Bernanke: No Bail Out for Lenders or Investors

Friday, August 31, 2007

Federal Reserve chairman Ben Bernanke delivered a clear message. There will be no bail out of lenders or investors.
Markets had rather hoped that Bernanke would indicate he has an interest rate cut up his sleeve but went nevertheless northwards, brushing away a message from president George W. Bush who announced measures to help debtors in preventing a foreclosure, but ruled out assistance to speculators. Except for bonds everything else went up too: oil, foods, the Federal Reserve Dollar and precious metals.
In his speech at the Fed's annual equivalent of a summer picknick in Jackson Hole Bernanke briefly touched the Fed's short term agenda before entertaining high calibre guests with a historical timeline of the US housing market.
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.
The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country. Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.
What is still left is a clear perspective of the Fed's view on the housing mess. Instead we are left with sentences as such:
As you know, the downturn in the housing market, which began in the summer of 2005, has been sharp.
As you know, the financial stress has not been confined to mortgage markets.
Concur, but what does that mean for monetary policy that turned from fighting inflation to solving the credit crunch in 10 days in August?
Only a few weeks in the crisis the magical touch of central banks has vanished in the smoke of billions burned in CDO hell.
Easy monetary policy won't help as it is the root of the problem in the first case. The mortgage excess has not created an ownership society but a nation of debtors and is the direct consequence of Alan Greenspan's wide open liquidity tap.
It is not liquidity. It is money=debt.
In the past 35 years central banks have countered markets' seizures with ever more debt, propelling debt on all levels to staggering amounts.
All debts have always been called at one point of time in history.

A Few Interesting News of the Day

Thursday, August 30, 2007

Markets were rangebound on Thursday ahead of Fed chairman Ben Bernanke's speech on housing and monetary policy he will deliver on Friday in Jackson hole.
Today's release of strong GDP figures for Q2 will not ease the task of the Fed chairman who is expected to hint at lower interest rates in order to shore up markets dependent on daily cash infusions by central banks. The BEA released a preliminary growth figure of 4.0% for Q2 2007 that stems from stronger exports and nonresidential construction and higher government spending, predominantly in the form of defense expenditures and the running costs of the Iraq war.
The turmoil in mortgage backed securities currently benefits Treasuries tremendously.

10-Year Treasury Yield

GRAPH: 10-year Treasuries have eroded almost all losses, benefitting from the flight from mortgage backed securities. Chart courtesy of Yahoo.
A wave of downgradings of mortgage or asset backed securities will make many a pension fund manager sweat these days. According to a Bloomberg story some bonds were slashed from AAA to CCC overnight. Some snippets:
Last week, Standard & Poor's butchered the ratings on $3.2 billion of debt from structured investment vehicles spawned by Solent Capital Partners LLP in London and Avendis Group in Geneva. About $254 million was slashed from the top AAA grade to CCC+ and CCC -- slides of 16 and 17 levels, triggered by their investments in mortgage-backed bonds.
Think about that for a second. You left the office Tuesday owning a AAA rated security. By the time you got back to your desk on Wednesday morning, it was eight steps below investment grade in a category S&P defines as "currently vulnerable to nonpayment.'' Try explaining that to your pension-fund trustees.
DBS Group Holdings Ltd., Singapore's biggest bank, said on Aug. 7 it had S$1.4 billion ($921 million) at stake in collateralized-debt obligations. This week, it boosted that total to S$2.4 billion. It seems the bank had overlooked its commitment to a unit called Red Orchid Secured Assets. As the man said, a billion here and a billion there and pretty soon you're talking about real money.
A rare moment of comedy arises from what Moody's Investors Service had to say about the oversight. "I don't think DBS will be the only one who has missed something the first time," said Deborah Schuler, a senior Moody's analyst in Singapore.
Could this be the same Moody's that called structured investment vehicles "an oasis of calm in the subprime maelstrom" in a July 23 report? "The vehicles are not structured to forcibly liquidate assets in times of crisis," Moody's said. Their ability to access several sources of finance "obviates the need to liquidate large buckets of assets at potentially the worst period in the life of the vehicle."
Moody's recently added some new phrases to its lexicon of code words. When the rating company refers to "updating its methodology" or "refining its risk assessments," what it really means is that its historical models say absolutely nothing about how the future might turn out.
Last week, for example, Moody's summarized "the most recent refinements" to how it treats bonds backed by so-called Alternative-A mortgages. "In aggregate, the change in our loss estimates is projected to range from an increase of approximately 10 percent for strong Alt-A pools to an increase of more than 100 percent for weak Alt-A pools," Moody's said.
So a mortgage-backed security with a rating based on, say, a 1.5 percent loss rate might now suffer 3 percent losses in its collateral, Moody's said. How's that for missing something the first time?
Again rating agencies were sitting on their hands it appears, as in all debt crises in the past 15 years. I am wondering if anybody has an idea of the size of all outstanding risk. I am willing to bet "no."
Looking for a cover for the financial hurricane descending on Wall Street I immediately look whether my gold shield will protect me.
It looks good. India, the biggest buyer of physical gold, just reported a 72% increase in demand in the first half of 2007. According to a story found at the BullionVault India imported a record 372 tons in that period. This equals half of global gold production.
Thanks to the efforts of Western central banks Indian savers enjoy artificially depressed prices. A funny way of development help.

ECB Prints More and Changes Its Rules

Wednesday, August 29, 2007

Don't let yourself fool by today's relative calm in the markets. Central banks continue to inundate markets with fresh money as predicted yesterday. The European Central Bank today pumped another 50 billion Euros into markets. The 3-month repo is a costly affair though. The ECB accepted minimum bids at 4.56% and reported an average rate of 4.62%. A week earlier a tender with the same volume saw a marginal rate of 4.49% and an average rate of 4.61%.
In a different release the ECB announced that it will amend the rules governing its forex management.
On 20 July 2007 the Governing Council adopted a Guideline amending Guideline ECB/2006/28 on the management of the foreign reserve assets of the European Central Bank by the national central banks and the legal documentation for operations involving such assets (ECB/2007/6). The Guideline will be published shortly in the Official Journal of the EU and on the ECB’s website.
Let's see what this will be about.
A look at the ECB's balance sheet alerts this blogger to the structural shifts in the ECB's assets. Surprisingly bank loans have grown only moderately to 465 billion Euros from 450 billion at the end of 2006.
But the trash can gets fuller and fuller. So called "other assets" now amount to 251 billion Euros. At the end of 2006 this position was 217 billion. According to the ECB
The position other assets is a collective item including, in particular, items in the course of settlement (settlement account balances, for example the float of cheques in collection), coins of euro area Member States and other financial assets (e.g. equity shares, participating interests, investment portfolios related to central banks' own funds, pension funds and severance schemes or securities held due to statutory requirements). This item also contains tangible and intangible fixed assets, revaluation differences on off-balance-sheet instruments as well as accruals and deferred expenditure.

