Worthless Billions Won't Solve a Trillions Problem

Wednesday, December 19, 2007

Welcome to the inflationist days. Central banks are pouring money in unprecedented amounts into markets reeling from an insolvency crisis that cannot be solved by throwing artificially created bills of credit onto a market while accepting dubious collateral. Just have a look at the explosive growth of "other assets" in the ECB's balance sheet
At the same time European central banks salt away their only asset with alpha performance: gold holdings in ounces keep declining, and this practice has never been questioned by politicians so far. Is it ignorance or incompetence? Watching ECB president Jean-Claude Trichet telling a very empty European Parliament on Wednesday nothing new about the current crisis it enforces my belief that European politicians do not have the faintest idea how grave the situation is.
"Liquidity" actions
by central banks will not help to avoid but only delay the inevitable process of deflating the layers of debt created in this century. After all what is a few hundred billions of Euros for all European banks when only the off-balance risk of the banking sector of tiny Austria reels under 2.1 trillion of derivatives risk while having equity of only 73 billion Euros, according to data compiled by Oesterreichische Nationalbank
Translate these relations to the bigger members of the Eurozone and get an idea of how big the mess really may be...
So no matter how many more billions Trichet will create, it ain't gonna earn him a paper-jumpsuit from Superman as these new Euros that have grown the ECB balance sheet in less than a year by almost 20% will only worsen the current crisis which was brought on by too much money in the first place.The whole world nowadays knows that the mess was created by too much cheap credit. Only central bankers keep denying this. Extending credit further is not a solution but only a whimpish action to delay the outcome until 2008.
No matter how much new money is created, the day of reckoning will be December 31 when all "assets" have to be priced for year-end results. I think is is fair to advise some cash/gold on hand in January. Just in case the ATM won't work.

FOMC Rate Cut Will Not Change The Fundamentals

Monday, October 29, 2007

Who wants to be in the shoes of the Federal Open Market Committee (FOMC) on Wednesday? Escalating market pressure for a rate cut collides with a horrible inflation outlook as exploding oil prices start pushing commodities higher. Will there be enough hawks defending at least stable rates or will the doves led by Nanny Benny cave in to panicking markets and do the worst of all by cutting rates further? Chances are the FOMC will do nothing in a situation that would require a rate hike if fighting inflation is still a predominant concern which can be doubted in the face of the housing and mortgage bust.
Alan Greenspan once called gold a very reliable inflation indicator. A study that proves gold's high correlation with inflation can be found here. As the oldest currency in the world has jumped to $795 in Asian trading on Monday it appears the world is headed for markedly higher prices soon. Oil's ascent above $93 is poised to add to the spin of the inflation spiral that can be seen so clearly in basically all commodities. Been to your baker lately?
Americans are destined to get the worst of it all, thanks to a Federal Reserve dollar plunging to new record lows against the Euro on a daily basis.
Rollercoasting financial markets still indicate that the credit crunch - what happened to the "savings glut" of 2005? - is only worsening as banks hold back their funds in fear that their interbank counterparties go bust overnight. All attempts to prop up markets with SIVs should be seen as what they are: Vain efforts to pump up unsupportable prices. Where do all these billions come from? Certainly not out of the vaults of rich investors but created with Ben Bernanke's electronic printing press. Banks trying to play in the darkroom to hide the disaster run the risk of getting rimmed.
Cutting rates can be a very deceiving medicine that may work well in the short term. It will lessen the burden of debtors whose adjustable mortgages are set for a hike this fall. But it will not change the fundamentals that have been created by a 7-year streak of reckless deficit policies accompanied by a crumbling US infrastructure and major political and economic shifts on the globe.
The whole mess was created by too much credit. Extending it further will be monetary suicide resulting in sky high inflation.

ECB Drowns Markets In "Liquidity"

Wednesday, October 10, 2007

The European Central Bank (ECB) has added 55 billion Euros "liquidity" in its latest regular one-week tender on Wednesday. Bids for 218 billion Euros were accepted at a minimum rate of 4.12% and the weighted average rate came in at 4.16%, still above the reference rate of 4%. In so called "other operations" the ECB drained 24.5 billion Euros. As the ECB website information painstakingly avoids to list its money market operations in chronological order (as the Fed NY does) I am at a loss to explain where this was drained from. Single data points only are not exactly the kind of transparency Europe's high priests of ever expanding credit always like to praise so much.
It is ECB policy though. Only a day earlier ECB president Jean-Claude Trichet had told the European Parliament, Euro bankers should apply "verbal discipline." I would say, a sound policy would help more to calm markets which bid cash gold to a new 28-year high at $743.
In order to find out how much "liquidity" is currently chasing too few goods and services we will have to wait for the next weekly financial statement of the ECB.
The latest weekly statement shows a net gain of 2.5 billion Euros in "other assets" and a net drain of 150 million in gold and gold receivables, which was a result of central banks selling and one central bank again buying gold coin.
NOTE: Blogging hiatus until next Tuesday due to a shiny new (push)bike in the basement and perfect weather in Vienna. But a crash, which I expect to happen any day, could change all that. Times are simply way too interesting to leave my laptop behind.

FOMC Says Data Has Limited Value

It appears that Jim Cramers infamous outburst on TV has led the Federal Reserve into a panic action at its latest Federal Open Market Committee (FOMC) meeting. According to the FOMC minutes published on Tuesday policymakers brushed away economic data and preferred to give markets a shot in the arm with its 50bp cut of the Fed Funds rate to 4.75%.
Here comes the lengthy explanation from the FOMC that tries to justify a rate cut I still consider most inappropriate in a time when surging commodities prices show that even a downturn in the USA will be offset by continuing strong demand from the economic powerhouses in the Eastern hemisphere.
From the FOMC minutes:
In the Committee's discussion of policy for the intermeeting period, all members favored an easing of the stance of monetary policy. Members emphasized that because of the recent sharp change in credit market conditions, the incoming data in many cases were of limited value in assessing the likely evolution of economic activity and prices, on which the Committee's policy decision must be based. Members judged that a lowering of the target funds rate was appropriate to help offset the effects of tighter financial conditions on the economic outlook. Without such policy action, members saw a risk that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment. Similarly, the impaired functioning of financial markets might persist for some time or possibly worsen, with negative implications for economic activity. In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action.
If the FOMC calls this rate cut prudent I am inclined to change my brand name.
Market participants can learn a very important lesson from this decision. Don't worry about moral hazard. Just bet the house (what a pun in these days) and in case it goes wrong, cry for Nanny Benny. He will immediately fire up the Fed's helicopters and shower the burning house with "liquidity." And if the helicopters are not enough, he still has this (not so) secret weapon, called printing press. Welcome to the new world order of perma-inflation.
The Fed's excuses did not stop there. Here is a little more:
Such a measure should not interfere with an adjustment to more realistic pricing of risk or with the gains and losses that implied for participants in financial markets. With economic growth likely to run below its potential for a while and with incoming inflation data to the favorable side, the easing of policy seemed unlikely to affect adversely the outlook for inflation.
Don't despair yet. The minutes offer at least a real gem of information, telling us that the FOMC sits on wet bottoms.
There seems to have been an intense discussion of inflationary dangers. Remember, in August this was the predominant concern of the Fed.
Now they are backtracking with a rather inconsistent statement:
The Committee agreed that the statement to be released after the meeting should indicate that the outlook for economic growth had shifted appreciably since the Committee's last regular meeting but that the 50 basis point easing in policy should help to promote moderate growth over time. They also agreed that the inflation situation seemed to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown. Nonetheless, all agreed that some inflation risks remained and that the statement should indicate that the Committee would continue to monitor inflation developments carefully.
Hu?

We Have No Idea
The next sentence sounds as if the FOMC hopes for understanding nods:
Given the heightened uncertainty about the economic outlook, the Committee decided to refrain from providing an explicit assessment of the balance of risks, as such a characterization could give the mistaken impression that the Committee was more certain about the economic outlook than was in fact the case.
Does anybody know what the captain of the Titanic said after the ship hit the iceberg?
In my interpretation we can expect that the Fed will sideline its fight inflation as soon as bankers will repeat their cry for Nanny Benny.
Looking back into history will let me find sleep tonight. Future investment strategies are not that difficult. Don't listen to any Sunday school talk that says there will be no bailout for gamblers as it will be only empty talk. Nanny Benny will stand guard at the helipad and keep the engines ready for more action.
Which reminds me of an old Wall Street rule: Money walks and bulls**t talks.
And the orchestra of the Titanic had been fiddling while first class passengers had been jumping into the lifeboats. Wall Street today offers the same perspective: There will be lifeboats for the privileged ones only who know that the ship is sinking. All others please enjoy the orchestra.
Sorry, I can't help my cynicism. I remember August too well. Just re-read my posts from August and you will understand it.

