rises will seem surreal.
White House aides are already mulling another blast of spending. It won't fly. We have hit the political limits of such extravagance almost everywhere. The fiscal crutches of recovery are going to be knocked away, with outright tightening in a slew of states nearing the danger point of debt-compound spirals. This will occur in a world where excess capacity is already at post-War highs. It reeks of deflation.
Irving Fisher explained why the self-correcting mechanism of economies breaks down in his Debt Deflation Theory of Great Depressions in 1933: "Over indebtedness to start with, and deflation following soon after". Most of the West has exactly that, but worse – debt is much higher.
He coined the term "swelling dollar" to describe how falling prices and incomes raise the real burden of debts, leading to asphyxiation. There is a "swelling yen" in Japan today. Earnings were down 4.8pc in July from a year earlier. Bonuses fell 11pc. Wholesale prices fell a record 8.5pc.
Yes, Japan rebounded in the second quarter as shipping finance came back from the dead. The free fall has stopped. That is all. Industrial output was still down 23pc in July year-on-year.
What matters for debt service is that Japan's economy has shrunk by a tenth. Debt has not shrunk. It is rising. The public debt will rocket to 215pc this year.
China is in better shape but it is remarkable that there should be any deflation at all in a year when banks have let rip on credit, doubling lending to $1.1 trillion in the first six months.
The money has leaked into property and the Shanghai stock market; or worse, it has been spent building yet more excess plants to produce goods the world cannot yet absorb. This is much like the late phase of America's Roaring Twenties when asset prices reached their crescendo even as the underlying economy – burdened with over-capacity – tipped into deflation.
Beijing is at last tightening credit, mostly by stealth. We will learn soon whether Market Maoists are better at pricking asset bubbles than Ben Strong's Fed in the 1920s, or Ben Bernanke's Fed today.
I suspect that Dr Bernanke is more worried about deflation than he dares to let on. His ex-colleague Frederic Mishkin let slip last month that the Fed would be showering more money on the economy (buying US Treasuries), not less, were it not for market angst over the monetization of US deficits.
Bernanke is learning that he cannot in fact administer the anti-deflation medicine he talked about so confidently seven years ago. He can act only if and when the danger is so blindingly obvious that resistance crumbles.
There are three ways out of our mess. We can pursue 1930s liquidation that purges debt through mass default. Such Calvinist destruction cannot be imposed on a modern democracy.
We can devalue debt by deliberate inflation. This will backfire as bond vigilantes boycott government debt - unless rigged by capital controls or "administrative measures". You see where this leads.
Or we can try to right the ship by paying down our debts, very slowly, by sweat and toil, navigating a treacherous course between the Scylla and Charybdis of the twin-flations, for as long as it takes. This is the only responsible course left we as we face the devastating consequences of our own credit delusions. Are we up it?


Saturday, September 5, 2009

China and Precious Metals: Fasten Your Seatbelts!

  1. Central Banks to become net buyers instead of large sellers: Stockhouse
  2. China urges citizens to buy gold and silver: Seeking Alpha
  3. Warnings Ignored: Silverseek
  4. Reasons for latest gold/silver breakout: Motley Fool:
  • In a move that Western media sources have failed to cover adequately, the agency responsible for oversight of China's state-owned enterprises (SOEs) recently warned foreign financial institutions that SOEs will be permitted to walk away unilaterally from failed OTC derivative hedge contracts.
  • China will purchase up to $50 billion in Special Drawing Rights (SDRs) from the International Monetary Fund. Fools will recall that China has explicitly called for replacing the U.S. dollar as the world's reserve currency in favor of these SDRs. Russia and India have likewise indicated an interest purchasing SDR-denominated IMF bonds.
  • China's ramped-up dealmaking activity for resource-related assets around the globe reflects an official policy directive. Recent loans or investments by Chinese entities relating to foreign resource assets are themselves nearing the $50 billion mark. China has indicated that foreign reserves will be deployed in support of this broader initiative, representing another clear diversification away from U.S. dollar exposure.
  • The Democratic Party of Japan emerged as the clear victor in last week's election, ending a 15-year reign of the Liberal Democratic Party. Fools will recall that the Democratic Party of Japan's finance chief advised his nation last May to cease purchasing U.S. Treasury bonds unless those bonds are denominated in yen.
  • China is considering a ban on rare-metal exports. More than 95% of the world's supply of rare-earth minerals comes from China, so the move places global manufacturers of everything from hybrid cars to cell phones in a difficult position. China is also the world's leading producer of gold, and this move raises this Fool's eyebrow as a precedent for China's restricting exports of key strategic resources.
  • China is actively encouraging its 1.3 billion citizens to invest in precious metals. I have viewed excerpts from state television touting the extraordinary relative value of silver to gold given the large deviation from the historical ratio between prices of the two metals. Because gold and silver are surprisingly small physical markets, even a minor uptick in investment demand could fuel sizeable price increases.
  • Hong Kong is repatriating its physical gold reserves from London to high-security vaults at home, and it is inviting the region's central banks to store their bullion there. Announced just this week, the move deals a significant blow to London's historical role as a global hub in the precious metals market, and it raises the specter of a potential price-settlement hub in Asia to rival the New York and London daily spot-price fixes. The Hong Kong Monetary Authority is also targeting a new gold bullion ETF using the new vault as a repository, which would remove yet more physical supply from the market. The SPDR Gold Shares (NYSE: GLD) reports holding 1,078 tonnes of gold, slightly more than China's last-reported gold reserve
And Jesse has some interesting things to say about Wall Street Bankers: Jesse's Cafe Americain:

