Chart Of The Day: Fannie Mae Dives 10 %

Thursday, September 29, 2005


While Freddie Mac is undergoing a multiyear balance sheet revision that ties up about a third of its staff, Fannie Mae surprised investors yesterday with a 10-percent plunge. Anybody heard anything lately that Fannie Mae will have to revise its books too? What does the share price development want to tell us? Maybe some problems in the mortgage market?

Are Central Banks Slowing Their Gold Sales?

Wednesday, September 28, 2005


Gold sales under the Central Bank Gold Sales Agreement (CBGSA) may fall well short of the proposed 500 tons in the coming 12 months. According to Pierre Lassonde, president of the world's biggest gold producer, Newmont Mining, "for the next year only 250 of the 500 ton quota has been spoken for," miningmx.com reports. Answering questions at the Denver Gold Forum Lassonde said there was a turnaround in official sector attitudes to gold which now believed bullion prices might improve. The fear motivating the central bank gold sales of the 1990s had been replaced by greed, he said.
Paul Walker, an executive director for GFMS, a UK independent metals research house, said that net sales by central banks (which includes gold bought by the official sector), would "probably be less than the 500 ton quota. The jury is still out but I wouldn't be surprised if it were lower," he said.
It has to be noted that no official announcement about the CBGSA for the coming 12 months, starting last Monday, has been made yet.

Greenspan Speech Offers Some Comfort For Markets - But Only Some

Tuesday, September 27, 2005


Will it be different this time? Federal Reserve Chairman Alan Greenspan finally found some comforting words for financial markets after two days of unsettling remarks about the US budget deficit and consumers lacking a financial cushion in the wake of extensive home equity extraction which has been the driving force behind the economic expansion in this millennium. In his speech about "Economic Flexibility" Greenspan praised the self-correcting abilities of an economy that is not over-regulated as markets and their new products allow for an incremental adjustment of imbalances in real-time.
Being a fan of balanced times Greenspan had something to offer to both bulls and bears.
Alluding to the highest public and private debt levels ever seen in American history Greenspan noted calmingly that
"recent regulatory reform, coupled with innovative technologies, has stimulated the development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk.
Conceptual advances in pricing options and other complex financial products, along with improvements in computer and telecommunications technologies, have significantly lowered the costs of, and expanded the opportunities for, hedging risks that were not readily deflected in earlier decades. The new instruments of risk dispersal have enabled the largest and most sophisticated banks, in their credit-granting role, to divest themselves of much credit risk by passing it to institutions with far less leverage. Insurance companies, especially those in reinsurance, pension funds, and hedge funds continue to be willing, at a price, to supply credit protection.
These increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago. After the bursting of the stock market bubble in 2000, unlike previous periods following large financial shocks, no major financial institution defaulted, and the economy held up far better than many had anticipated."
But Greenspan is not thoroughly optimistic as human emotions of euphoria and distress - translate that into the old formula of greed and panic - seem to be the weakest link in the wealth-chain in his opinion. He warned that
"a decline in perceived risk is often self-reinforcing in that it encourages presumptions of prolonged stability and thus a willingness to reach over an ever-more-extended time period. But, because people are inherently risk averse, risk premiums cannot decline indefinitely. Whatever the reason for narrowing credit spreads, and they differ from episode to episode, history cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets. Such developments apparently reflect not only market dynamics but also the all-too-evident alternating and infectious bouts of human euphoria and distress and the instability they engender."
The Fed chairman left no illusion that authorities would be able to clean up a financial mess, reminding listeners that the significant tightening in 1994 did not help to avoid the stock market bubble of the last century. He said that the "equity market's ability to withstand periods of tightening arguably reinforced the bull market's momentum."
Seeing difficult times ahead he said that a flexible labor market might be perceived as job-insecurity but that it actually promotes job creation. He repeated his urgent plea for a better education for Americans.
"Protectionism in all its guises, both domestic and international, does not contribute to the welfare of American workers. At best, it is a short-term fix at a cost of lower standards of living for the nation as a whole. We need increased education and training for those displaced by creative destruction, not a stifling of competition."
Altogether the speech sounded a bit distant to the slew of problems the US are facing and that are listed here and here. The market took Greenspan's own shoulder-padding for the period of his reign at the Fed, which saw the longest expansion in history, initially very positive and rallied, but the Dow failed to break through the 10,500-point mark and retreated in late trading.
Morgan Stanley chief economist Stephen Roach added in a Bloomberg TV interview some counter-perspective. He said that Greenspan will retire at a time when the US is confronted with the worst current account deficit ever, a housing bubble that will inevitably burst while the savings rate of Americans is negative at the same time.
Looking for a clue to the next interest rate step of the Fed one is left with with the impression that the chairman hopes to retire before the long list of problems will begin to leave their bloody marks on the economy. Record energy prices and gold prices are clear signs that all is not as well as everybody might wish. The conference he addressed is still optimistic. According to the Wall Street Journal
"the US economy is likely to continue its "solid expansion" into 2006, even as price spikes in oil and natural gas cause ripple effects in coming months, a new National Association of Business Economists survey of 43 forecasters says. In the storm's aftermath, the forecasters pared their prediction for inflation-adjusted economic growth by 0.4 percentage point for this quarter and by 0.2 percentage point for the next one. Overall, they expect gross domestic product to rise 3.5% this year and 3.4% next year."
Expect the Fed to stay on course with their baby-steps of 25 basis point rate increases for the coming last three meetings with Greenspan at the helm. And run for cover after that. But this is only a human emotion expressed by me as I fear that the transition from Greenspan to his yet unnamed successor will lead to severe ripples in the markets. There are simply too many problems to remain complacent, a feeling the latest FOMC statement has mirrored too.

Europe's Money Printing Press Gains Speed

After yesterday's ranting about the absurd growth in US money supply the same problem hits hard at home too. While the European Central Bank (ECB) is vigorously defending its mandate to keep the value of the Euro steady, money supply figures show a different picture.
The ECB today published another set of shocking money supply data (pdf). M3 growth accelerated to a record annual rate of 8.1 (7.9) percent in August, pushing the 3-month average to 7.9 percent. M1 is growing still faster with the annual rate accelerating to 11.5 (11.1) percent in August, driving the 3-month average to a new high of 11.2 percent. While these figures begin to come in at roughly double of what was the target for money supply growth they also point to growing inflationary problems in the Eurozone. GDP growth forecasts for 2005 deviate around the 1-percent mark while headline inflation is now at 2.1 percent - a figure every European consumer can only laugh about.
Money supply growing at more than 8 percent was last recorded during the German reunification in Europe. In short - there is too much money around for a stagnating supply of goods and services. Spell this i-n-f-l-a-t-i-o-n.
The ECB has not yet published its consolidated weekly financial statement for the last week, normally due at this time, that will tell about the activities of the Eurosystem members in the gold market. The new Central Bank Gold Sales Agreement kicked in yesterday.
UPDATE: There were no gold sales by the ECB members last week, the weekly statement shows. In the week before one European central bank had sold gold for 57 million Euros.
The ECB will revalue the gold reserves of its 12 members at the end of the current quarter. Currently the gold hoard is valued at 361 Euros per ounce and stands at 132.77 billion Euros. At the moment an ounce trades for 382 Euros. This would translate into a revaluation of 5.8 percent or to more than 145.7 billion Euros. The ECB members have kept the nominal level of their gold reserves more or less unchanged in the past 12 months by selling into price spikes.

What Will Weaken Within The Week

Monday, September 26, 2005

Excuse me, but I've lost track how many billions of dollars have been recently pledged for the relief efforts in the aftermath of hurricanes Katrina and Rita. While the economic calendar shows a steady trickle of macroeconomic figures for the running week I doubt that any of these lagging indicators will manage to erase the huge uncertainties the markets are facing these days. Looking at the devastation in the south of the US and excitement about Alan Greenspan's remarks about the US having lost its control of budget deficits even the top figure of the week, GDP growth in the second quarter, estimated at 3.3 %, will not be able to turn around the rather negative sentiment for US equities.
But don't worry too much. As long as money supply keeps its explosive expansion there is enough liquidity to keep markets propped up in the face of whatever desasters might hit the world this week.