Does OPEC Mull Rejecting Federal Reserve Dollars?

Tuesday, October 09, 2007

The Federal Reserve Dollar may be in for another big punch. Gulfnews banking editor Babu Das Augustine has raised the possibility that OPEC may switch from dollars to another currency, furthermore reducing the demand for the Dollar which gets shunned by more and more oil producing countries. Iran only accepts Euros or Yen and Venezuela dumped the greenback while countries in the gulf region move their funds away from it too.
According to Das Augustine,
"Asset diversification by the Gulf sovereign wealth funds and the possibility that the Organisation of Petroleum Exporting Countries (OPEC) will change the pricing of oil from the dollar to another currency could mean more trouble for the dollar."
Quatar and Vietnam announced only a few days ago that they were shifting away from the ailing currency that was never worth less than nowadays.
Analysts see the admission by Qatar as a signal that regional state-owned funds are moving away from the dollar.
Qatar has admitted that its investment fund has been diversifying their portfolios to compensate for the decline of the dollar. It would be naive to think that other Gulf funds are loyal to the dollar at the cost of heavy portfolio losses," said a Dubai-based investment banker.
During the past 12 months, companies, mainly state-owned investment arms and private equity firms from the GCC, have quietly acquired more than $50 billion in assets worldwide with Asia's and Europe's shares together accounting for more than 55 per cent.
The state-owned Kuwait Investment Authority, with assets of more than $150 billion, last year increased the Asian share of its portfolio to 20 per cent from 10 per cent.
Although gulf central banks have been discussing asset diversification in the past two years, there hasn't been any evidence of a major shift. The size of assets held by Gulf central banks are relatively small compared to the funds managed by the state-owned investment funds.
According to IMF estimates, global investment funds managed by governments control an estimated $2.5 trillion, outstripping hedge funds. Morgan Stanley estimates these assets could rise to $12 trillion by 2015, roughly the size of the US economy. Gulf countries account for a major share of these funds.
Currency market analysts believe that the gulf sovereign funds' gradual move away from the dollar is a precursor to OPEC opting for a different currency in which to price oil.
"If the dollar were to lose its lustre as a reserve currency this could prove disruptive to the global financial system," Merrill Lynch said in a research note.
"Pricing oil in dollars might have made sense when there was a paucity of other relatively stable currencies and when the Middle East imported more from the US - but not any-more," said an analyst.
I guess it is safe to say that the exodus from the first completely unbacked reserve currency in the world's history has begun - and will not stop. A strong reason for this is the fact that the USA has very little to offer in terms of sought-after export goods besides weapons, aircraft and gas guzzling oversize cars whose low MPG ratios can only be afforded by oil producing countries anymore.
Anybody counter my bet that another fiat currency experiment will be coming to an end in the next decade?
Before you lose your money; remember that ALL fiat currencies of the past 350 years have returned to their intrinsic value. Gold has NEVER lost its value in the past 3,500 years!
For some background about the role of the Federal Reserve Dollar in commodities markets click here.

US Congress Knows the Parallels Between 1929 and 2007

Monday, October 08, 2007

I cannot recollect to have seen this congressional testimony by Robert Kuttner (pdf) from October 2 being reported in the MSM.
It again confirms my view that shorting the financial sector and the Federal Reserve (not US!) Dollar as well as all US federal debt and using the profits to buy more precious metals is probably the most prudent investment strategy these days. I am most grateful for your other suggestions in comments.
Read Kuttner's testimony in full (all emphasis mine):

Testimony of Robert Kuttner
Before the Committee on Financial Services
U.S. House of Representatives
Washington, D.C.
October 2, 2007