"Do these people take us for imbeciles? Do they think that the world does not see their corruption, their greedy, devious nature when it is not masked by a captive media, and is not repelled by it?

In 2005 we forecast this very outcome, that Wall Street and their cronies would push their schemes beyond all reason, like drunk drivers or addicts who cannot quit, until they create a cathartic, catastrophic event which will cause someone to finally take away their keys at the last.

That time is approaching. No one can predict exactly when, but it is there. Make sure you are wearing your seat belts."

Friday, September 4, 2009

The Chinese Know The Value of Gold; South Africans Fast Asleep At The Wheel.

I recently read on Mineweb an important story about the Chinese Government now officially encouraging their population to buy gold and silver. Because they know, as fiat-currencies are crumbling, that in the nearby future only gold and silver will have value. Gold and silver cannot be printed and have no risk attached to it. It is what it is.

The article below has more or less the same message: "we want to have our physical gold and silver in our pocket as we do not believe the custodians anymore. Trust is breaking down".

In a couple of years time the Chinese will be applauded for their great insight in the markets and we will know 2 kind of people: the ones with - and without gold and silver.

The South Africans in the meantime, shipped in February of this year, with approval of course of the Reserve bank, Minister of Finance and everybody else high up in the financial food chain, their ETF gold of Absa bank to the UK. Now we are talking only 28 tons, but the mere fact that this happened says something about their insight in financial markets, the lack of confidence on how to be in charge of your own destiny and knowledge of monetary history. Count the latter to be close to zero: everybody is running around in circles and no one has a helicopter view.

Where are the refreshing sounds from the South African Government, Reserve bank or financial media? They are all looking at their fiat-currency navel waiting for the next advertising Ponzi Rand to come in. Oh yeah, the Reserve bank is increasing their gold reserves, but this is for their convenience only, not because they suddenly see gold as a tool to prosperity for the population. South Africa unfortunately licks the boots of the Money Men of the IMF (read: Wall Street Bankers) who denies them to link their currency to gold or silver

Soon the financial world in the US and EU starts to unravel and there is nothing they can do about it. Just read Steve Keen, economics professor in Australia:
"What we are going through is a deleveraging crisis and we haven't experienced one of those since 1930. Last time (1929) it took 10 years and a world war to get rid of it, and this time we are staring up with 1.7 times the level of debt in America, not even mentioning the derivatives catastrophe that is also there."

"And deleveraging which is the attempt by the private sector to reduce its debt level can overwhelm the government's stimulus. The whole problem was caused by irresponsible lending and the only way out of this ultimately is to eliminate that debt. The debt has to be written off"
As the current financial system struggles to survive their follies, gold and silver will shine.

And what is the South African Government trying to do about it? Just about nothing. Reasons: as said before we contribute it to lack of knowledge on the monetary history.

Oh yes,
they talk all day about uplifting the impoverished masses. But if they really want to do something about poverty and enrich South Africa they should encourage the South African population to hoard gold and silver instead of Rands. It is there: in the ground below their feet!!