Money Supply M3

GRAPH: Money supply M3 has grown a staggering 111 billion dollars over the 4 weeks leading up to September 13. The last time the Fed really tightened liquidity was in the first half of the 1990s.
While the US is fighting natural desasters, the political situation in Germany does not appear as being solvable in the next days. Add in this week's release of France's estimates for the budget deficit and the dollar and the Euro are likely remain to balanced against each other. Oil looks rather resilient after the big selloff on Friday which has slowed markedly in early trading.
Central Bank Gold Sales Agreement
A good question is the short-term direction of gold as the new Central Bank Gold Sales Agreement (CBGSA) is scheduled to kick in this week, allowing the member central banks of the Eurosystem to dump another 500 tons over the coming 12 months. In retrospective the central banks were always quite good to throw their best of all assets at short-term market highs on the market. What is missing until now is a formal announcement that the CBGSA will continue the pattern of past years.
Get Your Daily Dose Of Fedspeak
Following the indiscretion of Greenspan's obviously confidential remarks about the exploding US budget deficits the chairman himself will have two opportunities to calm the markets, the Fed calendar shows.
Today Greenspan will speak about "Mortgage Banking" to the American Bankers Association Conference and on Tuesday he will give a yet untitled speech to the National Association of Business Economists. As both events are televised newsgatherers will have no chance to ask Greenspan about his private view on the US budget deficit. The chairman has repeatedly warned about the exploding deficits and the political unwillingness to address them. His speech on mortgage banking can be expected to include yet more warnings on Fannie Mae and Freddie Mac, the latter currently undergoing a multi-year revision of its financial statements.
On Monday, governor Susan Schmidt Bies will talk about "Basel II" at the Institute of International Bankers Annual Dialogue with Government Officials. A quite interesting topic as minimum reserve requirements in the US banking perform like a cone of ice in the sun.
Vice chairman Roger W. Ferguson will unveil the new $10 bill on Wednesday. Expect some additional bits and pieces of information on Ferguson's current view on the state of the economy.
On Thursday governor Donald L. Kohn - always good for some stern warnings - will give a speech about "Inflation Modeling: A Policymaker's Perspective" to an academic audience.
What To Make Out Of It
Asked about the consequences for financial markets I assume that the political uncertainties in Germany and fears of unabatedly rising deficits in the USA will keep currencies in an equilibrium.
Stocks and bonds should head lower - that is if the printing press gets shifted at least two gears lower - in the face of new expectations that the Fed will stay on its measured path in the last 127 days of Greenspan's reign. Looking at the FOMC calendar this will translate into a Fed Funds rate of 4.50 % by the end of January. There has been no long-term period in history where stocks could successfully fend off higher interest rates. Bed prepared for rough times ahead.
The action in gold will be most interesting as there is heavy speculation that the central banks are keen to drive down the price of gold - the strongest reminder for inflation dangers - to levels below $450 an ounce. See silver trailing gold's performance.
My outlook for oil is unchanged since I had recommended a level of $63 per barrel as the last low-cost entry point. As the cooler season begins and most Europeans have not filled up their heating oil tanks yet the price pressure will certainly be on the upside over the coming months.

Fury Over Greenspan's Remarks About US Losing Budget Deficit Control

A Reuters report from Sunday that says Fed Chairman Alan Greenspan said the US has lost control of its budget deficit has created a fury in official American circles, the British Independent wrote in a follow up on Monday.
Alan Greenspan

First the most important parts from the Reuters story:
U.S. Federal Reserve Chairman Alan Greenspan told France's Finance Minister Thierry Breton the United States has "lost control" of its budget deficit, the French minister said on Saturday.
"'We have lost control,' that was his expression," Breton told reporters after a bilateral meeting with Greenspan.
"The United States has lost control of their budget at a time when racking up deficits has been authorized without any control (from Congress)," Breton said.
"We were both disappointed that the management of debt is not a political priority today," he added.
Ministers from the Group of Seven rich nations on Friday called for vigorous action around the world to curb rising imbalances in international trade and investment accounts.
A decrease in the U.S. budget deficit were cited by the G7 as one way to ease those imbalances. U.S. Treasury Secretary John Snow said the U.S. administration was still committed to halving its budget deficit by 2009.
Breton spoke as International Monetary Fund Managing Director Rodrigo Rato said U.S. plans to cut its government expenditures now looked ambitious in the light of huge reconstruction costs to be borne in the wake of Hurricane Katrina.
Breton said: "The situation that is creating tension today on the currency market ... is clearly the American deficit."
The United States needed to address its budget deficit, he said, adding: "It seems to me that my counterpart John Snow is completely aware of this, he wants to harness the problem, but it seems to me he doesn't have the room for maneuver."
Breton added that after hearing Greenspan talk about inflation: "One has the feeling - though he didn't say so - that interest rates will probably continue to rise slightly until his departure."

These statements were not received well in Washington where the White House is earmarking billions of greenbacks for rebuilding and war efforts on a daily basis. According to the Independent,
a clearly irritated senior US Treasury source said: "Things can get lost in translation."
A spokesman for the US Treasury said: "This administration is absolutely committed to the President's goal of halving the deficit as a percentage of GNP by 2009 and we have every expectation of meeting that goal."
I refer you to the post "US(SR) 6-Year Budget Plan Not Very Convincing" that focused on future US budgets and the fact that projected figures have already been very optimistic without the highway bill and hurricane clean-up costs.
The dollar traded half a cent lower in early Monday trading in Europe.
Greenspan will have two chances to explain his remarks at speeches he is scheduled to hold today and tomorrow. See the next post for an overview of this week's most important events for international financial markets.

No Matter What Happens, Wall Street Does Not Go Down

Friday, September 23, 2005

Negative savings rates, accelerating inflation, a devastated southern coastline with even bigger threats looming from hurricane Rita - after Katrina was called the worst that could happen - ballooning current account, trade and budget deficits. A war that cannot be won, oil prices at (nominal) record highs, a 275 % rise in the leading interest rate, a declining bond market. Rumours that the major players in the market carry to much derivatives risk. Stagnating personal incomes and the expectation of sharply rising unemployment because of the hurricanes. A rising share of GDP attributable to a growing government while private sector employment growth has been the weakest since records began.
And what does Wall Street do? It shrugs it all off, moving sideways in a 10,350 to 10,600-point trading range. Does that sound logic?
What is keeping the biggest stock market in equilibrium? Certainly not private investors who are up to their eyeballs in debt. Neither money managers who can put their money to more fruitful work in the Far East or the commodities markets.
The sharp brekaout of gold does not exactly reinforce hopes that US shares are valued fairly as it indicates higher inflation than any concernced official would admit. Talking about officials: No president ever had lower approval ratings than Alfred E. Neuman, sorry, I meant George W. Bush. And no president has ever spent more money (which he has to borrow abroad to the tune of some $3 billion a day) while not spending one thought on how to repay it.
Oil prices today declining on the hope that Rita will be downgraded to a category 4 hurricane. Katrina was a category 4, so where is the relief. That's still enough wind to tear apart close to a quarter of the US' refining capacity, not to speak of disruptions in oil exploration in the Mexican gulf!
Is This All Too Good To Be True?
On top of it all sits the biggest debt pile American consumers have run up in history. Sorry, a wooden house is not worth a million dollars, nowhere in the world.
But Wall Street does not care. Turn off CNBC and either switch to Bloomberg TV or - best of all - start reading the blogs in my blogroll in the sidebar. Leave aside your political bias; the mounting debts don't care whether you are conservative or progressive. As taxpayer it is your common denominator.
The median size of an IRA is about $27,000. How long do you think you can live comfortably on that paltry savings once you retire.
Reading about 500 to 1,000 pieces of news every day I find it hard to come up with only one story per day that is halfway optimistic about the future of the US economy.
Not that Europe is somehow better off. Record unemployment in most EU countries coupled with a negligible GDP growth outlook does not exactly spell good times ahead.
Coming back to the US. Can anybody direct me to an industry sector that has a dynamic export growth outlook? Arms exports are excluded. That would be too easy at all!
The car industry with their oversized gas guzzlers is about to be strangled by high oil prices which are here to stay, given the growing oil demand in the Far East.
The insurance industry will come in the squeezer from the hurricanes.
The construction industry will get suffocated from the foreseeable bursting of the housing bubble.
The high-tech industry finds better educated workers in India and Singapore.
The service industry will face problems as soon as consumers feel the pinch from higher interest rates and rising inflation.
And why does Wall Street look so resilient in the face of all the problems covered in these posts:
US AAA Rating - How Much Longer?
We Can Guarantee Cash
Where Did All The Trillions Go?
Inflation In Hedonic Conundrum
Those who enjoyed annual income growth of 5 percent, please raise your hands
Current account balances show dramatic shift
US(SR) 6-year budget plan not very convincing - disturbing fine print
Counting the bubbles
Markets cheer 15 % decline of oil prices - after a rise of 434 %
There is no free lunch - higher rates equal higher risk
NYT - The Perfect Storm That Could Drown The Economy
Global struggle for oil can become a nightmare for the markets
Imperial struggles (no fairy tale)
Two oriental giants will compete for economic dominance
Oil prices and Fed Funds diverge strongly
If it weren't that cheap to print them greenbacks...
Experience shows that man never learned anything from experience (G.B. Shaw)
Mandelbrot: Old Formulas Will Not Work in Volatile Markets
Growth Sector #1: Conundrums
Real Estate - Debt Funded by Debt
Greenspan Stresses Need to Balance the Budget - by Higher Taxes and Lower Outlays
Bush Is Optimistic
FRB's Kohn: When the Unexpected Inevitably Occurs
Snow: Sort Out The (Hedge Fund) Mess Yourself
US Debt: 136,347 Dollars per Head
China's BIG Problem Goes by the Name of Energy
GDP No Gauge For Living Standards
Chart Of The Day: US Debt (That Was In 2002!)
A GAAP Look At The US Budget Reveals Multi-Trillion Deficit
Chart Of The Day: Deflation CycleAn Interesting Monetary Detail In The Aftermath Of The London Bombings
Greenspan Sees $60 Oil Shave Off 0.75 % Growth
Greenspan Bends Truth On Stabilizing Effect Of Gold Standard
BIS Warns Of Asset Price Deflation
The Shortest Possible Investment Advice
Will Greenspan Lose His Wreath Of Honour Before He Retires?
Greenspan's Blueprint For A Gold Standard
USA: The 3rd World Is Only A Few Blocks Away
Already 50 Countries Tie Currency To Euro
Thinking again of the resilience of Wall Street to reflect all these mounting problems in share prices, maybe teh following post sheds a little light on the true working of the big money game:
Money Firm Claims Wall Street Is Rigged By The Government
WSJ - Greenspan Sternly Warns Of GSE risks
Some things don't appear to be as they appear I conclude. All comments are highly welcome!