Mr. Chairman and members of the Committee:
Thank you for this opportunity. My name is Robert Kuttner. I am an economics and
financial journalist, author of several books about the economy, a magazine editor, and former investigator for the Senate Banking Committee. I have a book appearing in a few weeks that addresses the systemic risks of financial innovation coupled with deregulation and the moral hazard of periodic bailouts.
In researching the book, I devoted a lot of effort to reviewing the abuses of the 1920s, the effort in the 1930s to create a financial system that would prevent repetition of those abuses, and the steady dismantling of the safeguards over the last three decades in the name of free markets and financial innovation.
The Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934,
laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets.
Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials - excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.
The most basic and alarming parallel is the creation of asset bubbles, in which the
purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.
There is good evidence--and I will add to the record a paper on this subject by the Federal Reserve staff economists Dean Maki and Michael Palumbo--that even much of the boom of the late 1990s was built substantially on asset bubbles. ("Disentangling the Wealth Effect: a Cohort Analysis of Household Savings in the 1990s,")
A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank - e.g. Morgan or Chase - as a proxy for the soundness of the security.
It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks—part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed’s discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.
Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interestthat were endemic in the 1920s - lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction - assuming perpetually rising asset prices - so in a credit crisis they can act as net de-stabilizers.
A third parallel is the excessive use of leverage. In the 1920s, not only were there pervasive stock-watering schemes, but there was no limit on margin. If you thought the market was just going up forever, you could borrow most of the cost of your investment, via loans conveniently provided by your stockbroker. It worked well on the upside. When it didn't work so well on the downside, Congress subsequently imposed margin limits.
But anybody who knows anything about derivatives or hedge funds knows that margin limits are for little people. High rollers, with credit derivatives, can use leverage at ratios of ten to one, or a hundred to one, limited only by their self confidence and taste for risk.
Private equity, which might be better named private debt, gets its astronomically high rate of return on equity capital, through the use of borrowed money. The equity is fairly small. As in the 1920s, the game continues only as long as asset prices continue to inflate; and all the leverage contributes to the asset inflation, conveniently creating higher priced collateral against which to borrow even more money.
The fourth parallel is the corruption of the gatekeepers. In the 1920s, the corrupted insiders were brokers running stock pools and bankers as purveyors of watered stock. (In the) 1990s, it was accountants, auditors and stock analysts, who were supposedly agents of investors, but who turned out to be confederates of corporate executives. You can give this an antiseptic academic term and call it a failure of agency, but a better phrase is conflicts of interest. In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent. The core structural conflict is that the rating agencies are paid by the firms that issue the bonds. Who gets the business - the rating agencies with tough standards or generous ones? Are ratings for sale? And what, really, is the technical basis for their ratings? All of this is opaque, and unregulated, and only now being investigated by Congress and the SEC.
Yet another parallel is the failure of regulation to keep up with financial innovation that is either far too risky to justify the benefit to the real economy, or just plain corrupt, or both. In the 1920s, many of these securities were utterly opaque. Ferdinand Pecora, in his 1939 memoirs describing the pyramid schemes of public utility holding companies, the most notorious of which was controlled by the Insull family, opined that the pyramid structure was not even fully understood by Mr. Insull. The same could be said of many of today’s derivatives on which technical traders make their fortunes.
By contrast, in the traditional banking system a bank examiner could look at a bank's loan portfolio, see that loans were backed by collateral and verify that they were performing. If they were not, the bank was made to increase its reserves. Today's examiner is not able to value a lot of the paper held by banks, and must rely on the banks' own models, which clearly failed to predict what happened in the case of sub-prime. The
largest banking conglomerates are subjected to consolidated regulation, but the jurisdiction is fragmented, and at best the regulatory agencies can only make educated guesses about whether balance sheets are strong enough to withstand pressures when novel and exotic instruments create market conditions that cannot be anticipated by models.
A last parallel is ideological - the nearly universal conviction, 80 years ago and today, that markets are so perfectly self-regulating that government's main job is to protect property rights, and otherwise just get out of the way.
We all know the history. The regulatory reforms of the New Deal saved capitalism from its own self-cannibalizing instincts, and a reliable, transparent and regulated financial economy went on to anchor an unprecedented boom in the real economy. Financial markets were restored to their appropriate role as servants of the real economy, rather than masters. Financial regulation was pro-efficiency. I want to repeat that, because it is so utterly unfashionable, but it is well documented by economic history. Financial regulation was pro-efficiency. America’s squeaky clean, transparent, reliable financial markets were the envy of the world. They undergirded the entrepreneurship and dynamism in the rest of the economy.
Beginning in the late 1970s, the beneficial effect of financial regulations has either beendeliberately weakened by public policy, or has been overwhelmed by innovations notanticipated by the New Deal regulatory schema. New-Deal-era has become a term ofabuse. Who needs New Deal protections in an Internet age?
Of course, there are some important differences between the economy of the 1920s, and the one that began in the deregulatory era that dates to the late 1970s. The economy did not crash in 1987 with the stock market, or in 2000-01. Among the reasons are the existence of federal breakwaters such as deposit insurance, and the stabilizing influence of public spending, now nearly one dollar in three counting federal, state, and local public outlay, which limits collapses of private demand.
But I will focus on just one difference - the most important one. In the 1920s and early
1930s, the Federal Reserve had neither the tools, nor the experience, nor the self-confidence to act decisively in a credit crisis. But today, whenever the speculative excesses lead to a crash, the Fed races to the rescue. No, it doesn't bail our every single speculator (though it did a pretty good job in the two Mexican rescues) but it bails out the speculative system, so that the next round of excess can proceed. And somehow, this is scored as trusting free markets, overlooking the plain fact that the Fed is part of the U.S. government.
When big banks lost many tens of billions on third world loans in the 1980s, the Fed and the Treasury collaborated on workouts, and desisted from requiring that the loans be marked to market, lest several money center banks be declared insolvent. When Citibank was under water in 1990, the president of the Federal Reserve Bank of New York personally undertook a secret mission to Riyadh to persuade a Saudi prince to pump in billions in capital and to agree to be a passive investor.
In 1998, the Fed convened a meeting of the big banks and all but ordered a bailout of Long Term Capital Management, an uninsured and unregulated hedge fund whose collapse was nonetheless putting the broad capital markets at risk. And even though Chairman Greenspan had expressed worry two years (and several thousand points) earlier that "irrational exuberance" was creating a stock market bubble, big losses in currency speculation in East Asia and Russia led Greenspan to keep cutting rates, despite his foreboding that cheaper money would just pump up markets and invite still more speculation.
And finally in the dot-com crash of 2000-01, the speculative abuses and insider conflicts of interest that fueled the stock bubble were very reminiscent of 1929. But a general depression was not triggered by the market collapse, because the Fed again came to the rescue with very cheap money.
So when things are booming, the financial engineers can advise government not to spoil the party. But when things go bust, they can count on the Fed to rescue them with emergency infusions of cash and cheaper interest rates.
I just read Chairman Greenspan's fascinating memoir, which confirms this rescue role. His memoir also confirms Mr. Greenspan's strong support for free markets and his deep antipathy to regulation. But I don't see how you can have it both ways. If you are a complete believer in the proposition that free markets are self-regulating and self-correcting, then you logically should let markets live with the consequences. On the other hand, if you are going to rescue markets from their excesses, on the very reasonable ground that a crash threatens the entire system, then you have an obligation to act pre-emptively, prophylactically, to head off highly risky speculative behavior. Otherwise, the Fed just invites moral hazards and more rounds of wildly irresponsible actions.
While the Fed and the European Central Bank were flooding markets with liquidity to
prevent a deeper crash in August and September, the Bank of England decided on a
sterner course. It would not reward speculators. The result was an old fashioned run on a large bank, and the Bank of England changed its tune.
So the point is not that the Fed should let the whole economy collapse in order to teach speculators a lesson. The point is that the Fed needs to remember its other role - as regulator.
One of the odd things about the press commentary about what the Fed should do is that it has been entirely along one dimension: a Hobson's choice: - either loosen money and invite more risky behavior, or refuse to enable asset bubbles and risk a more serious credit crunch - as if these were the only options and monetary policy were the only policy lever. But the other lever, one that has fallen into disrepair and disrepute, is preventive regulation.
Mr. Chairman, you have had a series of hearings on the sub-prime collapse, which has now been revealed as a textbook case of regulatory failure. About half of these loans were originated by non-federally regulated mortgage companies. However even those sub-prime loans should have had their underwriting standards policed by the Federal Reserve or its designee under the authority of the 1994 Home Equity and Ownership Protection Act. And by the same token, the SEC should have more closely monitored the so called counterparties - the investment and commercial banks - that were supplying the credit. However, the Fed and the SEC essentially concluded that since the paper was being sold off to investors who presumably were cognizant of the risks, they did not need to pay attention to the deplorable underwriting standards.
In the 1994 legislation, Congress not only gave the Fed the authority, but directed the Fed to clamp down on dangerous and predatory lending practices, including on otherwise unregulated entities such as sub-prime mortgage originators. However, for 13 years the Fed stonewalled and declined to use the authority that Congress gave it to police sub-prime lending. Even as recently as last spring, when you could not pick up a newspaper's financial pages without reading about the worsening sub-prime disaster, the Fed did not act - until this Committee made an issue of it.
Financial markets have responded to the 50 basis-point rate-cut, by bidding up stock prices, as if this crisis were over. Indeed, the financial pages have reported that as the softness in housing markets is expected to worsen, traders on Wall Street have inferred that the Fed will need to cut rates again, which has to be good for stock prices.
Mr. Chairman, we are living on borrowed time. And the vulnerability goes far beyond the spillover effects of the sub-prime debacle.
We need to step back and consider the purpose of regulation. Financial regulation is too often understood as merely protecting consumers and investors. The New Deal model is actually a relatively indirect one, since it relies more on mandated disclosures, and less on prohibited practices. The enormous loopholes in financial regulation - the hedge fund loophole, the private equity loophole, are justified on the premise that consenting adults of substantial means do not need the help of the nanny state, thank you very much. But of course investor protection is only one purpose of regulation. The other purpose is to protect the system from moral hazard and catastrophic risk of financial collapse. It is this latter function that has been seriously compromised.
HOEPA was understood mainly as consumer protection legislation, but it was also systemic risk legislation.
Sarbanes-Oxley has been attacked in some quarters as harmful to the efficiency of financial markets. One good thing about the sub-prime calamity is that we haven't heard a lot of that argument lately. Yet there is still a general bias in the administration and the financial community against regulation.
Mr. Chairman, I commend you and this committee for looking beyond the immediate
problem of the sub-prime collapse. I would urge every member of the committee to spendsome time reading the Pecora hearings, and you will be startled by the sense of deja vu.
I'd like to close with an observation and a recommendation.
My perception as a financial journalist is that regulation is so out of fashion these days that it narrows the legislative imagination, since politics necessarily is the art of the possible and your immediate task is to find remedies that actually stand a chance of enactment. There is a vicious circle - a self-fulfilling prophecy - in which remedies that currently are legislatively unthinkable are not given serious thought. Mr. Chairman, you are performing an immense public service by broadening the scope of inquiry beyond the immediate crisis and immediate legislation.
Three decades ago, a group of economists inspired by the work of the late Milton Friedman created a shadow Federal Open Market Committee, to develop and recommend contrarian policies in the spirit of Professor Friedman’s recommendation that monetary policy essentially be put on automatic pilot. The committee had great intellectual and political influence, and its very existence helped people think through dissenting ideas. In the same way, the national security agencies often create Team B exercises to challenge the dominant thinking on a defense issue.
In the coming months, I hope the committee hears from a wide circle of experts - academics, former state and federal regulators, financial historians, people who spent time on Wall Street - who are willing to look beyond today's intellectual premises and legislative limitations, and have ideas about what needs to be re-regulated.
Here are some of the questions that require further exploration:
First, which kinds innovations of financial engineering actually enhance economic efficiency, and which ones mainly enrich middlemen, strip assets, appropriate wealth, and increase systemic risk? It no longer works to assert that all innovations, by definition, are good for markets or markets wouldn’t invent them. We just tested that proposition in the sub-prime crisis, and it failed. But which forms of credit derivatives, for example, truly make markets more liquid and better able to withstand shocks, and which add to the system's vulnerability. We can't just settle that question by the all purpose assumption that market forces invariably enhance efficiency. We have to get down to cases.
The story of the economic growth in the 1990s and in this decade is mainly a story of technology, increased productivity growth, macro-economic stimulation, and occasionally of asset bubbles. There is little evidence that the growth rates of the past decade and a half - better than the 1970s and '80s, worse than the 40's, 50's and '60s - required or benefited from new techniques of financial engineering.
I once did some calculations on what benefits securitization of mortgage credit had actually had. By the time you net out the fee income taken out by all of the middlemen - the mortgage broker, the mortgage banker, the investment banker, the bond-rating agency - it's not clear that the borrower benefits at all. What does increase, however, are the fees and the systemic risks. More research on this question would be useful. What would be the result of the secondary mortgage market were far more tightly subjected to standards?
It is telling that the mortgages that best survived the meltdown were those that met the underwriting criteria of the GSE's.
Second, what techniques and strategies of regulation are appropriate to damp down the systemic risks produced by the financial innovation? As I observed, when you strip it all down, at the heart of the recent financial crises are three basic abuses: lack of transparency; excessive leverage; and conflicts of interest. Those in turn suggest remedies: greater disclosure either to regulators or to the public. Requirement of increased reserves in direct proportion to how opaque and difficult to value are the assets held by banks. Some restoration of the walls against conflicts of interest once provided by Glass Steagall. Tax policies to discourage dangerously high leverage ratios, in whatever form.
Maybe we should just close the loophole in the 1940 Act and require of hedge funds and private equity firms the same kinds of disclosures required of others who sell shares to the public, which in effect is what hedge funds and private equity increasingly do. The industry will say that this kind of disclosure impinges on trade secrets. To the extent that this concern is valid, the disclosure of positions and strategies can be to the SEC. This is what is required of large hedge funds by the Financial Services Authority in the UK, not a nation noted for hostility to hedge funds. Indeed, Warren Buffet's Berkshire Hathaway, which might have chosen to operate as private equity, makes the same disclosures as any other publicly listed firm. It doesn't seem to hurt Buffett at all.
To the extent that some private equity firms and strategies strip assets, while others add capital and improve management, maybe we need a windfall profits tax on short term extraction of assets and on excess transaction fees. If private equity has a constructive role to play - and I think it can - we need public policies to reward good practices and discourage bad ones. Industry codes, of the sort being organized by the administration and the industry itself, are far too weak.
Why not have tighter regulation both of derivatives that are publicly traded and those that are currently regulated - rather weakly - by the CFTC: more disclosure, limits on leverage and on positions. And why not make OTC and special purpose derivatives that are not ordinarily traded (and that are black holes in terms of asset valuation), also subject to the CFTC?
A third big question to be addressed is the relationship of financial engineering to problems of corporate governance. Ever since the classic insight of A.A. Berle and Gardiner Means in 1933, it has been conventional to point out that corporate management is not adequately responsible to shareholders, and by extension to society, because of the separation of ownership from effective control. The problem, if anything, is more serious today than when Berle and Means wrote in 1933, because of the increased access of insiders to financial engineering. We have seen the fruits of that access in management buyouts, at the expense of both other shareholders, workers, and other stakeholders. This is pure conflict of interest.
Since the first leveraged buyout boom, advocates of hostile takeovers have proposed a radically libertarian solution to the Berle-Means problem. Let a market for corporate control hold managers accountable by buying, selling, and recombining entire companies via LBOs that tax deductible money collateralized by the target’s own assets. It is astonishing that this is even legal, let alone rewarded by tax preferences, even more so when managers with a fiduciary responsibility to shareholders are on both sides of the bargain.
The first boom in hostile takeovers crashed and burned. The second boom ended with the stock market collapse of 2000-01. The latest one is rife with conflicts of interest, it depends heavily on the perception that stock prices are going to continue to rise at multiples that far outstrip the rate of economic growth, and on the borrowed money to finance these deals that puts banks increasingly at risk.
So we need a careful examination of better ways of holding managers accountable - through more power for shareholders and other stakeholders such as employees, proxy rules not tilted to incumbent management, and rules that reward mutual funds for serving as the agents of shareholders, and not just of the profit maximization of the fund sponsor.
John Bogle, a pioneer in the modern mutual fund industry, has written eloquently on this.
Interestingly, the intellectual fathers of the leveraged buyout movement as a supposed source of better corporate governance, have lately been having serious second thoughts.
Michael Jensen, one of the original theorists of efficient market theory and the so called market for corporate control and an advocate of compensation incentives for corporate CEOs has now written a book calling for greater control of CEOs and less cronyism on corporate boards. That cronyism, however, is in part a reflection of Jensen's earlier conception of the ideal corporation.
I don't have all the answers on regulatory remedies, but people smarter than I need to systematically ask these questions, even if they are beyond the pale legislatively for now.
And there are scholars of financial markets, former state and federal regulators, economic historians, and even people who did time on Wall Street, who all have the same concerns that I do as well as more technical expertise, and who I am sure would be happy to find company and to serve.
One last parallel: I am chilled, as I’m sure you are, every time I hear a high public official or a Wall Street eminence utter the reassuring words, "The economic fundamentals are sound." Those same words were used by President Hoover and the captains of finance, in the deepening chill of the winter of 1929-1930. They didn’t restore confidence, or revive the asset bubbles.
The fact is that the economic fundamentals are sound - if you look at the real economy of factories and farms, and internet entrepreneurs, and retailing innovation and scientific research laboratories. It is the financial economy that is dangerously unsound. And as every student of economic history knows, depressions, ever since the South Sea bubble, originate in excesses in the financial economy, and go on to ruin the real economy.
It remains to be seen whether we have dodged the bullet for now. If markets do calm down, and lower interest bail out excesses once again, then we have bought precious time. The worst thing of all would be to conclude that markets self corrected once again, and let the bubble economy continue to fester. Congress has a window in which restore prudential regulation, and we should use that window before the next crisis turns out to be a mortal one.