I, for one, do not accept the theory that monetary inflation will save the markets from their inevitable demise brought upon by too much liquidity.
Central banks have lost the most important game already. Their two-faced behaviour made them lose any credibility and soon they will look like one-trick ponies.

Markets Watch the Fed - But What Does the Fed Watch?

Tuesday, August 28, 2007

It is a well known fact that market participants watch the Federal Reserve in order to predict future moves. But what is known about the process how the Fed watches the economy?
Taking the latest Federal Open Market Committee (FOMC) minutes from the August 7 meeting it appears the FOMC relies heavily on lagging indicators. Reading the minutes results in a lengthy review of the then most recent economic indicators but what is missing is a more intense discussion of the future. Having a bunch of economists at one table whose profession is to forecast the future makes it hard to believe that the FOMC only ticks off recent data and then has a cup of tea.
But the minutes leave this impression, especially as there is only one slight hint that would suggest that the Fed knew of the brewing trouble in money markets that would force it to cut the discount rate only 10 days later. Takers at this window of last resort were not to be seen despite some leading banks who grudgingly grabbed $2 billion at a higher rate in order to promote this facility.
Snips like the following are not designed to erase fears about a recession accompanied by heavy inflation. Does the Fed know where the US economy is headed to?
From the minutes (my comments in italics):
The Manager (of the System Open Market Account) ... reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting.
And? Nothing happened there in the runup to August meltdown?
Despite continued softness in house prices, household wealth moved markedly higher in the second quarter, mostly reflecting rising equity prices.
House-price appreciation continued to slow, with some measures again showing declines in home values.
Home equity goes down but home values rise?
Household surveys conducted in early July indicated that the median expectation for inflation over the next year remained unchanged from June's elevated level despite declines in gasoline prices in both months. Median expectations of longer-term inflation ticked up and were near the top of the narrow range that had prevailed over the past few years.
Consumers are worried more about rising prices because they feel them at every purchase.
Financial market conditions were volatile during the intermeeting period, particularly over the last few weeks of the interval. Yields on nominal Treasury securities fell on balance, possibly reflecting an increased preference by investors for safe assets as well as revisions in policy expectations. Conditions in markets for subprime mortgages and related instruments, including segments of the asset-backed commercial paper market, deteriorated sharply toward the end of the period. Credit conditions for speculative-grade corporate borrowers tightened substantially, as investors pulled back from higher-risk assets. Spreads on speculative-grade bonds increased to near their highest levels in the past four years. A number of high-yield bond and leveraged loan deals intended to finance leveraged buyouts were delayed or restructured, though other high-yield bonds were issued. In contrast, credit conditions for investment-grade businesses and prime households were relatively little affected by the market turbulence. Issuance of investment-grade bonds continued. Yields on investment-grade corporate issues rose relative to yields on Treasury securities, but because yields on Treasuries declined, yields on investment-grade bonds were about unchanged on net. Nonfinancial commercial paper outstanding posted a modest gain in July, while the pace of bank lending to businesses picked up from an already solid clip. Mortgage loans and consumer credit appeared to remain readily available to households with strong balance sheets, although late in the period some evidence pointed to diminishing availability of jumbo mortgages.
Seems the market is in a mess.
After rising at a rapid pace in the first half of the year, M2 grew at a more moderate rate in July.
And nobody wants to look at M3 anymore, now running at 13%.
In preparation for this meeting, the staff lowered somewhat its forecast of real GDP growth in the second half of 2007 and in 2008. The reduction was in part due to the annual revision of national income and product accounts (NIPA), which revealed somewhat less rapid growth in output and productivity during the past three years than previously reported and led the staff to trim its estimates of the growth rates of structural productivity and potential GDP; the reduction also reflected less accommodative financial conditions and the softer tone of some near-term indicators.
In preparation for the coming cyclical economic downturn we reduce our forecasts (and hope the White House will not behead us.)
In their discussion of the economic situation and outlook, meeting participants indicated that they still saw moderate economic expansion in coming quarters as the most likely outcome but that the downside risks to growth had increased. Participants reported that economic expansion had continued at a moderate pace in many regions of the country despite further weakness in the housing sector. Going forward, most participants anticipated that growth in aggregate demand would be supported by rising employment, incomes, and exports, with the result that growth in actual output probably would remain close to growth of potential GDP despite the ongoing adjustment in the housing sector. Several mentioned that the revisions to the NIPA pointed to a modest downward adjustment in projected growth of actual and potential GDP, but thought that potential output growth was likely to be a bit higher than forecast by the staff. However, recent spending indicators had been mixed, and credit conditions had become tighter, suggesting greater downside risks to growth. Participants generally expected that core inflation would edge lower over the next two years, reflecting a slight easing of pressures on resources, well-anchored inflation expectations, and the waning of temporary factors that had boosted prices last year and early this year. Participants anticipated that total inflation would slow as well, particularly if market expectations of a modest decline in energy prices in coming quarters were to prove correct. But they were concerned that the high level of resource utilization and slower productivity growth could augment inflation pressures. Against this backdrop, the Committee agreed that the risk that inflation would fail to moderate as expected remained its predominant policy concern.
Why do slower growth and higher inflation always come hand in hand?
Participants agreed that the housing sector was apt to remain a drag on growth for some time and represented a significant downside risk to the economic outlook. Indeed, developments in mortgage markets during the intermeeting period suggested that the adjustment in the housing sector could well prove to be both deeper and more prolonged than had seemed likely earlier this year. Participants noted that investors had become much more uncertain about the likely future cash flows from subprime and certain other nontraditional mortgages, and thus about the valuation of securities backed by such mortgages. Consequently, the markets for securities backed by subprime and other non-traditional mortgages had become illiquid, and originations of new subprime mortgages had dropped sharply. While these markets were expected to recover over time, it was anticipated that credit standards for these types of mortgages would be tighter, and interest rates higher relative to rates on conforming mortgages, in the future than in recent years. However, participants also observed that mortgage loans remained readily available to most potential borrowers, and that interest rates on conforming, conventional mortgage loans had declined in recent weeks, providing some support to the housing sector.
They were absolutely wrong on this.
Participants thought that consumer expenditures likely would expand at a moderate pace in coming quarters, supported by solid gains in employment and real income. Though growth in consumer spending had slowed in the second quarter, the slowing likely reflected temporary factors in part, including some payback from unusually strong growth in prior quarters and the surge in gasoline prices. Several participants noted the risks that house prices could decline significantly and that credit standards for home equity loans could be tightened substantially as factors that could weigh on consumer spending. However, the sizable upward revision--from negative to positive--in estimates of the personal saving rate during the past three years suggested somewhat less need for households to rebuild their savings.
At least there is some dissent about the complacent view of the housing market. And what is your real income growth?
Participants expected that business investment would be supported by solid fundamentals, including high profits, strong business balance sheets, and moderate growth in output. Recent financial market developments were thought unlikely to have an appreciable adverse effect on capital spending. Although lenders recently appeared to be less willing to extend credit for financial restructuring, the supply of credit to finance real investment did not appear significantly diminished. Funding had become more costly and difficult to obtain for riskier corporate borrowers, but there had been little net change in the cost of credit for investment-grade businesses. Also, businesses in the aggregate continued to have sufficient internally generated funds to finance the expected level of real investment. Nonetheless, participants recognized that conditions in corporate credit markets could change rapidly, and that adverse effects on business spending were possible. Moreover, heightened asset market volatility and the associated increase in uncertainty, if they were to persist for long, could lead businesses to pare capital spending plans. Still, participants judged that continued growth of investment outlays going forward was the most likely outcome.
Let's drop it from our helicopters and hope somebody will invest, consume, whatever keeps it going round.
In their discussion of monetary policy for the intermeeting period, Committee members again agreed that maintaining the existing stance of policy at this meeting was likely to be consistent with the overall economy expanding at a moderate pace over coming quarters and inflation pressures moderating over time. The expansion would be supported by solid job gains and rising real incomes that would bolster consumption, and by increasing foreign demand for goods and services produced in the United States. The ongoing adjustment in housing markets likely would exert a restraining influence on overall growth for several more quarters and remained a key source of uncertainty about the outlook. The recent strains in financial markets posed additional downside risks to economic growth. Members expected a return to more normal market conditions, but recognized that the process likely would take some time, particularly in markets related to subprime mortgages. However, a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response.
We know it's bad and we have sleepless nights too.
Markets need a cleansing process to sort out the bad apples. It would be helpful if the Fed takes a position. Bail out or not but let the markets know clearly, please.