Reality TV - From Property To Debt Management

Thursday, September 22, 2005

Remember all those Reality TV shows following wannabe real estate moguls? Couples hunting for the next property that would guarantee them a killing after some renovation work? Condo-flippers flooring the throttle in order to be on time at the next sales event?
Now that some first signs of a slowing of the housing bubble are appearing on the horizon - have a look at the recent discounts on multi-million dollar mansions on websites like Luxist - the themes of these shows are going to change as well.
From property to debt management.
A new Reality TV show is scouting for young Americans who are in debt up to their eyeballs. Today I received the following email from brokefolk.com.
Attention high school students, college students, recent graduates, newlyweds, and Young America: If your life is a financial mess, a new reality show wants to hear about it...
The show is now conducting a nationwide search for unusual, extreme, and entertaining stories about real money messes from funny, outgoing and interesting people who are starting their financial life off on the wrong foot...
Offering a financial makeover to contestants with stories unusual or dramatic enough to capture America's hearts, the show is currently accepting email stories nationwide from America's young people. In addition to appearing on the show, winners can receive financial assistance to help them solve their money problems.
"We want to hear the emotions and frustrations behind your situation," speaker Peter Bielagus said. "Maybe you are 22, and you have $23,000 of credit card debt. How did you get there? Did you feel you had to have certain items to fit in with a certain crowd?"
25 And Bankrupt - This Show Wants You
Bielagus says the show wants personal financial tales from people who range from a college student longing to buy their first real estate investment property, to a soldier just home from the war who had to put on life hold for 24 months, to someone who had to declare personal bankruptcy at 25 and is now struggling to get back on their feet.
"Maybe you and your spouse have committed to a dream wedding, but are out of money. Perhaps you are so far in debt that you use credit cards to pay your credit card debts," said Bielagus. "We want to hear it and we want to help."
Applicants are encouraged to send an email describing your situation and why you think you would be a good candidate for the show. "Remember," says Bielagus, "we want more than numbers, we want to hear your story: what are the emotions, frustrations and pressure that got you where you are?"
The clock starts ticking when the show will become a widespread reality in real life. Consumer debt figures, the negative savings rate and the soon-to-deflate housing bubble will carry the drama into several million American living rooms. And it won't go away by turning off the TV.

Psychopaths Are Better Traders, Scientists Say

Wednesday, September 21, 2005

Not making a killing in the markets? Prone to cut profits and let losses climb through the roof? Don't worry, this just means you are perfectly normal.
In the rare case that you are a constant winner in the markets - better consult your psychiatrist.
Scientists have found out that the emotionally impaired are more willing to gamble for high stakes and that people with brain damage may make good financial decisions, Reuters picked up a story first published in the London Times last Monday.
Oh, and better cover your back. Your boss might as well have climbed the career ladder for the same malfunction.
In a study of investors' behavior 41 people with normal IQs were asked to play a simple investment game. Fifteen of the group had suffered lesions on the areas of the brain that affect emotions.
The result was those with brain damage outperformed those without.
The scientists found emotions led some of the group to avoid risks even when the potential benefits far outweighed the losses, a phenomenon known as myopic loss aversion.
One of the researchers, Antione Bechara, an associate professor of neurology at the University of Iowa, said the best stock market investors might plausibly be called "functional psychopaths."
Fellow author, Baba Shiv of Stanford Graduate School of Business said many company chiefs and top lawyers may also show they share the same trait.
"Emotions serve an adaptive role in speeding up the decision-making process," said Shiv.
"However, there are circumstances in which a naturally occurring emotional response must be inhibited, so that a deliberate and potentially wiser decision can be made."
I feel much better now.

Inflation Concerns Keep Fed On Measured Path

Tuesday, September 20, 2005

With the added impact of hurricane Katrina amidst slowing economic indicators and rising unemployment the Federal Open Market Committee's (FOMC) job to keep the economy in balance has become a lot trickier. While the FOMC acted as anticipated and raised the Fed Funds rate the 11th time in a row to 3.75 % and also kept the much discussed phrase about its "measured path" of removal of accommodative monetary policy in the statement, it can be read between the lines that inflationary pressures stemming from higher energy and other costs will keep the Fed rising rates for at least one more time.
Uncertainty about the near-term outlook was also reflected in the vote. For the first time since the Fed started rising rates it was not an unanimous vote. Fed governor Mark W. Olson voted for a pause at this FOMC meeting.
Worth noting is also the fact that the long-term inflation outlook appears now only "contained" to the FOMC. In previous statements this outlook had been described as "well contained."
What the most recent statement of the FOMC lacks is the confident and complacent tone of previous statements. Until today the Fed has appeared more knowledgeable about the future course of the economy. Admitting to uncertainty in the wake of Katrina can be seen as a straight way to be as honest as possible. But this will certainly not manage to instill confidence with the growing number of already very wary investors. See markets heading lower for the rest of the year.
While the Fed still tries to play down inflation fears by pointing at the relatively low core inflation rate the high priests of ever expanding credit nevertheless warned of higher energy and other costs. Well, if energy and other costs rise, what is remaining as the core inflation rate?
Being very critical of these so called "core" rates I want to remind readers that core inflation and the Consumer Price Index are actually two completely different things unless we learn to live without energy and nutrition. Inflation for mere mortals is now running at an annualized rate of 6.17 percent.
It is also to be seen whether the Fed will finally tighten money supply. The graph (click for larger image) shows that all 11 rate hikes have had close to zero effect in this matter. Money supply has rather accelerated in the past two years.
Market participants impulsively categorized the statement as one that rather raises more questions than it answers, an opinion I humbly share.
Markets immediately jumped on the Fed's bandwagon of uncertainty, sending both stocks and bonds lower while the dollar shot to its highs of the day. The surge in the dollar can be explained by the fact that investors will be able to achieve higher yields on their future investments in the debt market. This will work in the short- to medium-term only, see the post "There Is No Free Lunch - Higher Rates Equal Higher Risk."
Following the markets pointedly negative reaction the Fed for the first time in a while has failed to calm investors who anyway face a long list of economic threats:
  • Current account deficit
  • Budget deficit
  • Trade deficit
  • Inflation
  • Medicare
  • Current (Iraq) and looming wars (Iran)
  • GSE's (includes the housing bubble)
  • Stagnant private sector employment
  • Katrina's costs
  • The highway bill
  • Demographics
None of these issues has yet been adequately addressed by the current administration and the global growth outlook does not offer any relief either. The booming economies in the Far East will come to a sudden standstill as soon as growth projections for the US get revised downwards again. The Fed itself has raised this possibility, saying that Katrina will dent the near-term outlook.
But then it is to be remembered that Katrina is not the single issue wreaking havoc on the American economy. It should rather be called the drop that led to an overflowing barrel. See the list above.