ECB, BoE Leave Rates Unchanged Despite Inflationary Dangers

Friday, October 05, 2007

Central banks in the Eurozone and Great Britain have left key interest rates unchanged in their meetings on Thursday.
ECB president Jean-Claude Trichet delivered this key paragraph in his introductory statement at a press conference held in Vienna.
To sum up, a cross-check of the information identified under the economic analysis with the outcome of the monetary analysis has confirmed the existence of upside risks to price stability over the medium term, against the background of good economic fundamentals in the euro area. Accordingly, and with money and credit growth vigorous in the euro area, our monetary policy stands ready to counter upside risks to price stability, as required by our primary objective. At the same time, given the heightened level of uncertainty, additional information is needed before further conclusions for monetary policy can be drawn. Consequently, the Governing Council will monitor very closely all developments. On the basis of our assessment, and by acting in a firm and timely manner, we will ensure that risks to price stability over the medium term do not materialise and that medium and long-term inflation expectations remain firmly anchored in line with price stability, which is all the more important in the current context. As regards the financial markets, we will continue to pay great attention to developments over the period to come.
Eurozone inflation accelerated above the 2% target rate in August and stands now at 2.1%.
According to Trichet recent money supply record figures may be overstating actual M3 growth as a result from the flattening yield curve and recent market volatility.

Data Shows Monetary Policy Still Accommodative
The ECB has dropped the phrase about an "accommodative monetary policy" stance for the first time since October 2005. Dropped words are one thing - and the hard data in the most recent weekly financial statement of the Eurosystem shows the opposite. The ECB's longer term refinancing transactions now stand with 265 billion Euros at almost double the former pre-summer average of 150 billion Euros.

First Gold PURCHASES by a Central Bank

I also cannot forego a light chuckle when seeing that gold reserves have been revalued to the tune of 8.4% at the end of Q3 2007.
According to the ECB last week saw also the first gold coin purchases by a central bank from the Eurozone since its inception. Gold is the best performing asset of the Eurozone's reserves but has been dumped over the last 8 years when central banks began to prefer yield carrying investments.
I doubt that these investments have really delivered more profits than leaving the bars in the vaults. Not that this would have been of any interest to the press corps in attendance...

My Inflation Is a Lot Higher
Having relocated to Vienna again (and still suffering from jet lag) I am experiencing acute and severe sticker shock. Following are some price raises since April.
  • City parking fees rose 50%.
  • Public local transport rose 13.3%.
  • Bread costs now 3 Euros for half a kilo, roughly 1,200% more than when I started monitoring bread prices 35 years ago (and 10plus percent only in 2007.)
  • Pizza in my favourite place rose 14.9%.
  • Gasoline costs about 20% more.
  • Milk and milk products rose around 15%.
  • Butter rose 25%.
Family members extend this list with more food items, electricity and natural gas which all rose markedly, they say.
As these figures will probably not add up to the official inflation rate of 2.1% but result in significantly higher personal outlays I conclude one more time: Consumer price indices have nothing to do with reality and are kept artificially low as governments have to pay inflationary increases in many index linked contracts.
How much longer will consumers accept this betrayal?