M3 Growth in Eurozone Reaches New Record And ECB Will Continue To Print, Print...

While the truly interesting monetary data including the massive credit injections in August is a month away the latest money supply growth figures from the ECB already shows a steeply accelerating trend. The draining of 65 billion Euros in this weeks regular tender still leaves a lot of new liquidity out there.
Eurozone money supply M3 grew at an annualized record rate of 11.7% (10.9%) in July and the 3-month average rose to 11.1% (10.6%.) Lending to all sectors except households extended at faster speeds than before.
It is destined to get worse. In a fight picked by French president Nicoals Sarkozy, who blames the ECB's policies for slower growth, ECB president Jean-Claude Trichet has suddenly moved from his pseudo-hawkish stance (as proven by unabated M3 growth) and signalled markets that the ECB will not hike rates in its September meeting, the Telegraph reports.
According to the paper, Trichet has abandoned his "strong vigilance" for inflation.
"What I said was before the market turbulences," he said, making his first public appearance since the ECB began injecting €350bn (£238bn) of emergency liquidity to prevent a seizure of the credit markets.
Some light is shed on Sarkozy's crusade against the ECB. France wants to leash the ECB closer to the growth targets of the Eurozone. France is expected to reach 2.1% GDP growth in 2007, lagging behind Germany where growth is forecasted at 2.9%.
The Telegraph quotes from a French paper that alleges Sarkozy wants to axe Trichet.
"What's happening on world markets is a rebuke for the ECB. It shows I'm right, and that Trichet shouldn't be considered Europe's sacred cow," he allegedly told aides, later leaked to the magazine Canard Enchâiné.
"After causing a liquidity squeeze by raising rates, he's now had to inject liquidity to calm the crisis. We've now got to take advantage of this crisis to bend it [the ECB] to our will," he said.
Trichet Summoned to Extraordinary EP Hearing
Trichet has been summoned to a hearing at the European Parliament on September 11. A stament found in the WSJ says,
At the request of Mrs Pervenche Berès, chairwoman of the Committee on Economic and Monetary Affairs of the European Parliament (ECON Committee), Mr Jean-Claude Trichet, President of the European Central Bank, will come to the ECON Committee on 11 September to respond to developments in the capital markets. This is the first time such an ad hoc meeting is organised in addition to the regular hearings held every three months. Mr Jean-Claude Trichet was not able to come earlier since he can only come after the meeting of the Governing Council on 6 September.
The Committee is concerned by the subprime mortgages meltdown in the US, causing the drying up of credit supply and disturbances in the financial markets worldwide. Recent developments in the capital markets echoe long term concerns by the ECON Committee which were notably raised in the EP resolution of 12 July on the ECB stating: "there has been a decline in US housing prices and a recent deterioration in the mortgage credit market which could have an impact on the real economy; considers that such a development should be taken as a warning for what could take place in the eurozone; calls for the ECB to monitor closely these developments which have the potential to have consequences for the real economy".
The Committee believes that further attention needs to be given to transparency and regulation of entities engaged in the excessive risk taking, such as hedge funds and private equity as well as to the role of the credit rating agencies (CRA) in this context. In this respect, the EP resolution of 11 July 2007 on the Financial services policy White paper stressed " the need among CRAs for transparency of fees and the separation of rating and ancillary services as well as for a clarification of assessment criteria and business models; emphasises that CRAs play a public role in, for example, the CRD and that they should, therefore, meet high standards of accessibility, transparency, quality and reliability required of regulated businesses such as banks". In its resolution adopted on 19 June 2007 on the Report on competition policy 2005, the EP called "on the Commission to examine the respective competition situations of rating agencies".
In July, a Committee delegation led by Mrs Pervenche Berès discussed these issues with US counterparts, notably with members of the House Committee on Financial Services and the Senate Committee on Banking , Housing and Urban Affairs as well as with the US Fed and attended the hearing of Ben Bernanke, Governor of the US Fed. The Committee believes that further attention should be given to these issues.
Against the backdrop of banks' difficulties in raising credit and the ECB's liquidity injections thereupon, the Committee is particularly interested in the monetary policy decisions to be taken by the ECB's Governing Council in reaction to the financial turmoil. The Committee deems it important to maintain growth in the EU and that, in addition to the liquidity supplied by the ECB, the monetary policy has a role to play in this respect.
The Committee also considers that supervision is key in facing systemic risks. The EP resolution of 11 July 2007 on the Financial services policy White paper stated that the EP "is concerned that the current nationally and sectorally based supervisory framework may potentially fail to keep pace with the financial market dynamics and stresses that it must be sufficiently well resourced, coordinated and legally entitled to give adequate and quick responses in cases of major systemic crises that affect more than one Member State".
Members of the ECON Committee will question the President of the ECB based on the EP's earlier positions and the current situation on financial markets.
We learn independence is only a fair weather game and the ECB will continue to print, print, print...
UPDATE: Click here for Trichet's very long speech on "Productivity in the euro area and monetary policy" delivered to the 22nd Annual Congress of the European Economic Association on Monday.