Comparison Of The Two Latest Statements
September 20: The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-3/4 percent.
August 9: The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-1/2 percent.
September 20: Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility.
While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.
August 9: The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually. Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated.
UNCHANGED: The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.
Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

September 20: Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Anthony M. Santomero; and Gary H. Stern. Voting against was Mark W. Olson, who preferred no change in the federal funds rate target at this meeting.
August 9: Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
September 20: In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Richmond, Chicago, Minneapolis, and Kansas City.
August 9: In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

It will be most interesting to scrutinize the FOMC minutes in 3 weeks from now.

If WiMAX Were Only Available Today - Tip On Alvarion

Friday, September 16, 2005

Getting incrasingly frustrated with my modem connection in the Austrian hinterlands which works at a crappy 40k only I googled around for future internet access possibilities and stumbled upon Alvarion Ltd. which is the self-proclaimed world market leader for so-called WiMAX connections.
In short, before my modem hangs up again for whatever - beep - reasons:
WiMAX is the next big step after WLAN. Whereas WLAN works only for a few 100 feet, WiMAX enables users to connect to the internet within a radius of roughly 30 miles to the nearest transmission unit and does so even across mountains or within buildings at speeds surpassing DSL connections. The Nasdaq-listed company, ticker ALVR, went public at the end of the internet craze at some $50 a share and is currently trading close to its 52-week low at $ 8.80 after it surprisingly posted another quarterly loss. Click here to proceed to all financial details of Alvarion which claims to have established sales in already 130 countries around the world.
As they just landed a contract with Israels national internet provider Bezeq they seem to be more than a daytripper. Reading their product descriptions this sounds like a stock The Prudent Investor can recommend (and will buy himself to put his money where his mouth is) as the company is expected to return to profitability again in the next quarter.
There are even analysts reports available that compare Alvarion to Microsoft or Apple at their early stages. The concept of erecting a single low-cost transmission unit every couple of miles is simple enough to fulfill my investment standards where the first rule says, if a company can't explain what it does within three sentences/minutes, look elsewhere to put your money.
Alavarion has published a release some time ago that they are cooperating with Intel on a WiMAX chip. If all this becomes true it could pave the road to the fulfilment of heavy internet users wettest dreams: Highspeed internet whereever you are. This should send the stock skywards in the medium term.
NOTE: Blogging will resume on September 20.

WSJ - Greenspan Sternly Warns Of GSE risks

Thursday, September 15, 2005

I am a bit limited in my blogging at my current location (slow modem connection) but happy not to have overlooked another stern warning of Fed chairman Alan Greenspan about the systemic risks of the Government Sponsored Entities (GSE) Fannie Mae and Freddie Mac. In a letter dated September 2 (pdf) to Republican Senator Robert Bennett Greenspan wrote, "as Fannie and Freddie increase in size relative to the counterparties for their hedging transactions, the ability of these (companies) to quickly correct the inevitable misjudgments inherent in their complex hedging strategies becomes more difficult," the Wall Street Journal reports.
Mr. Greenspan's letter concludes: "In the case of (Fannie Mae and Freddie Mac), excessive caution in reducing their portfolios could prove to be destabilizing to our financial system as a whole and in the end could seriously diminish the availability of home mortgage funds."
Legislation to impose a range of new controls over the congressionally chartered companies, known as government-sponsored enterprises, or GSEs, has been stalled in the House, in part over Mr. Greenspan's concerns that it doesn't go far enough in curbing the growth of the companies' mortgage portfolios.
Many conservatives, who see Fannie and Freddie as a form of government intrusion, also worry that another provision of the bill would strengthen the companies' already substantial political clout on Capitol Hill, by substantially raising the amount of money they dedicate to affordable-housing programs around the country.
The two companies borrow money to buy home mortgages. They either hold the mortgages in their own portfolios or sell them to other investors. Because they can borrow almost as cheaply as the federal government itself, critics worry that there are no effective curbs on their potential growth, and particularly the growth of their portfolios. That is a potential concern because their portfolios of mortgages make the companies extremely vulnerable to interest-rate swings.
The companies try to hedge that risk through complicated strategies involving derivative investments such as interest-rate swaps. But Mr. Greenspan and some others worry that as the companies and their portfolios grow, they could overwhelm the ability of Wall Street banks to act as the counterparties. Already, market participants have reported occasional shocks when sudden zigzags in interest rates have brought the companies - along with other mortgage-market players - into the swaps market suddenly.
Freddie Mac said Mr. Greenspan's comments were consistent with prior statements he has made. The company also sought to play down concerns about systemic risk posed by its portfolio investments. "Our portfolio is very conservatively managed and tightly regulated," said Freddie spokesman David Palombi, pointing to the elaborate tests that federal officials run to measure its safety. He also suggested that the markets themselves would prevent untoward growth of the companies, and warned that "arbitrarily limiting our retained portfolio would decrease over time the availability of the long-term, fixed-rate, prepayable mortgage."
Fannie declined to comment. Both companies have warned investors that the legislation could materially hurt their profits and affect their ability to promote affordable housing.
While holdings of mortgages and related securities by Fannie and Freddie have soared during the past 15 years, so far this year their combined holdings have declined. At the end of July, the combined total came to about $1.449 trillion, down 7 % from the end of 2004. That is partly because Fannie has been shrinking its holdings to meet stiffer capital requirements imposed by the company's regulator in the wake of an accounting scandal.
But critics worry that if the current wave of scrutiny passes without strong new legislative curbs, the companies will be free to start growing again. That concern led Mr. Greenspan to warn earlier this year that passing the House bill would be worse than doing nothing.
Yesterday, the chief proponents of the House legislation sought to improve chances for their bill by amending it to steer more of the companies' profits into affordable housing in the stricken Gulf Coast region. One of the leaders of the effort is Rep. Richard Baker, a Louisiana Republican who represents the Baton Rouge area.
Another proponent, House Financial Services Chairman Michael Oxley (R., Ohio), said the bill is expected to come to a floor vote next week. Still, it isn't clear that the changes will be enough to overcome objections to the House measure among conservative critics.
A shortlist of most threatening risks to the economy:
  • Current account deficit
  • Budget deficit
  • Trade deficit
  • Inflation (new figures due today, seen at 0.5 % monthly change)
  • Medicare
  • Current (Iraq) and looming wars (Iran)
  • GSE's (includes the housing bubble)
  • Stagnant private sector employment
  • Katrina's costs
  • The highway bill
  • Demographics
  • Middle East
This growing pile of current and future debts has only one positive side effect: Anybody heard anything about Bush's plans to privatize social security lately?
Bush and Social Security

NOTE: Full scale blogging will commence on September 20, the day of the next FOMC meeting whose results are highly dependent on today's new inflation figures. Another 0.5 % increase in the headline figure would compound to an annual rate of 6.17 % and could force the Fed to leave the path of "measured" hikes, caught in the conflict of higher prices and slowing growth.

3rd Week Without CB Gold Sales - Expecting Correction After September 26

Wednesday, September 14, 2005

The member central banks of the Eurosystem have been absent from the physical gold market for the third week in a row after dumping their annual 500 tons of bullion by the end of August, the latest weekly consolidated financial statement of the ECB shows. Gold and gold receivables were unchanged at 137.829 billion Euros.

Their absence from the market can be clearly seen on the chart. Gold rose from $430 to $450 an ounce since then. The new central bank gold sales agreement will come into effect on September 26. Expect a good dose of bullion entering the market from this date onwards that could drive the gold price down to the $42x-level before it will resume its primary - and in my opinion unstoppable - uptrend. The major driving force is the continuing strong physical demand in the Middle East and new strength in the Indian jewellery market as the main season for weddings is just about to begin next month and will last until the end of the year.
It is also to be noted that gold gains a lot of glimmer for Euro thinkers as the price rise is accompanied by renewed strength in the dollar. While the dollar gained again close to three percent, gold has corrected less than one percent at this moment.
At the heydays of gold around 1980 asset managers used to recommend that investors hold 5 to 10 percent of their savings in bullion. It can be safely assumed that the current share of gold in private investors portfolios is less than one percent. Give or take a few more crises on the globe (Iraq, Iran, inflation, inequality) and imagine what will happen to the gold price if the current portfolio share rises to 2 percent.