Eurozone Inflation Jumps the 2% Barrier

Friday, September 28, 2007

Higher pasta prices in Italy, petrol for 1.20 Euros and much more per litre, espresso shots for 4 Euros and double-digit raises for communal and federal services finally show up in the Eurozone's official inflation rate - which is laughed at at best in Europe.
A first estimate of Eurostat arrived at an annualized inflation rate of 2.1% in September after 1.7% in August.

ECB Pumps Up Markets With Another 50 Billion
It won't get any better. Surging food and energy prices are complemented by fresh money from the ECB. According to data on its website the ECB created another 50 billion Euros in a 3-month repo that drew an average weighted rate of 4.63%, significantly above its target rate of 4%.
Don't expect to find information on the volume of bids on the site of the "transparent" ECB, which also did not announce this repo beforehand to the wider public. This new transaction reverses almost half of the drain of 114 billion Euros last week. Money created solely for the purpose of supporting unsupportable securities prices.

Central Banks Fooling the Public
It is amazing that central banks appear to be one-trick ponies that try to douse the fire with gasoline. All that new money - and not a single unit of service or product created. Do central banks really believe the public can be fooled much longer with wads of paper?
Fiat money is the cheapest product in the world. Just go to Zimbabwe, the country of starving millionaires.
Well, the game will go on as long as the general public buys into the ridiculous official inflation rates which are completely out of sync with consumers daily experiences at the cash register.
Based on these unreal inflation rates central banks fix interest rates at levels that are below actual inflation.

The ECB's Dilemma
The ECB is in a big dilemma. Its monetary policy is currently failing. Inflation is above the target rate of 2% and M3 has been ignored in all policy decisions since the inception of the Euro. M3 currently grows at 11.7% annually, more than double the target rate of 4.5%.
While these indicators would justify a rate hike, such a move could push Europe into a recession. Export oriented economies like Germany fear any further advances of the Euro. France, Spain and Italy are on the brink of a recession already. Any rate hike would burden budgets further.
Taking clues from a speech by vice president Lucas Papademos the ECB will probably sit on its hands at the next council meeting as the turmoil in capital markets is still being evaluated. It will also depend on others. Papademos said the ECB holds close contact with the Federal Reserve, raising my suspicion that exchange rates will see huge distortions.
I should also emphasise that ... the ECB and the Eurosystem have been in close contact with other central banks in the world, notably the Federal Reserve System. While each monetary authority took decisions to attain its own objectives and in line with its own assessment and operational framework, it is unquestionable that this liquidity squeeze which had manifestly global dimensions called for a response with commensurately global cooperation.
I uphold my statement that precious metals will prove to be the best currencies in the near future - as they have been in the past 6000 years. Gold reached a new 28-year high today at $745 per ounce.

There Will Always be Enough "Liquidity"

Central banks have shored up financial markets again with freshly digitized money. New money that has no corresponding value in the economy and is solely used to support unsupportable prices of illiquid investment instruments.
After the give-in of the Bank of England earlier this week, which came to the rescue of financial institutions where managers are obviously not worth their money but still want to cash bonuses before bankruptcies. After this 10 billion pounds stint in the UK the European Central Bank said its discount window has handed out 3.9 billion Euros on Wednesday.
According to the Wall Street Journal,
the heavy use of the marginal lending facility -- the highest since October 2004, when banks borrowed €7.9 billion -- surprised money-market dealers, as it is regarded as lending of last resort.
"It is most remarkable, because it happened not at the end of the statement period but in the middle of it," said Jose Alzola, chief European economist at Citigroup.
The rate at which banks can subscribe to the deal is well above current interbank rates and a percentage point above the ECB's minimum refinancing bid rate of 4.00%. "There is no economic rationale for that; markets are flush with liquidity," said Cornelia Bahn, a trader at WGZ Bank.
On Tuesday, the ECB pumped an extra €33 billion of one-week money into the markets in view of overwhelming demand for its regular main refinancing tender. The ECB allotted €190 billion funds, compared with liquidity needs of €157 billion.
The ECB had withdrawn almost 114 billion Euros from its short term financing operations in the week ending September 21, the weekly financial statement shows.
Eurozone M3 Growth Slowed Marginally in August
Surprisingly the ECB's massive injections of freshly digitized money into a system suffering from a credibility problem did not blow up money supply M3 significantly.
According to an ECB press release the high levels were maintained:
The annual rate of growth of M3 stood at 11.6% in August 2007, after 11.7% in July 2007. The three- month average of the annual growth rates of M3 over the period June 2007 - August 2007 rose to 11.4%, from 11.1% in the period May 2007 - July 2007.
Lending to all sectors rose again in August. Consumers still seem not to take notice of rapidly deteriorating economic conditions in Europe.
The Federal Reserve system did not sit on its hands either. Data from the Fed New York shows it allotted $38 billion in 4 repos on Thursday and accepted primarily MBS and agency backed collateral.
One thing can be taken for granted: Central banks will continue on the path of reckless monetary inflation, cheered by indebted governments who seem to understand shit about monetary policy.
Fed chairman Ben Bernanke can be expected to continue to manufacture the cheapest-cost product the Fed has to offer - (electronic) cash.
As we know the Fed can only guarantee cash, but not its purchasing power.
In the Eurozone the situation appears a bit different. ECB president Jean-Claude Trichet wants to keep inflation in check but is bullied by French president Sarkozy whose government could break on higher rates. But word from Trichet is missing. Where is he, asks not only Edward Hugh.
Ironically the ECB could be forced to lower rates again to rein the runaway Euro which endangers the gentle economic blossom in the stronger Eurozone members and threatens recession for countries like Spain and Italy.
Don't let yourself fool from the current calm in markets. This could be the silence before the perfect storm. If you look for a safe shelter, try gold. At the time of writing it trades at $738 per ounce.

Treasury Signals Derivatives Mess Is Far From Over

Thursday, September 27, 2007

It appears as if the US Treasury expects a fallout in the derivatives market. Anthony Ryan, the Treasury's assistant secretary for financial markets, said on Wednesday that investors and their fiduciaries must do a better job of evaluating the risks of increasingly complex securitized derivatives products, Reuters reported.
Addressing an International Swaps and Derivatives Association (ISDA) conference in New York Ryan reminded his audience on the differences between investing and gambling.
Insufficient understanding or failure to perform an independent and adequate due diligence prior to making an investment decision is simply unacceptable. That's not investing - that's gambling.
In clear language I assume it means something along the lines of "it is your fault when you bought illiquid crap."
According to Ryan the Presidents Working Group on Financial Markets, also dubbed the "Plunge Protection Team," has launched an examination of recent market turmoil, including the impact of securitization and the role of ratings agencies in credit and mortgage markets.
On Tuesday, the Treasury had asked pension fund investors and asset managers to make recommendations as to what information hedge funds should disclose to protect investors and strengthen US capital markets.
Given the continuing problems in money markets where even massive doses of fresh money are of no help the real mess is probably only about to begin. Nobody has exact or even approximate figures for the current size of the derivatives market but all estimates range in the hundreds of trillions. There must be a lot of bag holders out there and right now is the time where every fund manager with pricing problems in his portfolios waits for the other ones to drop theirs first.
Such action will come as banks and funds have to dress up their balance sheets for what will certainly not be a good Q3 2007.
At the moment the market appears way too quiet for all the problems that did not get solved by the Fed's recent rate cut. And these problems are in the vast majority.

The Federal Reserve Dollar Loses Its Face

Tuesday, September 25, 2007

The Federal Reserve (not US) Dollar slumped to a new alltime low on Tuesday, trading at more than $1.4150 to the Euro.
The USD index slid to the new record low of 78.14.

weak dollar

PICTURE: Certainly not as good as gold. In 94 years the Federal Reserve Dollar has lost more than 95% of its value. Drawing courtesy of Milt Priggee.