$25 Billion for Everyone (ahem, Banks Only)

1 question - 2 answers.
Do you experience a financial crisis brought upon you by something called "subprime" although you are not a bank?
Sorry, neither I nor the Fed can't help you because it is your fault that you could not foresee that homes were - and still are - grossly overvalued.
Do you experience a financial crisis brought upon you by something called "subprime" but you are a bank?
Sorry, I still can't help you, but the Fed will help you because it is not your fault that you could not foresee that homes were - and still are - grossly overvalued, isn't it? In order not to risk anything the Fed has come up with a scheme well known in the White House. Instead of flooding the market with fresh money and raising suspicions with investors the Fed does as the administration does: It bends the rules. Banks now can create their own money and 3 already received the all clear sign to participate in the lethal game of monetary inflation with $25 billion each.
Fortune online online alerted the world to the new anarchy in capital markets where the game has moved to a tilted playing field. In order to delay the inevitable collapse of financial markets the Fed now hands out permissions to major banks to grant loans more or less regardless of its capital base.
Is this the inofficial burial of Basel II?
Or is it just another manipulation of markets with money created out of nothing? Why are lenders bailed out but the borrowers are left holding the bag they got lured into ?

JP Morgan, Citigroup and Bank of America are now allowed to lend an additional $25 billion each to their securities subsidiaries, regardless of the capital/assets ratio. Hey, that's another $75 billion created at the cost of 3 letters and it doesn't show up as an emergency Fed open market operation.
It looks as if we have arrived at the end of free markets as soon as first cracks appear in the financial house that was built on leverage and low interest rates.
Markets are now run by the Fed's decree which has striking similarity to the issuance of presidential executive orders: Nobody breaks the law because the Fed now says so. Capital ratios are only relevant for small players, it appears.
Funny Money
The sleigh-ride into the era of funny money is an abrupt turn from free market principles. All this while the economy is still in relatively tame waters compared to the 1970s.
One thing should be clear by now to every market participant. Fed chairman Ben Bernanke will certainly not risk a monetary contraction on behalf of the Fed. The taps are wide open and the Fed will continue to douse the fire with ever more petroleum. But it will pay a price in time.
Money supply growth - now running around 13% and expected to spike higher - with no corresponding value creation is the classic Austrian definition of monetary inflation.
The actions taken by central banks so far did not result in the effect so deeply wished for. Instead of restoring calm to the markets the creation of some $500 billion dollars only managed to feed the worries of a market that has suddenly found out that every potential return falls and rises congruently to its risk.
But we can rest assured that Bernanke will live up this promise to use all available options - within the law or not.
Seeing that the evil policies of the White House have now found eager copycatters in the Fed I stay my course of staying away from anything that depends on the Federal Reserve dollar. This currency is dead. We are only fighting about the style of the burial.

Happening in North America: Growth and Budget Surplus Estimates Upped

Friday, August 24, 2007

Is this a coincidence?
A nation with quite limited defense expenses, rich in commodities, providing a social safety net that can be called one, an environmentally responsible population that favors a pragmatic style over dogmas and is so lovingly unpretentious (at least on the Wet Coast) also boasts a very healthy economy.
According to a Reuters report Canada's finance department raised its forecasts for GDP growth and the budget surplus.
It lifted its growth forecast for 2007 to a real 2.5% (2.3%) and expects now a budget surplus of at least more than C$3 billion in both 2007 and 2008, based on higher tax revenues. Canada is the only G7 member that runs a budget surplus.
From the report:
"The improved outlook stems from stronger-than-expected economic performance, as well as higher-than-anticipated revenues as suggested by year-to-date financial results. Program expenses are expected to be largely unchanged from the budget 2007 outlook."
It said the budget surplus in June was C$2.85 billion, up from C$2.26 billion in June 2006. The April to June surplus was C$6.36 billion, up from C$5.89 billion in the same period last year and more than twice the originally forecast surplus for the whole fiscal year.
It did not say how much more than C$3 billion it thought this year's surplus would be, noting that a comprehensive update would come in the autumn Economic and Fiscal Update.
The department released an updated economic forecast, which it takes from private-sector economists, to show real economic growth this year of 2.5 percent, up from the 2.3 percent forecast in the March budget. But the economists cut the forecast for 2008 to 2.7 percent from 2.9 percent.
The economists significantly boosted their projections for GDP inflation -- used to determine how much of nominal growth in gross domestic product is due to higher prices. For 2007 they saw GDP inflation of 2.7 percent instead of 1.5 percent, and for 2008 they boosted their forecast to 2.2 percent from 2.0 percent.
Consequently, nominal GDP growth, which has a strong correlation with tax revenues, has been revised up to 5.2 percent for 2007 from 3.9 percent. The figure for 2008 remains unchanged at 5.0 percent.
This would leave nominal GDP about C$20 billion higher in both 2007 and 2008 than projected in the March budget.
It looks as if the second largest country in the world outruns its big neighbour who wants to become a brother with the publicly strongly opposed security and prosperity partnership (SPP.) Demonstrators against last weekend's meeting of prime minister Harper with George Bush and Vincente Fox uncovered 3 thugs that wore the same boots as riot police, trying to agitate peaceful protesters.

Watch the video and decide yourself. Canadian police declined to further comment on the incident and arrest reports never included these 3 men. A false flag attack?

Looking For Assets That Are Not the Liability of Somebody Else?