Money Firm Claims Wall Street Is Rigged By The Government

Tuesday, September 13, 2005

ATTENTION: This is a very long post covering excellent research about the PPT (Plunge Protection Team). No lunatic fantasies here, but lots of well-sourced quotes from former Fed officials, presidential advisers and other officials that support suspicions that the well-being of US equity markets is a matter of national interest.
Remembering the magical recovery of the Dow Jones Industrial Average (DJIA) on April 20, when it touched the 10,000-point mark for a few seconds before magically bouncing off and opening about one percent higher the next day, I still cannot suppress the feeling that other than only market forces were at work to prevent a fall below the psychologically extremely important five-figure mark in the current period of exploding deficits, accelerating inflation, stagnant private sector employment and slowing GDP growth projections.
John Embry and Andrew Hepburn from Toronto-based, well-reputed Sprott Asset Management have recently come up with a disturbing piece of research "Move Over, Adam Smith: The Visible Hand of Uncle Sam" (pdf) that fuels lingering skepticism whether US capital markets are driven by expectations of private investors and their asset managers only.
Executive Order No. 12,631 gave birth to the PPT
While the authors would not have needed to get the existence of the PPT confirmed by former Clinton adviser George Stephanopoulos as it was officially born as the "Working Group on Financial Markets" by Ronald Reagan's presidential executive order no. 12,631 in 1988, they raise well-founded concerns that the PPT has been intervening on Wall Street multiple times. The Treasury website hosts pictures of PPT members Treasury secretary John Snow and Fed chairman Alan Greenspan, the other two heads of the group being the acting chairmen of the Securities Exchange Commission (SEC) and of the Commodity Futures Trading Commission (CFTC).
Excuse me for omitting the links but I am currently blogging via modem connection. But a search of the Treasury's site for the "Working Group on Financial Markets" reveals several dozen documents, none of them very informative though.
The press has been rather silent about the PPT too, all the while this group has been meeting on a regular basis. The Washington Post published the most extensive article on the PPT in 1997, followed by a report in the British Guardian on September 16, 2001 and one in the Financial Times on February 21, 2002. Embry and Hepburn also refer to John Crudele's writings in the tabloid New York Post and "The Texas Hedge Report" from December 2004.
In their introduction they write
"Most people probably assume that the U.S. stock market is free of government interference. It is acknowledged that the bond and currency markets are influenced by policy-makers, but equities are considered different territory altogether. Current mythology holds that share prices rise and fall on the basis of market forces alone.
Such sentiments appear to be seriously mistaken. A thorough examination of published information strongly suggests that since the October 1987 crash, the U.S. government has periodically intervened to prevent another destabilizing stock market fall. And as official rhetoric continues to toe the free market line, manipulation has become increasingly apparent.Almost every floor trader on the NYSE, NYMEX, CBOT and CME will admit to having seen the PPT in action in one form or another over the years."
They admit that
much of the information is evidence of intent to intervene, rather than proof of manipulative activities themselves. This amounts to a distinction without a significant difference. That the government has given such serious consideration to supporting the stock market demonstrates its willingness to cross an important line, violating the traditional American belief in unfettered markets. It underscores the notion that the health and stability of the market represents an integral part of national security, thereby justifying government action when financial peril looms.
Provocative Conclusion: The Market Is Rigged
In their foreword the authors come to the following provocative conclusion:
We believe we can establish that the government has intervened in the stock market. What we cannot outline with any degree of certainty are many of the details, nuances, twists and turns of such activities. This is due to the utter lack of official disclosure of market interventions.
The Drop Of '89
Embry and Hepburn open their case with the drop of October13, 1989, when the Dow plunged 130 points or 6.9 percent in the wake of the collapse of United Airlines management takeover bid.
Treasury Secretary Nicholas Brady acknowledges that an unprecedented 48-hour whirlwind of meetings and phone calls took place that weekend, involving major stock, option and futures exchanges, brokerages, big institutional investors, the Federal Reserve, foreign central banks, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The following monday a futures-induced rally helped prevent a further plunge, the research paper claims.
It backs its doubts about a free stock market with quotes from former Fed governor Robert Heller who suggested in a Wall Street Journal article,
the Fed's stock market role ought not to be very ambitious. It should seek only to maintain the functioning of markets, not to prop up the Dow Jones or New York Stock Exchange averages at a particular level. The Fed should guard against systemic risk, but not against the risks inherent in individual stocks. It would be inappropriate for the government or the central bank to buy or sell IBM or General Motors shares. Instead, the Fed could buy the broad market composites in the futures market. The increased demand would normalize trading and stabilize prices. Stabilizing the derivative markets would tend to stabilize the primary market. The Fed would eliminate the cause of the potential panic rather than attempting to treat the symptom, the liquidity of the banks.
Strong stuff, indeed.
The doubting couple at Sprott produce further ammunition from NY Post stories done by Crudele.
In a 1992 article, John Crudele quoted someone who maintained strong connections in the Republican Party as stating that the government intervened to support the stock market in 1987, 1989 and 1992: Norman Bailey, who was a top economist with the government's National Security Council during the first Reagan Administration, says he has confirmed that Washington has given the stock market a helping hand at least once this year.
People who know about it think it is a very intelligent way to keep the market from a meltdown," Bailey says. Bailey says he has not only confirmed that the government assisted the market earlier this year, but also in 1987 and 1989.
Now a Washington-based consultant, Bailey says the Wall Street firms may not even know for whom they are buying the futures contracts. He says the explanation given to the brokerage firms is that the buying is for foreign clients, perhaps the central banks of other countries.
A Treasury-Fed Split?
The authors go on to highlight that Fed chairman Greenspan always denied any direct intervention in the stock market by the Fed itself.
But Greenspan had hinted that the Treasury could be following a different agenda, responding to questions about market interventions during the Mexico debt crisis of former St. Louis Fed president Tom Melzer with this cryptic answer,
"I seriously doubt that, Tom. I am really sensitive to the political system in this society. The dangers politically at this stage and for the foreseeable future are not to the Federal Reserve but to the Treasury. The Treasury, for political reasons, is caught up in a lot of different things."
At the March 28, 1995, FOMC meeting Greenspan is quoted about the relationship of the Fed towards the Treasury and the stock market,
"We have to be careful as to precisely how we get ourselves intertwined with the Treasury; that is a very crucial issue. In recent years I think we have widened the gap or increased the wedge between us and the Treasury.... In other words, we have gone to a market relationship and basically to an arms-length approach where feasible in an effort to make certain that we don't inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in. Most of the time we say 'no'."
The Sprott team interpretes these words with the perspective that
"these passages obviously suggest that by 1995 the Treasury was engaging in activities that Greenspan deemed politically dangerous and, accordingly, with which he was very reluctant to be associated. It is only logical that these actions had not been disclosed publicly by the time he made these two statements. Had they been public, the Treasury would have already suffered the consequences of the political dangers of which Greenspan spoke.
Greenspan revealed what looks to have been a major split between the central bank and the executive branch of government. He spoke of having "widened the gap" between the Fed and Treasury, taking their relationship to a market-based one. This "arm's-length approach" was likely the Fed's attempt to preserve its credibility if the Treasury's initiatives resulted in a political storm. Whatever Treasury was up to sounds rather questionable, judging by Greenspan's explicit statements about political dangers and also his implied worry that the central bank could "inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in."
He seems to have fretted that even the appearance of the Fed's participation in these activities could be politically toxic for a central bank that prides itself on independence. Precaution thus appears to have been the Fed's approach when dealing with the Treasury. Of course, according to Greenspan, the Fed only said no to the Treasury most of the time, indirectly admitting that in at least some instances the central bank participated in the unspecified initiatives.
<>Greenspan Hated To Be On The Record
We do not know what these initiatives were and, indeed, Greenspan's frustrating ambiguity suggests he was cognizant of the fact that his words were being recorded. So we are left to speculate. It's a reasonable assumption that whatever the Treasury was doing was market-related. This likelihood is indicated by the Treasury's apparent attempts to include the Fed in the initiatives. The central bank is not responsible for fiscal policy, so logically its only use to the Treasury would be to execute or participate in some market-related transactions. This is further corroborated by Greenspan's comment that the Fed had moved to a "market relationship" where feasible with the Treasury. That statement suggests that the Fed had to conduct at least some of the initiatives on behalf of the Treasury.
At this point we return to the Exchange Stabilization Fund (ESF), which is controlled by the Treasury Secretary. According to the New York Fed's website, "ESF operations are conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury." As a result, it is easy to see how the Fed could become entangled in questionable Treasury initiatives.
Speaking of such endeavours, at the January 31, 1995, meeting the Federal Reserve's general counsel revealed that the ESF conducted previously undisclosed gold swaps, and, while not spelling out the crucial details, a close reading of the transcript suggests they were recent transactions. Six years later, in an apparent cover-up, that same lawyer would claim not to know of any such dealings. But gold was probably not the only area in which the ESF dealt covertly. According to Greenspan, as of 1995 the Treasury was caught up in not one or a few, but "a lot of different things." While only speculation, it is certainly possible that the Treasury used the ESF for stock market interventions that the central bank deemed unnecessary. If so, the Fed would logically have been concerned that its participation could draw criticism if such a scheme were revealed.