Numbers Speak a Clear Language

Thursday, September 20, 2007

A list of today's records reads like this:
HIGHS
  • Gold climbs to a 28-year high at $737
  • Oil closes at the all-time high of $83.32
LOWS
  • The Federal Reserve Dollar falls to an all-time low at $1.41 to the Euro
  • The Canadian Dollar trades on a par with the Federal Reserve Dollar for the first time since 1975
Next to this Thursday proved that the 2-hour relief rally in Treasuries after the Fed's rate cut was only such. The 10-year yield raced 15 basis points to 4.67%.
Maybe these rapid moves base on first signs that now Saudi Arabia says "bye bye" to the Federal Reserve Dollar, a currency moving closer to its collapse with every day.
From The Telegraph:
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.
"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.
There are indeed few fiat currencies one can safely hide behind these days.
The British Pound got whacked after the Bank Of England made a U-turn and will now bail out banks who had lent money to the wrong clientele.
From the International Herald Tribune:
The Bank of England has abruptly reversed its policy of refusing to ease lending standards, offering to inject cash into British money markets amid criticism that it had not done enough to stem a credit squeeze that has undercut one of the largest European economies.
Days earlier, the governor of the Bank of England, Mervyn King, said the bank would not follow the Fed and the European Central Bank by putting cash into a system where banks had stopped lending because of volatile conditions, saying such moves encouraged risky behavior by banks and sowed the seeds of future financial crises.
The central bank said it would provide funds at a three-month maturity and would accept "mortgage collateral" at an auction of £10 billion, or $20 billion, in loans next week in order to "alleviate the strains in longer-maturity money markets." The bank will still charge a penalty rate of 6.75 percent, it said.
The bank said it would also make three further offerings at "weekly intervals" to reduce the gap between the benchmark rate of 5.75 percent and the rate banks charge to lend to one another. Banks have been reluctant to lend to one another because they prefer to keep their own money while it remains unclear how much longer the credit squeeze might last.

Still not convinced inflation turns from an isolated problem into a wide-spread fire?
Turn to China which today announced a price freeze on many commodities. China's inflation rate climbed to an 11-year high of 6.5%.
From chinadaily:
China's top economic planner has ordered a suspension in government orchestrated price hikes in the latest efforts to keep inflation in check.
"In principle, there will be no new price-raising measures by the government this year," the National Development and Reform Commission (NDRC) said in a notice, co-signed by five other agencies including Ministry of Commerce and Ministry of Finance, published on its website on Wednesday.
An approval from the NDRC is needed if any local government feels it has to increase prices on certain products "under special conditions", according to the notice.
The order applies only to prices under government control, such as gas, oil, water, electricity, and other prices of crucial goods and services that affects the livelihood of the public, including public fares.
Although the government has no control over most of the prices in China, this price control measure will help prevent a hike in firms' costs, thereby eliminating part of the pressure for further price increases.

For my part this is enough bad inflation news to follow a simple investment strategy: Long precious metals. The leverage - if at all - is up to your taste.

Nanny Benny

Wednesday, September 19, 2007

The kid cried and Nanny Benny was quick to wipe off the tears and say, "everything will be allright."
Only problem in the current Fed fairy tale: Both parties involved have forgotten about the burning house!
Jim Cramer can uncork a bubbly. His outcry on tout TV was answered swiftly and generously by the Fed. Forget about $81 crude oil and fiscal philandering, let's keep the markets party going at truly all costs.
Today's 50bp rate cut to a Fed funds rate of 4.75%, the first in 4 years, will backfire after an initial relief rally.
The aggressive move (on the wrong side) after 17 ascending baby steps may appeal to banks suffering from a credit crunch that is rather a credibility crunch. It will also appeal to debtors whose mortgage adjustment will be delayed for another year and may even offer the chance for some to refinance at a better rate. It will also appeal to the big spenders in the White House.
But will it also appeal to creditors financing the permanent US spending spree?
Let's not forget that only a month ago the Fed's predominant concern was inflation. Oil was trading for a good $10 less than now.
Gold's surge to a new 16-month high proves this point.
This rate cut is a band-aid to a patient with gangrene. What was the cure after the internet bubble is now becoming the poison for markets where we find out that despite all the nice talk there happened no real risk diversification but almost everybody preferred to lean on the side of permanently low rates and rising house prices. Extending this excess will make the next big correction in stock markets only stronger.
This will probably only sink in once foreign investors begin to pick up their chips from the dollar table and wager them elsewhere.

Venezuela Dumps Federal Reserve Dollar for Oil Payments

Monday, September 17, 2007

Venezuela will not accept Federal Reserve Dollars for payments of oil deliveries anymore.
Venezuelan President Hugo Chavez instructed Petroleos de Venezuela SA, the state oil company, to convert its investment accounts from dollars to euros and Asian currencies to reduce risk,
Bloomberg reported.
Chavez, speaking in his weekly address on national television, said the U.S. has bought goods from around the world, paying with paper that is "a bubble."
The world's oil trading system has primarily used dollars for decades, helping to make the dollar into a global currency. Iran in July requested yen rather than dollars for all shipments to Japan, boosting that currency.
Chavez has said in the past that he wants to divert Venezuelan oil sales from the USA to other clients, especially China.
Venezuela and China will work together on a $10 billion project to build six refineries and a shipping company to make Venezuela one of China's most important suppliers. Still, the U.S. continues to import 1.36 million barrels a day of crude and refined products from Venezuela, more than half its estimated 2.4 million barrels a day of output.
Crude oil jumped above the $80 mark after this announcement.

Greenspan's Kiss & Tell

Easy Al will keep 'em forecasts coming. Former Federal Reserve chairman Alan Greenspan will continue to rattle markets with his economic predictions. His successor Ben Bernanke won't be delighted to hear Greenspan repeatedly defending his public comments on the economy, interest rates and whatever else the former Fedhead elects worthy his suddenly very clear speech.
Otherwise today's interview on CBS (which was cut short by my cable provider in favor of elegant and silent killer whales after two thirds) informed us that Greenspan prefers, ahem, "interesting" orange wallpaper and reads - surprise surprise - economic stuff at breakfast. Rumours he negotiates a 10-page photo-strip with "Beautiful Homes" have not been confirmed yet. He still wears no logo polo shirts so sponsoring for the right sum should be no problem.
Relaxed to the max Mr. Greenspan's economic services firm is prepared to bring paying clients such economic wisdom as there will be severe 2-digit declines in house prices. Draw no wrong conclusions though. Greenspan argues in his book due on Monday that this is not the catastrophic result of his low interest rate policy in the Fed but that house prices are somehow connected to former communist workers in Europe becoming capitalists. Great, many of them have a mortgage now too. If that was meant by freedom?
On TV he stubbornly defended his position to keep his loudspeaker on. His predecessor at the Fed, Paul Volcker has been adhering to a "no comment" standard on rate issues since he retired.
Greenspan promised he will be different and is seemingly oblivious to the fact that he captained the period of the fastest and deepest rate cuts in history.
In his book he will tell us that the Fed could not regulate the banks who lowered loan standards close to Ninjas (no income no job or assets.)
Has he lost it? The Fed is by law the banking supervisory body and it was also during his tenure that the Glass-Stegall act was repealed.
Mr. Greenspan has had his weaknesses in forecasting economic events. We now know he sees a recession coming. Retire in peace.

US Mint Suspends Gold Coin Sales Due to Raising Prices

Friday, September 14, 2007








Is the USA running out of gold?
The US Mint has suspended all sales of most bullion coins on Thursday. A visit to its website shows that all golden American Eagle coins are "not available." This info is hidden on the product pages without a corresponding press release. The US Mint had limited bullion coin sales to a maximum of 10 ounces per order earlier. The Mint will reprice these coins by September 27, it said. Confirmed orders will still be shipped.
US gold reserves have not been audited in more than 40 years and are valued at $42 in the Fed's publications. The USA does not take part in the central bank gold sales agreement which runs until September 2009 and limits gold sales to 500 tons per year.
The info page for the 2007 American Eagle says,
"due to the increasing market value of gold, the American Eagle Gold Uncirculated Coins are temporarily unavailable while pricing for this option can be adjusted; therefore, no orders can be taken at this time. We expect products to be available with adjusted pricing on or after September 27, 2007."
Take note that there is a shortage in bullion silver on the retail level in Europe.
Gold surged to a new 2007 high of $717 per ounce on Friday.