Wednesday, August 22, 2007

Faced with two-handed central banks that print like mad while vainly trying to assure markets that nothing bad will surface in the near future makes one run for cover.
But investors worldwide are haunted by a new problem. In search of allegedly safer asset classes a new rule from old textbooks is rediscovered: Every paper asset is someone else's liability.
The recent flight from all other markets into US government debt paper is only so far justifiable as the Fed only needs to keep on printing to produce ever more dollars to repay debts, fulfilling the formal demands from rating agencies (now under fire on both sides of the Atlantic.) The Fed can always guarantee cash, but it cannot guarantee its purchasing power.
So why is the investment world holding on to the concept of calling paper obligations the opposite when these investments depend on future cash flows which in turn depend on a zillion of other factors?
The meltdown in the subprime sector can logically be nothing else then the prelude to a volcanic eruption in derivatives markets with its fantastomaniac leverage and size. Latest figures say this market weighs in at $460 trillion. Until now banks are only fighting with the explosion of a couple of grenades in what was thought to be a safe and profitable asset class.
Not to hear one word on the exposure in derivatives in times when the VIX goes wild is very suspicious. It can be safely assumed that the unwillingness of banks to lend to each other is the thunder announcing the storm. Follow this link to a Fitch report on derivatives.
The systemic risk of too few hands holding the majority of derivatives is just crying for a meltdown in development. Nobody can tell me the opposite.
And as Deutsche Bank is a major player in derivatives, sometimes called a hedge fund behind a bank facade, I think rumours focusing on a big European player going under could one day end up there. German banks today had problems getting loans in the interbank market, prompting the ECB to say it would come with more liquidity "help".
So far we have only seen billions vanish; the size of the derivatives market will ensure that soon the first headline with a trillion in it will be published. It is not a question of if, but only of when.
This leads to the question of my headline. It will be imperative to hold assets that are a store of value and not just a risk depending on the fate of the debtor.
There are only two asset classes that can shield against inflation which central banks have now ordered on the backseat in their frantic efforts to delay the necessary shakeout of a market based on illusory yield expectations.
Shares are a way to escape inflation. Even in Zimbabwe the real returns have outpaced inflation rates of 7,634%. A share in a company will always be a share in its assets. But such an investment will still be laden with numerous other risks.
So the search for an asset that is truly a store of value ends again at precious metals. A bullion coin or bar made of gold or silver in your hands is free of any obligations once you have paid for it.
Why is this so difficult to understand for the millions of investment experts?

Blogroll Updated - More Good Analytical Bloggers Added

Wednesday, August 15, 2007

I've updated my blogroll in the sidebar. In times of turmoil it always pays to check and counter check investment strategies frequently and especially whether underlying fundamentals give reason to adjust the portfolio.
Check these blogs I added - listed in no specific order - for witty and innovative angles discovered in politics and the economy. Most of these blogs are updated daily. And check all the other blogs in my blogroll not mentioned here as well. They are all my daily reads.

  • The sometimes rabid criticism in Elaine Supkis Culture of Life News blog is always most reliably backed up by facts. Get your daily dose of what bankers do not want to acknowledge officially. Are there more female bloggers to unsettle the otherwise male domain of financial bloggers?
  • A Fistful of Euros is a cooperative European blog with local analysis of economic and political events in the European Union. It also has the most comprehensive blogroll of high quality European bloggers.
  • Global Voices aggregates, curates, and amplifies the global conversation online at the highest level – shining light on places and people other media often ignore.
  • Jeff Matthews Is Not Making This Up - Witty corporate musings.
  • Kudlow's Money Politics - The comical Ali of capital markets. How can someone be so stubborn in supply-side theories while the ships are sinking?
  • Marginal Revolution picks up anomalies from all fields. A good daily surprise when you have stared at too many numbers.
  • The Mises Economics Blog adds the classical Austrian perspective to current events, which is a philosophy of truly free markets absent of any political intervention.
  • My favorite energy blog is The Oil Drum which deals with the time after oil.
  • The only inactive blog I kept is The Road To Euro Serfdom which has not been updated in a while after delivering daily tidbits on undemocratic events in the EU. I hope he comes back.
  • Looking for news from the Moscow stock exchange? The Russian Stock Market Blog has it daily and is written by award-winning market professionals.
  • Seeing the Forest deals with a different question along the slogan "Who is our economy FOR?"
  • Trading Market Update posts overlooked gems from the world of analysis with a technical bias.
  • Legendary Paul Kedrosky looks at CONTROLLED into undervalued stocks with a fundamental bias.
  • The Indian Economy blog is a good stop for Indian insights.
  • The now defunct unterthecounter blog has evolved into something much bigger. 1440 Wall Street makes you feel as if you were there.
  • Bernanke Panky and DollarDaze watch the Federal Reserve.
  • George Washington's blog, written by a patriot reports the attacks on all the positive values the USA once stood for.
  • For a good write-up what companies say only days before they go belly up and other corporate lies up I direct you to Market Ticker, these days one of my special favourites.
  • Fordham media professor Paul Levinson's Infinite Regress follows the presidential debates and how the media report them. Yes, I would vote for Ron Paul.
  • naked capitalism has very good commentary on current affairs with a focus on the big stories.
  • The best satire in financial writing comes of course from the UK. Special mention goes to portfolio manager Tim Price's blog The Price of Everything makes me laugh tears with every new post. If all goes very bad he can make a living from the world's first financial cabaret Monty Python style.
  • The latest addition is Global Economy Matters where you will find news on those countries overlooked in the MSM (mainstream media). Also noted for its good link lists.
Don't blame me for extending your extensive reading list. Recipient of all the blame in the world is Mrs. Margaralene Wozniak of Maple Terrace, Lake Tahoe.

Another Incomplete Write-Up of Tuesday's Interventions In Free Capital Markets

Tuesday, August 14, 2007

The good news: The Bank of Japan did not replace its 600 billion Yen overnight tender from Monday.
The bad news: The European Central Bank added another 7.5 billion Euros and the Fed stands ready to accept more pleas for new cash.
The amusing news: ECB president Jean-Claude Trichet said markets are progressively turning towards a normalization. Then why do they need all that new money? Marketwatch has the British Bankers Association with quotes that the mess is far from over. The Bank of England has been conspicuously absent in the liquidity feeding frenzy. Bloomberg has more comments contradicting the ECB.
The result: Share markets worldwide lose in excess of 1% and US Treasuries saw good demand in an ocean of otherwise difficult to price debt paper.
Oil traded up 1% on news that OPEC sees continuing strong demand despite a potential slowdown in the Western world.
Gold's trading range has markedly narrowed down over the last weeks, raising the possibility for a strong breakout.
For a little more chuckling here is what Trichet said. No comment from my side needed as his statement sounds very much as if he himself is seeking to try to regain his composure.
As I indicated after the Governing Council meeting on 2 August, the European Central Bank has paid great attention to the developments in the market. We have provided in particular the liquidity which was needed to permit an orderly functioning of the money market.
We experience a period of market nervousness, a period in which we see increased volatility in many markets and a significant re-appreciation of risks. In some respects, what has been observed can be interpreted as a normalisation of the pricing of risk.
We are now seeing money market conditions that have gone progressively back to normal.
The Eurosystem will continue to monitor the situation whilst euro area financial markets in general are going back to normal functioning.
As I did after our last meeting, I call on all parties concerned to continue to keep their composure. This attitude has been welcome and effective in the recent days. It will help to consolidate a smooth return to a normal assessment of risks in liquid markets.
Remember, it is all just normal when the ECB dilutes its reserves by almost 17% in a matter of 5 days.
The folly of the central banks is not only chided by bloggers. The Financial Times cites the US comptroller general David Walker who said there are chilling similarities between the downfall of the Roman empire and the current state of the USA.
In another report the FT alerts us to the fact that Euroarea GDP growth slowed down to 0.3% (Q1: 0.7%) in Q2 2007, making it more difficult for the ECB to hike rates.
A clear loss of momentum in Germany, France, Italy and the Netherlands, "makes the ECB decision to pre-announce a September hike look premature, to put it mildly," said Holger Schmieding, European economist at Bank of America. Since December 2005, the ECB has raised its main interest rate eight times to 4.0 per cent.
Bright Spot China
Not all central banks have run amok with their electronic printing presses. The Wall Street Journal reports that China's money market rates have held stable despite the Bank of China draining funds.
If all that confuses you as much as it does markets, find some peace in facts. Former Fed NY research director Stephen Chechetti wrote an excellent primer what the Fed does when it acts in the market.