Responsibility To Prevent Major Market Disruptions
At this point I recommend to my readers to download the whole 41-page research paper (link at the beginning of this post which lists countless other goodies like this excerpt from a Greenspan-speech from November 1996, repeated in January 1997.
He declared that
"governments, including central banks, have been given certain responsibilities related to their banking and financial systems that must be balanced. We have the responsibility to prevent major financial market disruptions through development and enforcement of prudent regulatory standards and, if necessary in rare circumstances, through direct intervention in market events. But we also have the responsibility to ensure that private sector institutions have the capacity to take prudent and appropriate risks, even though such risks will sometimes result in unanticipated bank losses or even bank failures."

I hope to have whetted your appetite for this highly interesting paper that tells of financial war games, dives into the response to 9/11and claims that the whole concept of the PPT is a brainchild of Fed governor Heller.
From The LTCM Crisis To The Iraq War
The Sprott paper also covers the dealings following the crash of Long Term Capital Management (LTCM) and secret agreements between the USA and Japan before the invasion of oil-rich Iraq.
The View From Now
And here come the last four pages of conclusions from this report that should make everybody think twice whether the stock market is really a free market or a matter of national interest to the nation with the highest debt on record in mankind's history.
The road to Baghdad in March 2003 may represent the last planned stock market intervention that we can identify, but our suspicions linger on to the present day. Displaying markedly low volatility, the Dow hovers comfortably above the 10,000 mark. Yet with severe trade and budget deficits, rising interest rates and stubbornly high oil prices, the reasons to be bearish on U.S. equities are numerous. Strangely, the market has an uncanny ability to maintain its footing when serious declines threaten. Given the historical backdrop of U.S. government activity in the market, this curious trading activity is suspicious to say the least. Indeed, it is our belief that market intervention continues and has actually increased in intensity.
For a possible explanation of why this may be happening, we turn to a rather extraordinary article that appeared in the Financial Times in March 2002. After noting the public revelation that the Federal Open Market Committee considered unconventional policy measures at its January 2002 meeting to cope with a possible deflation, the story revealed that a senior Fed official who attended the meeting said the reference to "unconventional means" was "commonly understood by academics."
The official, who asked not to be named, would not elaborate but mentioned "buying U.S. equities" as an example of such possible measures, and later said the Fed "could theoretically buy anything to pump money into the system" including "state and local debt, real estate and gold mines, any asset."
The Fed's aggressive easing of monetary policy after the tech bubble burst no doubt helped stave off a potential lapse into deflation. But the threat remains. As Myles Zyblock, Chief Institutional Strategist of RBC Capital Markets, recently commented:
Global policymakers are facing one of the most challenging backdrops in decades. The combination of excessive credit creation and extremely low inflation creates a potentially lethal mixture that, if left unchecked, could undermine the financial system and the economy. We need only to remind ourselves of the huge run-up in debt and the impact of its subsequent collapse on the economies of the U.S. in the 1930s and Japan in the 1990s to recognize the risks inherent in the present situation.
The U.S. lies at the heart of this new danger.... [T]otal debt (i.e., foreign, private and government) has risen 70 percentage points since the mid-1990s to about 307% of GDP - an all-time high! At the same time, inflation is hovering near a multi-decade low. A debilitating debt-deflation in this overleveraged economy is a possibility. The authorities have learned from the mistakes made by their predecessors and have embarked upon one of the most aggressive reflationary campaigns in post-war history in the hopes of producing strong tailwinds in order to thwart the risks.
Many people have noted that the Federal Reserve Act does not explicitly permit the central bank to purchase equities. Nevertheless, the significance of the statement in the Financial Times article by the anonymous Fed official should not be downplayed. For an organization not prone to unauthorized leaking, it is reasonable to assume that, much like the 1997 Washington Post story about the Working Group on Financial Markets, this remark about "buying U.S. equities" was not made without regard to the consequences of such a disclosure. In other words, as David Tice of the Prudent Bear Fund observed in 2003: "It would be naive in the extreme to assume that a central bank notorious for its supine treatment of markets would be insensitive to the effect the news of these (FOMC) deliberations would have on the equity market." He continued by arguing that any support lent to the market would likely remain covert providing that a sufficiently large critical mass of fund managers understood that there were support mechanisms at work in the market. The references to "unconventional measures" in the FT article help to create this "understanding."
Such an implicit understanding on the part of these managers would facilitate their ability to trade on the back of periodic covert interventions, thereby supporting government objectives. In these circumstances, policy makers would likely do nothing to disavow such a belief (and might in fact quietly encourage it), since the herding dynamics of these portfolio managers would enhance the authorities, objective of supporting the market. Only after this option has proved wanting would the authorities move to explicit intervention.
Why explicit? The public does not react to inferences and hidden coded messages by America's leading policy makers in the way in which a professional fund manager well attuned to the vagaries of the market would.
Worrisome Implications
Tice concluded by noting a worrisome implication of the Financial Times article:
The FT disclosure is particularly ironic given that just last week the Fed chairman again professed his belief in market forces as the best means of curtailing weaknesses in the corporate governance exposed by the collapse of Enron. An incredible statement coming from a man who has become synonymous with the perversion of the very free market forces he regularly extols. Has any other central banker ever had a put named after him? But Mr. Greenspan and his colleagues seem dead keen to establish moral hazard precedents as far as the eye can see, leaving the rest of us to deal with its exceptionally messy consequences when these "extraordinary measures" stop working.
Conclusion
The authors conclude - and I feel tempted to completely agree with them:
Given the available information, we do not believe there can be any doubt that the U.S. government has intervened to support the stock market. Too much credible information exists to deny this. Yet virtually no one ever mentions government intervention publicly, preferring instead to pretend as if such activities have never taken place and never would. It is time that market participants, the media and, most of all, the government, acknowledge what should be blatantly obvious to anyone who reviews the public record on the matter: These markets have been interfered with on numerous occasions. Our primary concern is 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.
We have not taken a position on the wisdom of intervention in this paper, largely because exceptional circumstances could argue for it. In many respects, for instance, the apparent rescue after the 1987 crash and the planned intervention in the wake of September 11 were very defensible. Administered in extremely small doses and with the mostsafeguards and transparency, market stabilization could be justified.
No Level Playing Field
But a policy enacted in secret and knowingly withheld from the body politic has created a huge disconnect between those knowledgeable about such activities and the majority of the public who have no clue whatsoever. There can be no doubt that the firms responsible for implementing government interventions enjoy an enviable position unavailable to other investors. Whether they have been indemnified against potential losses or simply made privy to non-public government policy, the major Wall Street firms evidently responsible for preventing plunges no longer must compete on anywhere near a level playing field. It is most unfair that the immensely powerful have been further ensconced in their perched positions and thus effectively insulated from the competitive market forces ostensibly present in our society.
In addition to creating a privileged class, the manipulation also has little democratic legitimacy in the sense that the citizenry has not given its consent. This has tangible ramifications. By not informing the public, successive U.S. administrations have employed a dangerous policy response that is subject to the worst possible abuse. In this regard, the line between national necessity and political expediency has no doubt been perilously blurred.
We can only urge people to see what the evidence indicates and debate what is and ought to be a very contentious matter. The time for such a public discussion is long overdue.