ECB Gives Banks Another Fix

Wednesday, September 12, 2007

Eurozone banks scrambled for another round of freshly minted money handed out by the ECB in dimensions not seen before.
Two weeks after their last extraordinary 3-month repo with a volume of 50 billion Euros the ECB injected another 75 billion Euros into the money market at markedly higher rates on Wednesday after draining 60 billion on Tuesday. This contradicts the calm picture ECB president Jean-Caude Trichet had delivered to the European Parliament only a day earlier.
The new 3-month tender was allotted at a marginal rate of 4.35% and a weighted average of 4.52% or 10 basis points lower than the last 3-month repo but still significantly above the ECB's target rate of 4%. The 3-month Euribor was quoted at 4.74% on Wednesday.
The ECB website does not offer information about the actual volume banks bid for and in genral does not provide a conclusive overview of its money creation process. The ECB's website also lacks all the statements about the money market handed out to the wire services. Not exactly an example of parallel information.
The Fed NY does it comparably better here. The Federal Reserve allotted $13 billion in a one-day repo today out of a total bid for $41 billion at rates just below 5%.
According to the latest weekly financial statement the ECB's balance sheet grew 50 billion to 1,207 trillion Euros, mainly through the refinancing operations. The trash can, called other assets, was served with a gain of 5 billion and now stands at an unprecedented 260 billion Euros.

Seven Seas Full of Free Energy

A cancer researcher has found a way to burn salt water with radio frequencies, exciting scientists about the use of the world's most abundant element to generate energy. In the light of today's new record oil price, quickly approaching the $80 barrier this is a most remarkable innovation. Better hedge those energy stocks.
From a Yahoo report:
John Kanzius happened upon the discovery accidentally when he tried to desalinate seawater with a radio-frequency generator he developed to treat cancer. He discovered that as long as the salt water was exposed to the radio frequencies, it would burn.
The discovery has scientists excited by the prospect of using salt water, the most abundant resource on earth, as a fuel.
Rustum Roy, a Penn State University chemist, has held demonstrations at his State College lab to confirm his own observations.
The radio frequencies act to weaken the bonds between the elements that make up salt water, releasing the hydrogen, Roy said. Once ignited, the hydrogen will burn as long as it is exposed to the frequencies, he said.

Watch a demonstration video after the jump.


The scientists want to find out whether the energy output from the burning hydrogen - which reached a heat of more than 3,000 degrees Fahrenheit - would be enough to power a car or other heavy machinery.
"We will get our ideas together and check this out and see where it leads," Roy said. "The potential is huge."

Look Here For an Inflation Proof Currency

I knew it. This headline draws attention these days. As the world wakes up to the fact that all currencies are created out of thin air by a simple entry into the electronic ledgers of the world's central banks investors begin to look for investments whose safety does not depend on an agency rating.
This chart from the World Gold Council may help your investment decisions.


GRAPH: This chart is a very graphic description what happens once nations abolish the gold standard in favor of unbacked fiat currencies. Remember: No fiat currency has existed longer than a human's lifespan and the Federal Reserve Dollar is already a Methusalem at 94 years. Chart courtesy of World Gold Council
The accompanying text makes a very important point: In the very long term only gold has proven absolutely inflation proof.
The value of gold, in terms of the real goods and services that it can buy, has remained largely stable for many years. In 1900, the gold price was $20.67/oz, which equates to about $503/oz in today's prices. In the two years to end-December 2006, the actual price of gold averaged $524. So the real price of gold changed very little over a century characterised by sweeping change and repeated geopolitical shocks. In contrast, the purchasing power of many currencies has generally declined.
Now put the fact of understated inflation figures in the past 2 decades and the resulting under-valuation of gold into the equation and you arrive at a surefire winner for the coming years until the system has cleared out all credit-fuelled excesses of this speculative past made possible by low interest rates which effectively hurt the interests of that rare species: the net positive saver. Gold has to make it past the $2,000 mark only to catch up to its nominal high in real terms.
Money Supply M3 Now Growing at More Than 14% YoY
If you need more evidence that the future of the current currency system looks bleak, shadowstats.com delivers the horror news. As the Fed does not publish these figures anymore in good old Soviet style (hide bad statistics) shadowstats calculates an appoximative continuation of M3 that shows that money supply is out of control. I wonder if they can do it for less than the Fed.
All those so-called "liquidity" "rescue" operations were nothing else than the creation of new money without a corresponding value. I faintly remember from some textbooks that this is called monetary inflation. Deducting 4% GDP growth from 14% M3 growth results in a true monetary inflation rate of 10%. I think prices at your grocery store align better with this rate than the funny "core" rate.


GRAPH: If you want to fend off inflation, only gold will do the job. M3 growth accelerated to an annual record rate of 14% thanks to the "liquidity" "rescue" operations of the Federal Reserve. According to the rule of thumb 14% M3 growth minus 4% GDP growth result in a true inflation rate of 10%. Chart courtesy of shadowstats.com
Do you need any more proof that gold will be a very promising investment in the near future? This bull market is still in its very early stages as the general public has no gold under their mattresses yet. Just imagine what will happen upon the rediscovery of gold as the ultimate currency: 5.5 billion people will bid for some 5 billion ounces of gold. Get yours today.

My Question About 9/11

Tuesday, September 11, 2007

If jet fuel burns at 980 centigrades and steel melts between 1,325 and 1,530 centigrades, what really happened to bring down the first skyscrapers by fire in history?
A more intense discussion of this physical impossibility would be the best service the world can give to those who perished in this hellfire.
My thoughts are with all innocent victims of 9/11 and its worldwide aftermath that leads to a totalitarian world in which peaceful protest will soon become impossible if citizens do not execute their rights.
For more on the growing similarities between the Bush administration and the Nazis click here. It has only become worse since.

Liquidity and Safety Are Two Pairs of Shoes

Monday, September 10, 2007

Long dated US Treasuries reversed part of their dramatic gains on Monday, dragged down by worries that foreign investors were actually dumping US debt paper in last week's run-up. According to a Bloomberg report America's creditors actively pursue a diversification of their assets, shifting away from the Federal Reserve Dollar. The next Treasury Inflow Capital data will bring more clues about the amounts moved.
Investors are correct by doing so. Last week's flight into US Treasuries was a flight into liquidity but certainly not a flight into safety unless one is satisfied with nominal and not real returns.
It appears a bit illogic to consider debt obligations from the biggest debtor the world has ever seen as a safe investment. Let us not forget that the AAA rating for US IOU's has never changed since debt has been rated. The paramount difference is, though, that the USA was the world's biggest creditor when it aquired its AAA rating. Now it is the biggest debtor and to keep the US economy as a going concern it needs foreign investments like a vampire thrives on blood.
It is true, the USA will always be able to pay off its debts as it is the only nation in the world that indebts itself solely in its own currency. The game of ever expanding credit can go on - as long as investors play along.
This is not very likely, now that the whole world has agreed on the fact that the financial system built on credit excesses is under severe stress and especially US debts have become the hot potato nobody wants to hold.
The seize up in interbank lending has provoked the Sunday Times to call the current mess oozing from mortgages into everything else "the worst crisis for 20 years." Banks have stopped lending to each other in order to allow a rollover of $113 billion in commercial paper due later this week. This is more demand than a month earlier when the liquidity crisis started. And the other big headache is still out there:
The prospect of serious market indigestion from maturing commercial paper is not the only headache for the banks. Globally, they have $380 billion of loans and bonds to be laid off from leveraged buyouts and other private-equity deals at a time when the markets have shifted sharply against them.
ECB Starts Panicking
Bankers on the continent are getting cold feet too. ECB president Jean-Claude Trichet warned in an appearance at the Bank for International Settlements (BIS) on Monday,
"There is a probability of fallout on the real economy in the USA."
We will have to follow very carefully what happens particularly in the USA. We will remain ... alert, (there is) no time for complacency,"
he added.
Trichet will testify at an extraordinary hearing of the European Parliament on Tuesday.
Trichet will not be in the loop of US Treasury secretary Henry Paulson who will meet with the recently installed new leaders of the Britain and France next week. A spokesman said Paulson had been trying to schedule trips to meet with Brown and Sarkozy since well before problems with U.S. subprime mortgages began roiling global financial markets last month.
China Changes Policy and Will Go Shopping
Paulson will need new allies in financing the unsustainable US deficits as China has announced major policy changes that will allow Chinese companies to invest abroad. According to chinadaily.com, the central bank will scrap unnecessary controls on foreign exchange reserves to fund local firms'outbound investment. Governor Zhou Xiaochuan said,
"we will remove unnecessary restrictions on reviewing sources of foreign exchange funds, as well as on foreign currency purchase and profit remittance.
We will also allow domestic firms to use their own foreign exchanges or buy foreign funds with local currency yuan to invest abroad."
The governor noted the central bank will explore ways to buy shares in foreign banks so as to provide more convenient financial services for the overseas operations of domestic businesses.
"We encourage them to raise capital through various means including bank loans, stock listings and bond sales,"
he said, adding their domestic operations can provide warrants for the fundraising once they get official go-ahead.
It seems as China will propel itself to the #1 rank of international investors at the blink of an eye.
Other news that influenced my thinking today is the roundup of a widespread discussion of moral hazard at nakedcapitalism.
And there is a new blog on the block. Mark Shivers has started "The Talking Fed" and aims to cover all speeches by Fed members.