Monetary Inflation - ECB with New Overnight Repo

The European Central Bank (ECB) has announced a new overnight tender at Tuesday's European market opening, according to MarketNews International. Its action contradicts the accompanying statement that spoke of normalising market conditions. This is now the third unscheduled tender in 4 workdays, not counting Monday's regular one-week tender that added 47.5 billion Euros.

New ECB headquarters

PHOTO: A model of the leaning towers that will become the new headquarters of the ECB in Frankfurt/Main. Photo: ECB

If anybody can verify this information at the ECB's website please let me know in comments. I could not find any releases relating to the unscheduled tenders.
If you have no luck either despite all the transparency pledges, have at least a look at the design for the new ECB headquarters in Frankfurt: Two leaning 185 meter towers that will dwarf all other banks in continental Europe's leading financial centre, leading to a dark vision where the central bank falls and maims the lesser ones. The building in the front appears like a heavily fortified sweatshop and I wonder whether the windowless wall structures will withstand the inflation missile that is in clear sight.
My online broker just snapped that a European bank is supposed to crawl in the gutter, getting flattened by - you guessed right - subprime. I knew these foolhardy acts of monetary inflation would show up within a few days. So we can move the guessing game from "when" to "who?"
TO BE UPDATEDSee next post.

Monetary Inflation Roundup for Monday - ECB Diluted Reserves by 16.8%

Monday, August 13, 2007

Central banks continued to flood capital markets with fresh money on Monday. After a start by the Bank of Japan which created 600 billion Yen or $5 billion the European Central Bank kept the tap wide open and supplied an additional 47.5 billion Euros. The Fed saw markedly lower interest for its overnight repo and accepted only $2 billion from $52 billion in bids, the WSJ reported.
The ECB succeeded in its short term goal of stabilizing the interbank market. According to a Bloomberg story, "the overnight rate at which banks lend euros to each other fell to as low as 3.95 percent from 4.16 percent earlier today. It spiked to 4.62 percent on Aug. 9, a six-year high. The ECB's benchmark refinancing rate is 4 percent."
But this looks like a pyrrhic victory. The ECB has now created 201.3 billion Euros since Thursday, or 674 Euros for each of the EU's 312 million citizens. This far exceeds the gold reserves of the ECB which stand currently at 172 billion Euros and equals 16.8% of its total reserves of 1.196 trillion Euros. Call that dilution.
Depending on the speed at which the ECB will drain these new funds they could lead to a 2.5% jump in money supply M3. The ECB will release its weekly financial statement on Tuesday.
China Reports Inflation @ 10-Year High
China reported a new 10-year high in inflation. Consumer prices rose an annualized 5.6% in July after a 4.4% rise in June. According to the official Chinese website the rise came mainly from foodstuffs which rose 15.4% YOY.

Monetary Inflation Rises With the Sun in Japan

The Bank of Japan (BoJ) was the first one in the ring for this week's round of money printing. According to a report from Reuters the BoJ injected 600 billion Yen or $5 billion on Monday and now it remains to be seen how much the European Central Bank (ECB) will replace after the weekend-repo from Friday matures.
The new mountains of money have no corresponding value in the real economy, adding to the process of monetary inflation central banks are supposedly so keen to avoid.
I have not verified the data - the ECB's website has become harder to navigate and changes frequently - but it is said that the ECB's unprecedented move led to an expansion of the monetary basis by 7% in 2 days. Call it monetary inflation on speed. I think not even Zimbabwe is that fast at creating new money.
Welcome to the most thrilling week in years that has also a lot of new economic data to offer, starting with retail sales and business inventories today.

UPDATED - Deutsche Bank Hires Greenspan As Adviser in Investment Banking

Sunday, August 12, 2007

German banking colossus Deutsche Bank has signed up former Federal Reserve chairman Alan Greenspan as an adviser to its corporate and investment banking activities, specifically excluding asset management.
Greenspan told the German daily Frankfurter Allgemeine that he looked forward to work with a bank with which he had dealt with pleasure before. He said the deciding factor was that former Fed economist Peter Hooper now heads research at Deutsche Bank Securities.
Sources inside the bank said Greenspan's job obligations would be to attend 1 to 3 conferences per quarter and frequent consultations by phone as well as some analytical work. The value of his contract was not disclosed.
Greenspan said he accepted the job after finishing writing his memoirs which are scheduled to be published on September 17.
It is his second consultancy job. Earlier this year he became consultant to Pimco, a subsidiary of German financial giant Allianz.
UPDATE: The Frankfurter Allgemeine has moved the story into its subscribers section. The link above now leads to a "page not found" message.
UPDATE II: English language readers of this blog had an exclusive 18-hour lead on this story which was posted Sunday lunch pacific time. Deutsche Bank came out with its press release on Monday morning.
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ECB Will Continue To Print Money by the Truckload - So Who Is About To Fail?

Call it dousing a fire with petroleum. The European Central Bank (ECB) will continue to feed freshly minted money in unlimited amounts to banks, trying to prevent the painful readjustment called asset deflation it helped create in the first place with expanding the mony supply at a rate of more than 10% for more than 2 years.
In an interview with the French regional paper Ouest France ECB president Jean-Claude Trichet said "I said on Thursday 2 August, reporting on the meeting of the Governing Council, that we would “continue to pay great attention to the developments in the markets over the period to come”. This is what we have been doing since then and what we are doing by granting the markets the appropriate liquidity."
Monday will see the replacement of the ECB's emergency weekend repo that led to to the creation of 155.8 billion Euros within 48 hours. To put this in a relation: The Eurosystem's total gold reserves have a value of 172.8 or a mere 17 billion Euros more than the money created in their electronic ledger in only 2 days.
Is the Euro in Bigger Danger Than the Dollar?
The panicky reaction of the ECB by saying it would lend "unlimited" - and did indeed so last week - leads me to the conclusion that the ECB is trying to prevent the collapse of one or more banks at literally all cost.
Seeing that the ECB came up with a multitude of new money compared with the Fed's emergency measures, creating as much money as the economies of Portugal or the Czech Republic or Norway produce in a year is a tell-tale sign that something will go bust when market rates turn higher.
We begin to see the other face of capitalism: When a consumer or a company go bankrupt it is their problem. When a bank collapses because its "experts" engaged in risky speculation backed up by pseudo sciences like technical analysis or rocket physics applied to options - as if a chart could signal fundamental events - it will be saved with the taxpayers' money. I guess everybody could live very well with such a business model. Like a car with airbags: Now you can crash at ever higher speeds and escape unharmed. Today this analogy applies to the banking sector. What happened to free market economics since Thursday?
Investmentwise I would say buy real money in gold or silver for your fiat currencies and short the European banking sector. As said before, the ECB would not inject the biggest amounts of "liquidity" (new debt) into markets if it did not have a very grave reason to do so.