Data Driven Days - Derivative Dangers

Monday, September 12, 2005

Starting with a benign Monday without any expected major economic news releases market participants are likely to dance on the tips of their toes for the rest of the week with a bagful of economic indicators that could have the power to move all markets - currency, equity, debt, gold - significantly.
As if the pile of indicators were not enough the Fed New York has summoned the heads of derivatives trading of the 14 biggest players in the multi-multi-trillion market for a meeting on Thursday. This unprecedented move raised a lot of speculation about whether there is something in the bush in this market that is ballooning at a speed and mostly off-balance sheet that makes it hard to define its sheer size.
Estimates for the global derivatives market range from $8.4 to $84 trillion which already gives you an idea that nobody really knows how much risk is out there. For comparison: Total US stock market capitalization lies at around $14 trillion.
JPMorgan Chase & Co., Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co. dominate the credit-derivatives market as the five most-cited trading partners, according to Fitch Ratings.
Seeing now about one hedge fund collapsing each week - either by fraud or simply by bad trading - there is reason to suspect that even one of the major players or their counter-parties could be at risk. It has to be noted that the major banks around the globe derive ever growing parts of their profits from issuing or trading highly complex derivatives instruments or from lending money to hedge funds who funnel it in these instruments, looking for above-average returns. As we know - where there is a winner, there must be a loser. Look out for any news about this conference which certainly is not a run-of-the-mill event. The Fed's letter to the banks said "a senior business representative and a senior risk management person" should attend the meeting initiated by Fed New York president Timothy Geithner.
Some of the Fed's concerns about derivatives markets, lengthily voiced by Fed chairman Alan Greenspan in May, may also show up in a speech of Fed governor Mark Olson that focuses on "Business Trends and Management Challenges for the Banking Industry". Olson will speak on Friday.
Data Pile
While Monday starts out as a benign day with no US economic indicators scheduled, Tuesday's trade deficit figures could bring a new record thanks to rocketing oil prices which might also get reflected in producer prices the same day and consumer prices on Thursday. Malicious note here: The so-called core numbers will not show a sharp rise. But they only concern people who neither eat nor drive.
US inflation

US inflation has been on an upward trend since 2002. Chart: Courtesy Econoday.
The Treasury budget will be of minor concern as the desaster from hurricane Katrina will only show up in future budget figures. Estimates for the cost of Katrina are ballooning every day. As soon as Congress passed immediate relief money at a level of $52 billion, total cost estimates today lie closer to $300 billion.
On Wednesday industrial production is expected to come in a notch higher; but don't forget that this is still a pre-Katrina figure and therefore meaningless for the future outlook. Retail sales are expected to have declined in August.
On Thursday the all important consumer price index (CPI) is seen at plus 0.5 percent. That is for mere mortals. Those who eat indexes in their dark and cold/hot homes will see their cost of living only 0.2 percent higher than a month ago. Note: If the CPI rises again 0.5 percent this turns out to be an annual rate of 6 - repeat 6 - percent annually at a time when wages are stagnating.
Friday is designed as a dollar versus the rest day. Both the current account deficit figures and the Treasury International Capital data are scheduled for a day that ends indicatorwise with consumer sentiment figures.
All US Data At A Glance
C=Consensus estimate; L=Last
Tuesday:
International Trade July: C: minus $60 billion; L: $58.8 billion
Producer Price Index: C: 0.7 %; L: 1 %
Treasury Budget: C: minus $50 billion; L: minus $52.8 billion
Wednesday:
Retail Sales: C: minus 1.4 %; L: plus 1.8 %
Retail Sales ex Autos: C: 0.5 %; L: 0.3 %
Industrial Production: C: 0.2 %; L: 0.1 %
Capacity Utilization: C: 79.8 %; L: 79.7 %
Thursday:
Business Inventories: C: unchanged; L: unchanged
Consumer Price Index (CPI): C: 0.5 %; L: 0.5 %
NY Empire State Index: C: 18; L: 23
Jobless Claims: C: 350,000; L: 319,000
Philadelphia Fed Survey: C: 14.0; L: 17.5
Friday:
Current Account Deficit Q2 2005: C: minus $194.5 billion, L: minus $195.1 billion
Treasury International Capital: No consensus; L: $ 71.2 billion
Consumer Sentiment: C: 85.0; L: 92.7
All together the data outlook does not exactly project a week of cheers. But observations of equity and debt markets in the recent past conjure the picture that these markets can take everything from war to natural desaster, thanks to the Federal Reserve pouring ever more liquidity into them. I have reserved this issue for tomorrow's post.

Greenspan To Retire On Schedule, Fed Hints

Friday, September 09, 2005

The Federal Reserve has given the so far clearest indication that chairman Alan Greenspan will retire as planned on January 31, 2006. According to a Reuters dispatch,
"the Fed said its first meeting of 2006 will take one day rather than two to avoid spanning the terms of two chairman. he Federal Open Market Committee will now meet on January 31, instead of gathering for two days, on January 31 and February 1, as it generally does in its first meeting of the year.
Greenspan's term ends January 31 and he has told associates that he would go on schedule.
But there has been persistent speculation that he might stay on longer, for instance if a replacement is not ready to take over in time.
"This schedule change avoids a meeting that spans the terms of two chairmen," the Federal Reserve said. It said Greenspan would attend the January 31 meeting.
The decision reinforces a sense among Fed watchers that the White House must work fast to find an heir to Greenspan, who commanded the Fed for 18 years with such skill that markets fret he could prove an impossible act to follow.
Three names lead the list of likely candidates to take over - Glenn Hubbard, a past adviser to President George W. Bush; Harvard economist Martin Feldstein; and former Fed Governor Ben Bernanke, who now is a White House adviser.
But no one has emerged as a clear front-runner and the White House may yet decide to select someone from Wall Street or industry, while Fed Governor Donald Kohn could prove the insiders' choice if Greenspan gets a big say.
Financial markets are naturally wary about a change in leadership at the U.S. central bank, particularly since it comes at a critical juncture for monetary policy.
The Fed has said it expects to continue a 15-month campaign of raising interest rates at a measured pace, although the devastation from Hurricane Katrina has some investors betting that it might pause after its next hike, at 3.75 percent.
Whatever the outcome of that debate, the first quarter of next year will be an even more crucial period than usual for the bank to plot and communicate its monetary policy path.
For more reading on the three candidates jump to "AP boils down Greenspan succession to three names."
It is most interesting that Reuters names Fed governor Donald Kohn, pictured below, as Greenspan's favorite for his succession. Kohn is certainly a hawk who is aware that not all is as it seems in financial markets. Kohn addressed the financial sector in June with a bowl full of warnings that also contained the key note "when the unexpected inevitably happens."
Given the political pressure any new Fed chairman will have to fend off from the Bush administration he is my favourite too. Only problem - this administration will very probably choose a chairman it considers the most subservient to aid the political goals of the president. See the chair getting taken by the candidate who is willing to lip-synch the sounds from the White House.
With inflation on the rise, worsening growth expectations due to hurricane Katrina and the dollar beleaguered by the Euro in its role as the world's prime reserve currency the next chairman, who is appointed for 14 years, will have to fight an uphill battle from the very first day in office.
Uncertainty about the future course of the Fed is already reflected in the gold price which closed in on the $450-mark today. Acting chairman Greenspan counts gold, personal consumer expenditures (PCE) and productivity among his most important indicators for future inflation expectations. All three indicators have been pointing to an acceleration recently. Greenspan's successor will not be able to excuse an advancing devaluation of the greenback with the note that he was taken by surprise.
And don't forget: Every new Fed chairman was confronted with a crisis soon after he took office. Browse to "Greenspan's retirement could take longer than 257 days." As of today Greenspan has 144 days left.