Gold and Silver have been money for 5000 year. The Chinese know this; they know what is coming and that the game is up.

Hong Kong recalls gold reserves, touts high-security vault
In a challenge to London, Asian states invited to store bullion closer to home

HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday.

The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center.

"Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region," said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region.

The Hong Kong Monetary Authority, which functions as the territory's unofficial central bank, will transfer its gold reserves stored in other vaults to the depository later this year, the Hong Kong government said in an earlier statement.

The monetary authority reported $63 million in physical gold reserves as of July 31, according to its International Reserves and Foreign Currency Liquidity statement. The authority wouldn't disclose where the reserves are held, but local media reports cited gold traders as saying that London's the most likely location.

Traders said the new depository facility could also foster new financial products, such as exchange-traded funds based on precious metals.

The 3,660-square-foot depository, located at the city's main Chek Lap Kok Airport, will serve as a "storage facility for local and overseas government institutions," according to the government statement.

Martin Hennecke, a financial advisor with the Hong Kong-based Tyche Group Ltd., said that could be appealing to regional central banks unnerved after watching the global financial system teeter on verge of implosion last year.

"Central banks are increasingly aware of the importance of having gold reserves at time of financial crisis and having it easily available at their own disposal," he said.

Meanwhile, local newspaper reports said the Hong Kong Mercantile Exchange had signed an agreement to use the depository for its physical settlement and storage needs.

Marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility, according to reports citing Raymond Lai, finance director with the Hong Kong Airport Authority.

Efforts will also be made to reach out to commodity exchanges, banks, precious-metals refiners and ETF providers, the reports said.

Management firm Value Partners planned to launch an ETF gold fund that will use Hong Kong instead of London as a repository for the gold backing the fund, local reports said Thursday.

Wednesday, September 2, 2009

Business as Normal on Wall Street: Casino Trading Continues

Casino or NY Stock Exchange?

So You Just Squandered Billions . . . Take Another Whack at It

Washington Post

You've probably never heard of Jay Levine, Chris Ricciardi, John Costas or Stanford Kurland, but they are charter members of Wall Street's Mulligan Club.

Back during the heyday of the credit bubble, they were the financiers who earned huge bonuses for creating, trading and investing other people's money in those complex securities that resulted in trillions of dollars in losses and brought global financial markets to their knees. And now they're out there again hustling for investors and hoping to make another score buying and trading the same securities.

Like golfers who treat themselves to a second drive after hooking the first one deep into the woods, these guys play on without apology or penalty. The maddening thing is that they're getting away with it and nobody seems to care.

Consider the case of Jay Levine, once the co-chief-executive of RBS Greenwich Capital, the American investment banking arm of the Royal Bank of Scotland. Under Levine's direction, RBS Greenwich went from the bottom of the "league tables" in terms of issuance of asset-backed securities to a perch near the top -- right up there, one industry publication wrote at the time, with Bear Stearns and Lehman Brothers as one of the "best mortgage-backed houses" in the business.

At the height of the mortgage frenzy, Levine's group generated more than $350 million in profit annually for RBS and Levine was reportedly RBS's highest paid employee, earning more than $60 million during the three years before his departure at the end of 2007.

Now, two years later, RBS is a financial ward of the British government, which has had to put in more than $30 billion to keep it from collapsing. RBS's biggest mistake was an ill-timed and overpriced purchase of a Dutch bank, but there were also tens of billions of dollars in U.S. credit losses, many of them attributable to RBS Greenwich.

Levine, meanwhile, left RBS at the end of 2007 to take the top job at Capmark Financial Group, a spinoff of GMAC that had become one of the country's biggest commercial real estate lenders. Since then, of course, things have only gone from bad to worse in the world of commercial real estate finance, forcing Capmark to post more than $2 billion in operating losses before it stopped filing public reports this spring. Its biggest shareholder, the buyout firm KKR, has now written off its entire investment in the company. Levine volunteered to reduce his base salary from $5 million to $4 million.

But don't shed too many tears for Jay. Even while remaining at Capmark, he's reassembled some of the old team from RBS Greenwich at a new firm, CRT Capital Group, a small trading house in Stamford, Conn., that he bought in July with former RBS Greenwich co-chief-executive Ben Carpenter and Ron Kripalani, who once headed the capital markets group at none other than Countrywide Financial. In a statement announcing the purchase, the new managers suggested that with so much of Wall Street operating under government-imposed pay caps, it was a perfect time to lure away the industry's "best producers."