Monetary Inflation - Central Bankers Fly Their Helicopters

Friday, August 10, 2007

The creation of more money without any corresponding value in a probably futile attempt to shore up panicking capital markets has reached epic proportions by Friday. Central banks worldwide injected unprecedented amounts of freshly digitized money to keep players afloat which raises the question which bank will go bankrupt in the next days.
Given the leverage in the system I just cannot imagine that this financial storm will pass without fatalities.
Losses in share markets were broadbased with only precious metals stocks shining after gold spurted $18 from $658 to $676. Major US indices briefly saw positive territory when bond markets stabilized after the massive shots in the arm only to fall into the red again.
Quick reminder: In history it has never worked to try to print your way out of problems. Markets are now correcting the imbalances created by policymakers with ridiculously low interest rates in the new millennium.
Let's take a look how much the magicians at the digital printing presses in the central banks pulled out of their hats in the last 2 days.
  • ECB: 155.8 billion Euros or $215 billion
  • Fed: 35 billion dollars
  • Japan: 1 trillion Yen or $8.5 billion
  • Australia: A$ 4.95 billion or $4.2 billion
  • Singapore: S$ 1.5 billion or $1 billion
  • Canada: $1.1 billion
Central banks in Switzerland and Korea have voiced their intention to provide funds as needed. But as long as the ECB keeps to its word to "help" markets with unlimited liquidity their help won't be needed.
A Reuters story came up with even higher numbers, saying that central banks have created at least $323 billion in the last 48 hours.
Central banks in Malaysia, Indonesia, the Philippines and Taiwan sold Federal Reserve dollars to support their own currencies.
And What Is Plan B?
Seeing that the "rescue" operations of central banks are not working - or are they going to create a few 100 billion more next week - there is only one question left: What is plan B?

Happy Money Printing - USA Edition and More Worries In Germany

Central banks on both sides of the Atlantic have been busy creating new money out of thin air in an effort to bolster ailing capital markets which appear to cave in under the load of risk that was disregarded until now.
After a mountain of new cash coming out of the ECB the Federal Reserve served markets again with a $19 billion breakfast via its weekend repo. This brings the liquidity added since Thursday to a total amount of $43 billion.
According to a report by LaRouche the European money market had been closed down for the first time in history on Thursday, allowing the ECB to funnel money to the banks in big trouble. Rumours are flying that another major German bank is on the brink of collapse.
Draw your own conclusions; mine is to short banking stocks and the market in general.

Market Ticker Blog Catches the Sentiment Very Well

I have added Market Ticker to my blogroll.
The author, presumably from the financial industry, manages to paint a very catchy picture of markets strongly unsettled. And he uncovers a lot of work for the SEC, listing numerous companies that reassured investors all is fine, only to reveal the opposite a few days later, which seems to have become the norm for troubled companies.
He complains that misleading investors by banks, rating firms and companies in many other sectors has become the norm today.
Just read his latest 4 posts and you get a good idea how nervous market insiders really are.

Happy Money Printing - ECB Floods Market With Cash

In an attempt to counteract the liquidity crunch embracing financial markets the ECB has injected another 61 billion Euros by a 3-day tender, bringing the creation of fresh money to a historically unprecedented 155.8 billion Euros. The ECB followed up its own words from a day earlier when it said it stood ready to bolster markets with unlimited cash. At the tender a day earlier the ECB had accepted all bids after interbank rates had shot up more than 50 basis points. Friday's tender resulted in a weigthted rate of 4.08% after 4.07% a day earlier.
With this action the ECB has created 510 Euros in new money for every of its 306 million citizens with mouseclicks, More paper, but no new value was created.
Many Europeans have less in monthly pensions than what is being salted away to "save" the "free markets". With the breath-taking doses of massive intervention by the Fed and the ECB I am asking myself where a free market can be found. Free market economy seems to come to an end as soon as the excesses cannot be hidden anymore.
Make Inflation a Class 1 Substance
Inflation is a very dangerous drug that should be scheduled a Class 1 substance. Inflation feels very well in the beginning when only the effect of good liquidity is noticed. But beware, one can get hooked in no matter of time, needing ever bigger amounts of liquidity to recoup the same good feeling.
The massive shot in the arm we witness theses days could easily lead to an overdose as more of the stuff will be needed to keep up the "don't worry be happy" mentality that was so arduously adhered to by the crowd of bulls.