Greenspan Suffers From Acute Total Amnesia

Friday, September 07, 2007

Alan Greenspan takes another step down. After his transformation from "Maestro" to "Easy Al" he now fights for the nickname "Greenshill", at least when one follows his comments from Friday. Alan Greenspan, the man solehandedly responsible for the mortgage mess concluded in a speech to economists that today's turmoil resembles the sentiment before the crises of '87 and '98. According to him the mortgage malaise has infected the rest of the economy. This assessment comes from the man who preferred to douse every monetary inflationary excess with more of the poison that caused all exaggerations in the first place.
Greenspan must suffer from acute total amnesia. It was him who once praised the doubtful fact that all Americans could buy a house because there were such financial innovations like zero down ARMs.
Greenspan did not turn a nation into homeowners. Greenspan pushed a whole nation into the highest debt ever, be it on the private, communal or federal level.
To say now that bubbles cannot be defused until the fever breaks is an outright lie. It was in his hands to pinch the bubbles and he never did. Instead of taking the punch bowl away Greenspan laced it with evermore liquidity and now we look at a toxic cocktail and he starts trying to shift the blame.
This crisis will play out as all crises. Denial > anxiety > fear > depression > panic.

Silver Costs 10% More in China

Thursday, September 06, 2007

Attention silver investors. Silver is bought and sold some 10% above the global spot price in China, a Reuters dispatch informs, quoting Ellison Chu, senior manager at Standard Bank London in Hong Kong.
"There's a huge price difference between the domestic price in China and the international price. The demand is quite strong in China these days.
The price in China is 10 percent higher than in the international market."
This news is insofar interesting as it raises the question whether the global spot price is valid anymore. Obviously not when such discrepancies occur.
A similar gap between the spot price and prices actually paid occurred in late 2006 when silver bullion was bought at prices some 10% higher than spot prices would have indicated in Europe. This was because of a supply shortage as I was told by sellers who predict that the supply problem will only grow in the near future.
According to the report demand for silver comes from all corners: Jewellery, photography, industrial and investment demand.
Silver again outperformed gold on Thursday and is expected to go a lot higher in mining circles. Nobody wants to be quoted but the prices I hear for 2008 range between $20 and $30 based on growing demand and a continuing supply deficit.
A list of silver companies can be found here.

Central Banks Continue on Path of Monetary Inflation

The European Central Bank donned its two masks again on Thursday. With one hand the ECB decided at its monthly meeting of the governing council to leave the key interest rates unchanged while the other hand continued to create fresh money, showering bidding banks with 42.2 billion Euros in a new overnight tender that drew an average rate of 4.13% or 13 basis points more than the current key overnight rate.
The Bank of England (BoE) left its key interest rate unchanged at 5.75% too.
In the USA the Federal Reserve allotted a total of new $23 billion in a 1- and 2-week tender besides replacing yesterday's 1-day repo.
And they want to make us believe markets are returning to normal. Money market rates tell a very different picture and I rather rely on the data than the propaganda coming from central banks. And in this reality banks are scrambling to borrow funds at rates significantly higher than what the priests of ever expanding credit would like to see implemented.
if there were no crisis, why did the ECB announce the creation of more new fiat money on Thursday. According to a press release the ECB will stage another additional 3-month tender on September 11. What is worrisome for those who see an inseparable link between inflation and money creation is the fact that the ECB set no maximum amount for this repo. So we can expect that banks will be showered with a new unprecedented cascade of credit.
Need more proof that the liquidity and credibility crisis has reached new heights? Take Australia. The Reserve Bank of Australia announced today it would accept more crap as collateral in its repos in the coming 6 weeks.
To see how the Fed sets the discount margins of the asset and mortgage backed crap in its repos follow this link for more outrage. The Fed now accepts MBS and ABS without a market price at 70% to 90% of their face value. Call it outright manipulation and putting value onto debt that has none!
But they begin to cover their backs. After the long denial that there is a banking crisis Fed governor Randall S. Kroszner told bankers how the Fed assesses crises. A short snip:
As a final thought, I counsel policymakers and market participants alike to remember that no two crises are the same.
He is at least honest to the point by saying the Fed has no clue either how to overcome the current crisis.
Not so ECB president Jean-Claude Trichet. Money supply explodes but in his new view the ECB needs more data to learn about the crisis. As this borders on the surreal here a hint to Trichet: Look at your exploding money supply and the ECB statutes where it says that money supply M3 growth should not exceed 4.5%. This target has never been reached since the inception of the Euro.
As this leads to the conclusion that monetary policy has failed one more time I am happy that I am not alone with this view: Gold raced to a new 2007 high of $696 per ounce and this is probably only the prelude to a new all-time high to be seen within the next 6 months.

Full Basket of Worries in the EU

Tuesday, September 04, 2007

While the world is focused on the lips of Fed chairman Ben Bernanke, recent European data show that the old world is sliding into a growth problem that could be used by ECB president Jean-Claude Trichet to cut rates at the next governors' meeting.
Eurostat released declining GDP growth figures for both the Eurozone and the EU27, stemming from higher consumer expenditures but decrasing business investment. Compared with the second quarter of 2006, seasonally adjusted GDP rose by 2.5% in the euro area and by 2.8% in the EU27, after +3.2% and +3.3% respectively for the previous quarter.
Q3 started on a negative note datawise. Eurozone producer prices advanced 0.3% MOM in July after a gain of 0.1% in June. The July YOY figure stands at 1.8%, helped by a decline in energy prices.
ECB Pours Markets One More
The European Central Bank poured one more for banks suffering from a backlog in clogged deals now believed to hover around the $500 billion mark.
It allocated 256 billion Euros in its regular tender, 46 billion more than last week.
While it is a bit difficult, to say the least, to navigate the ECB website, the latest weekly financial statement shows that the monetary expansion has slowed and the ECB has tempoarily drained 65 billion Euros and shrunk the balance sheet a cool 60 billion Euros to a total of 1.16 trillion Euros. Gold sales have come to a virtual halt in the last week of August.
UK MP's to Grill BoE about Credit Crunch
The Independent informs us that british parlamentarians will grill Bank of England officials about the current credit crunch that forced Barclays Bank to borrow 1.9 billion Pounds at the emergency credit facility.
Likely subjects for questions will include the Bank of England's emergency credit facility, the role of the credit rating agencies, and the stability of the financial system.
"We will ask how the emergency facility is being used, what the Bank's view of liquidity is, how we got into this position, and what reassurances the Bank can provide as to the stability of the entire system," Michael Fallon, the senior Conservative member on the committee, said.
Textbook Economic Decline In the USA
The outlook in the USA is not better. Plunging car sales come as the second milestone on the path of bursting bubbles after housing. Next will be credit cards. The Boston Globe runs a story that says credit card offers aimed at subprime debtors jumped 41% in the first half of 2007. Offers to those in the best credit grade fell 13%, paradoxically. Debtors paying their mortgage with their credit card. And you still want to own bank shares?
In order not to forget inflation at the gate of 100 million firearm owners here a snip from a story on rising ammunition prices from KHQA Online.
Russ Merkel is the Co-Owner of Merkels in Quincy and Manager of the store's hunting and fishing department. He said of the ammunition increase, "I can say in 37 years I've been involved in this business, I can't remember any other period of time we've had this much inflation, this much of a cost increase in ammo."
Merkel noticed ammo prices started going up last year....and by the end of 2006, they had gone up 60 percent. Most gun owners didn't notice last year because retailers had stocked up on ammo before the increase went into effect.
But this year is a different story.
Here's an example of the increase. This is a 40 pack of 223 Winchesters. Last year this box sold for around $8.50. This year the same box costs $15.95.
It will get worse. American-made ammo companies just announced they'll increase prices by 15 percent on September 1st and add yet another increase at the first of the year.
Negative Millionaires
The coming recession will create a new consumer class. The "negative millionaire" who not only has nothing but a million of debt on top of it.

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