Then there is Chris Ricciardi. In the world of finance, nothing has proven more toxic than collateralized debt obligations, or CDOs, and no one did more to expand their reach than Ricciardi. He pioneered them at Credit Suisse First Boston, then was lured away to Merrill Lynch, where he expanded the CDO business from less than $4 billion in new issues underwritten in 2003 to $28 billion in just the first half of 2007. That's when the music stopped and the venerable brokerage house found itself with $41 billion in CDOs and nobody to buy them.

By then, however, Ricciardi had already left Merrill and an $8 million-a-year pay package for what looked to be even better opportunities at Cohen & Co., a big Merrill client. Under Ricciardi as chief executive, it became a big CDO issuer in its own right, pumping out $25 billion of the stuff before the market collapsed.

Cohen & Co. is still limping along, but the publicly traded real estate investment trust that it manages -- and with which it merged -- now trades as a penny stock after its holdings lost more than $5 billion in value. Last month, its auditors cited material weaknesses in the company's internal controls.

There was a time when Swiss banks were known as much for their conservative investment strategy as for their secrecy and discretion. But that was before John Costas showed UBS how to turn its small American investment bank into one of the five biggest on Wall Street, and the source of nearly half of its profits.

Then, UBS asked Costas to open a hedge fund with $3 billion of the bank's capital, $1.1 billion raised from the outside and lots of borrowed funds. And, indeed, over the next two years, the hedge fund, Dillon Read Capital Management, bragged of gains of $2.5 billion, even after paying generous bonuses to Costas and his team. But when the market turned in the spring of 2007, UBS found itself hip-deep in soured U.S. real estate investments. UBS rushed to close Dillon Read and took its assets onto its own books. But when the dust finally settled, UBS was forced to recognize $37 billion in credit losses and write-downs, including $3 billion directly attributed to Dillon Read.

Costas, however, seems to have landed on his feet at 623 Fifth Ave., where he and a few partners used their bubble earnings to open the PrinceRidge Group, which provides trading and investment banking services to institutional investors. Company officials say their aim is to fill the vacuum left by the disappearances of Lehman, Bear Stearns and Merrill.

And then there is Stanford Kurland, who helped turn Countrywide Financial into the biggest mortgage lender in the United States, rising to chief operating officer and heir apparent to founder Angelo Mozilo. Kurland helped to create the growth-oriented culture at Countrywide and oversaw the introduction of new loan products that would later land the company in trouble. In late 2006, Kurland was forced out, reportedly in a dispute with Mozilo over succession and declining lending standards.

Not long after a failed Countrywide was forced into the arms of Bank of America, however, Kurland was back in action. Starting with some of the $140 million he had earned from Countrywide stock sales, he earlier this year put together a $600 million war chest and began buying up mortgages and securities backed by mortgages that were just like the ones he used to write back at Countrywide. And at the end of July, Kurland raised an additional $300 million from an initial public offering for his PennyMac Mortgage Investment Trust.

I contacted Kurland, Costas, Ricciardi and Levine, along with a number of other, less prominent members of the Mulligan Club, to talk about their attempts to cash in on the crisis they helped to cause. Some declined to talk, while others spoke only on the condition that they wouldn't be quoted. The message that came through in those conversations, and in comments made to other news outlets, was remarkably consistent:

There is probably some truth to these excuses, but taken as a whole, they are really nothing more than a cop-out. It's hard to believe that large organizations could really go from being smart and honest one day to being stupid and deceitful a year later. Nor is it credible that the money they earned during the good years was the result of individual brilliance while the money lost in the bad years was the result of uncontrollable market forces. It is also a peculiar moral code that says it is okay to traffic in crappy securities, just as long as you don't get stuck with them in your own portfolio when the market finally craters.

What's most curious, however, is why anyone would want to invest new money with people whose record is so tarnished. And then the answer hits you right between the eyes: The money isn't coming from savvy outsiders; it's coming from other members of the Mulligan Club -- members who are lucky enough to still have money to manage, and clever enough to know that some day they, too, might be looking for a second swing at the ball.