Already 50 Countries Tie Currency To Euro

Thursday, September 08, 2005

Deutsche Bank Research (DBR) today published a paper (pdf) that sees a growing importance of the Euro as the world's second reserve currency.
According to DBR the Euro is the world's solid number two reserve currency, but well behind the US dollar. The dollar share in global official forex reserve holdings declined to about 64 % at the end of 2003. The Euro has caught up: its share rose from 13.5 % in 1999 to almost 20 % in 2003.
While DBR sees "rumours of the death of the international role of the dollar are greatly exaggerated," the paper points out that about 50 small and medium-sized countries in Europe, the Mediterranean and Africa have pegged their currency to the Euro or orient their exchange rate policy towards the Euro. Accordingly, they have accumulated euros as reserve currency.
"The above-mentioned roughly 50 small and medium-sized countries with a Euro peg or a euro orientation for their currency need to hold official Euro reserves in order to boost confidence in their peg and/or their exchange rate policy and to be able to intervene in the Euro foreign exchange market if necessary," DBR concludes.
Euro holdings are not restricted to the international dwarfs though. The non-Euro G-7 countries - the US, Japan, the UK and Canada - basically need euro reserve holdings so they can stick to the G7 promise, repeatedly given by joint communique's, "to monitor exchange markets closely and cooperate as appropriate" in order to ensure orderly market conditions. This cooperation includes joint interventions in the foreign exchange market, for instance, by selling Euros to support the dollar. This implies that the US and the UK should also hold official reserves in euros although both countries are particularly reluctant to intervene in the foreign exchange market.
Potential To Challenge The Dollar
DBR sees reasons that the Euro has the potential to challenge the dollar for its ability to fulfill two major preconditions.
Firstly Euroland is the second largest economy behind the USA and well ahead of Japan. "Although Euroland has a larger population than the US it only produces the equivalent of 75 % of US GDP at current exchange rates. Euroland is the most important global exporter, shipping about 13 % of the world's exports. But it absorbs only about 12 % of world imports, i.e. much less that the US with its 17 % share reflecting the US role as a global growth engine. Euroland produces about 21% of world GDP, compared with 27 % in the US. With a ratio of goods exports (extra-EMU) to GDP of about 13 % Euroland's degree of openness is higher than that of the US or Japan."
Secondly the introduction of the Euro led to a greater integration of European financial markets, bringing higher liquidity in both sovereign and corporate debt markets. This fact was also acknowleged in a recent survey among central banks, DBR notes.
The researchers believe that the dollar will hold on to ist dominant position in this decade but they expect the Euro's share as a reserve currency to roughly double to 40 percent by 2010.
"Given the rising uncertainty surrounding the US current account deficit and the dollar exchange rate it is compelling for central banks with large dollar holdings to check the currency composition of their reserves. One way to tackle the issue is to differentiate between two types of accounts for official foreign exchange reserves:
On the one hand, an 'intervention account' where funds must be available at short notice in order to be able to intervene flexibly. This account will be solely a policy tool and only focus on macroeconomic targets.
On the other hand, a 'monetary wealth account' that will absorb the remaining official foreign exchange reserves. Funds in this account will be invested with the microeconomic aim of achieving an optimal return on investment in order to enhance the national monetary wealth."
DBR sees especially Asian central banks in an asset management dilemma as most of their forex holdings are denominated in dollars. Any quick move would lead to portfolio losses which leads DBR to the expectation that diversification will follow a slow but steady path.
NOTE: For a longer term outlook about the fight of dominance in global financial markets read the post "What will be the next big reserve currency?"

USA: The 3rd World Is Only A Few Blocks Away

Parts of the United States are as poor as the Third World, according to a shocking United Nations report on global inequality, the British Independent reports. Read on for the findings of the UN or surf to the complete 370-page report here.
Claims that the New Orleans floods have laid bare a growing racial and economic divide in the US have, until now, been rejected by the American political establishment as emotional rhetoric. But yesterday's UN report provides statistical proof that for many - well beyond those affected by the aftermath of Hurricane Katrina - the great American Dream is an ongoing nightmare.
The document constitutes a stinging attack on US policies at home and abroad in a fightback against moves by Washington to undermine next week's UN 60th anniversary conference which will be the biggest gathering of world leaders in history.
The annual Human Development Report normally concerns itself with the Third World, but the 2005 edition scrutinises inequalities in health provision inside the US as part of a survey of how inequality worldwide is retarding the eradication of poverty.
US Infant Mortality Same As In Malaysia
It reveals that the infant mortality rate has been rising in the US for the past five years - and is now the same as Malaysia. America's black children are twice as likely as whites to die before their first birthday.
The report is bound to incense the Bush administration as it provides ammunition for critics who have claimed that the fiasco following Hurricane Katrina shows that Washington does not care about poor black Americans. But the 370-page document is critical of American policies towards poverty abroad as well as at home. And, in unusually outspoken language, it accuses the US of having "an overdeveloped military strategy and an under-developed strategy for human security."
Poverty Is A Global Security Threat
"There is an urgent need to develop a collective security framework that goes beyond military responses to terrorism," it continues. " Poverty and social breakdown are core components of the global security threat."
The report launched yesterday is a clear challenge to Washington. The Bush administration wants to replace multilateral solutions to international problems with a world order in which the US does as it likes on a bilateral basis.
"This is the UN coming out all guns firing," said one UN insider. "It means that, even if we have a lame duck secretary general after the Volcker report (on the oil-for-food scandal), the rest of the organisation is not going to accept the US bilateralist agenda."
The clash on world poverty centres on the US policy of promoting growth and trade liberalisation on the assumption that this will trickle down to the poor. But this will not stop children dying, the UN says. Growth alone will not reduce poverty so long as the poor are denied full access to health, education and other social provision. Among the world's poor, infant mortality is falling at less than half of the world average. To tackle that means tackling inequality - a message towards which John Bolton and his fellow US neocons are deeply hostile.
India and China, the UN says, have been very successful in wealth creation but have not enabled the poor to share in the process. A rapid decline in child mortality has therefore not materialised. Indeed, when it comes to reducing infant deaths, India has now been overtaken by Bangladesh, which is only growing a third as fast.
Poverty could be halved in just 17 years in Kenya if the poorest people were enabled to double the amount of economic growth they can achieve at present.
Regional Inequalities
Inequality within countries is as stark as the gaps between countries, the UN says. Poverty is not the only issue here. The death rate for girls in India is now 50 per cent higher than for boys. Gender bias means girls are not given the same food as boys and are not taken to clinics as often when they are ill. Foetal scanning has also reduced the number of girls born.
The only way to eradicate poverty, it says, is to target inequalities. Unless that is done the Millennium Development Goals will never be met. And 41 million children will die unnecessarily over the next 10 years.
Decline in Health Care
For half a century the US has seen a sustained decline in the number of children who die before their fifth birthday. But since 2000 this trend has been reversed.
Although the US leads the world in healthcare spending - per head of population it spends twice what other rich OECD nations spend on average, 13 per cent of its national income - this high level goes disproportionately on the care of white Americans. It has not been targeted to eradicate large disparities in infant death rates based on race, wealth and state of residence.
High levels of spending on personal health care reflect America's cutting-edge medical technology and treatment. But the paradox at the heart of the US health system is that, because of inequalities in health financing, countries that spend substantially less than the US have, on average, a healthier population. A baby boy from one of the top 5 per cent richest families in America will live 25 per cent longer than a boy born in the bottom 5 per cent and the infant mortality rate in the US is the same as Malaysia, which has a quarter of America's income.
The health of US citizens is influenced by differences in insurance, income, language and education. Black mothers are twice as likely as white mothers to give birth to a low birthweight baby. And their children are more likely to become ill.
Only Wealthy Country Without Universal Health Insurance
The US is the only wealthy country with no universal health insurance system. Its mix of employer-based private insurance and public coverage does not reach all Americans. More than one in six people of working age lack insurance. One in three families living below the poverty line are uninsured. Just 13 per cent of white Americans are uninsured, compared with 21 per cent of blacks and 34 per cent of Hispanic Americans. Being born into an uninsured household increases the probability of death before the age of one by about 50 per cent.
More than a third of the uninsured say that they went without medical care last year because of cost. Uninsured Americans are less likely to have regular outpatient care, so they are more likely to be admitted to hospital for avoidable health problems.
More than 40 per cent of the uninsured do not have a regular place to receive medical treatment. More than a third say that they or someone in their family went without needed medical care, including prescription drugs, in the past year because they lacked the money to pay.
If the gap in health care between black and white Americans was eliminated it would save nearly 85,000 lives a year. Technological improvements in medicine save about 20,000 lives a year.
Child Poverty Rate in the US More Than 20 Percent
Child poverty is a particularly sensitive indicator for income poverty in rich countries. It is defined as living in a family with an income below 50 per cent of the national average.
The US - with Mexico - has the dubious distinction of seeing its child poverty rates increase to more than 20 per cent. In the UK - which at the end of the 1990s had one of the highest child poverty rates in Europe - the rise in child poverty, by contrast, has been reversed through increases in tax credits and benefits.

UPDATE: The Difference Between Finding And Looting

The Associated Press ran two telling pictures about the difference of looting and finding. These pictures are from August 30 but they tell a lasting story. Click the picture for a bigger version to read the embarrassing captions.

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