Irrational Exuberance Got Buried Yesterday

Investors seem to have finally woken up to the fact that not all is well with the economy of the USA. Stocks tumbled close to 3% on Thursday and extended their gains in after-hours trading. It looks as investors gave the most recent FOMC statement a close look again and saw the new part which spoke of a credit crunch while headlines on Tuesday were dominated by the repeated inflationary concerns. And I think I could not have been more timely with Wednesday's RED ALERT when president Bush entered the markets discussion. I mean, what does he know?
The markets' action tells me that the term "irrational exuberance" got finally buried on Thursday.
The market action is indeed most worrisome. When not even the gigantic injections of freshly digitized money by the Federal Reserve and the European Central bank to the tune of $150 billion on Thursday alone could quell the slide that continues in the Far East at the time of writing, then we have arrived at one of these moments where Mr. Market takes into hands what was left untouched by policymakers for too long.
Not that any of the facts that culminated in today's sell-off have not been known for a good length of time. Just check the archive of this blog.
The Bubbles Are Busting
Only 8 years in the making the new millennium has seen 2 major bubbles that led to a third.
Housing was followed by M&A and both fed the hedge fund bubble.
As there is hardly an investor who does not have to serve some sort of credit line in a leveraged world where the notional sum of derivatives outpaces global GDP several times we can prepare for more of the same to come as margin calls will force investors into liquidations of their positions.
To see that not even the liquidity excesses of the central banks are of help leads to the sad confidence that we are going to enter a bear market.
A Bear Barket Is When Everyone Loses
Suddenly it looks as if there are no investment classes one could escape to. Wanna buy consumer stocks? There will be plenty of supply in the near future. Bank shares? They will come a lot cheaper once market players realize that credit risk ultimately means counterparty risk. What does an exploding OTC option help an investor when the issuer goes belly up? Next to this banks will be faced with damage payments coming from non risk-adjusted advice they have given out before in order to fuel the boom in low credit grade investments.
Don't take too much comfort from Thursday's good performance of 10-year US Treasuries. There was no other place that looked remotely as a safe haven like this segment and the initial reaction will fade once markets take a closer look at US debts and the fact that they cannot be repaid without a massive dose of inflation - that will inevitably lead to hyper inflation.
Even the traditionally ultimate store of value fared badly. Precious metals were hammered down in late Thursday trading. But I don't buy reports that this was the result of investors selling the physical. Ted Butler has written enough on the huge short positions in COMEX futures.
But while decliners outpaced advancers in gold and silver mining shares the sector saw a bit of recovery and many shares closed above their lows, in stark contrast to Wall Street.
In general I wonder why there has been no flight to the real quality in this sector. Can you name any other companies involved in the process of directly producing real money?
Where Will This Lead To?
Verbal economic warfare has escalated in recent days. China threatened to dump its trillion of US debt and president Bush angered the Chinese by calling them foolhardy. Is he the right person to call others foolhardy? The Chinese don't have to sell. They just have to stop buying more US debt to show the USA that a debtor is never in the position do dictate terms unilaterally.
In the broader outlook we are entering uncharted territory insofar as China and India have not been part of the global economy during the last bear market in the 1970s.
It has to be seen whether consumers in Asia can fill the gap that will be left by indebted US consumers.
Altogether I would say that nothing is contained in the current state of markets. The outfall from the housing bust is by now felt all over the world, spelling more doom to come.
Central bankers may have been successful in diminishing the status of gold and silver since 1930, replacing it with the Federal Reserve dollar. This is not the case in Asia where 3 billion people will stash more of it once the developing global financial crisis can be felt in their wallets.
The Middle East, long time a major dollar investor is shifting away from the dollar too. Plans for more gold exchanges in these regions would not proceed if there was no demand.
Suggestions for other safe havens are most welcome in comments. As so many market observers I feel no lack of comprehension of events but I am still working on the solution.

Monetary Inflation - ECB Adds More Cash Than After 9/11

Thursday, August 09, 2007

The European Central Bank (ECB) has flooded the money market with an unprecedented 94.8 billion Euros on Thursday, by far exceeding the previous record of 69.3 billion Euros which it lent to banks after 9/11. As if that were not enough of a sign that markets are under severe stress the ECB said it would provide unlimited cash as skyrocketing interbank rates signaled that banks were draining liquidity, Bloomberg reported.
The Federal Reserve also added $24 billion liquidity in order to shore up suffering credit markets. A flight into US Treasuries sent the 10-year yield 8 bips lower to 4.79%.
Read the Bloomberg story after the jump.
The European Central Bank, in an unprecedented response to a sudden demand for cash from banks roiled by the subprime mortgage collapse in the U.S., loaned 94.8 billion euros ($130 billion) to assuage a credit crunch.
The overnight rates banks charge each other to lend in dollars soared to the highest in six years within hours of the biggest French bank halting withdrawals from funds linked to U.S. subprime mortgages. The London interbank offered rate rose to 5.86 percent today from 5.35 percent and in euros jumped to 4.31 percent from 4.11 percent.
The ECB said it would provide unlimited cash as the fastest increase in overnight Libor since June 2004 signaled banks are reducing the supply of money just as investors retreat because of losses from the U.S. real-estate slump. Paris-based BNP Paribas SA halted withdrawals from three investment funds today because the French bank couldn't value its holdings. Stocks in the U.S. and Europe fell, a turnaround from the past three days when investors concluded that credit market risks were abating.
"There seems to be a hole in the balance sheet of World Inc. that will have to be filled by government intervention," said Peter Lynch, chairman of private equity fund Prime Active Capital Plc in Dublin. "The ECB is treating this like an emergency; it might make traders even more afraid."
No Prices
The ECB said today it provided the largest amount ever in a single so-called "fine-tuning" operation, exceeding the 69.3 billion euros given on Sept. 12, 2001, the day after the terror attacks on New York.
The ECB's decision, just one week after the German government arranged the bailout of IKB Deutsche Industriebank, is confirmation that the subprime debacle isn't contained within the U.S.
BNP Paribas stopped investors withdrawing from funds with assets totaling 2 billion euros because it couldn't find prices to value their holdings after the selloff in credit markets. Last week, BNP Chief Executive Officer Baudouin Prot said the bank's U.S. subprime "exposure is absolutely negligible."
"They simply don't know what their assets are worth," said Timothy Ghriskey, Chief Investment Officer of Solaris Asset Management in Bedford Hills, New York, which manages $1 billion of assets. "They can't cash out their fund holders, and that's the type of crisis that's really based on panic."
Federal Reserve
The U.S. Federal Reserve added $24 billion in temporary reserves to the banking system today, the most since April. Fed spokesman David Skidmore declined to comment on the increases in overnight money-market rates.
"Banks reacted to the ECB's 'sale' offer in a similar way one would react to a sale in a department store" and "got all the money they could," said Ulrich Karrasch, a money market trader at HVB Group in Munich.
The ECB intervention added to declines in stocks, with Europe's Dow Jones Stoxx 600 Index falling 1.8 percent and the Standard & Poor's 500 Index of U.S. shares down 2.1 percent to 1,466.64. U.S. Treasury notes gained for the first time in four days as investors sought the safest assets, cutting yields on two-year notes by 16 basis points, or 0.16 percentage point, to 4.50 percent.
The euro fell 0.8 percent to $1.3684. It dropped 1.9 percent versus the yen.
"The one downside to the ECB doing something is that it may suggest there are more issues out there," said Barry Moran a euro-money market trader at the Bank of Ireland in Dublin. "People are nervous."
"Extraordinarily Serious"
Credit-default swaps on the CDX North American Investment- Grade Index rose as much as 11 basis points to 71 basis points, according to Phoenix Partners Group in New York, reflecting an increase in the perceived risk of owning corporate bonds.
Three-month dollar Libor rose to 5.5 percent from 5.38 percent.
For Bank of America Corp., the No. 2 U.S. bank by assets, today's increase in overnight borrowing costs is the biggest since the Federal Open Markets Committee raised interest rates at the end of June 2004. For UBS AG in Zurich, Europe's No. 1 bank, it's the largest jump since August 2004.
Both banks said their overnight borrowing costs rose 65 basis points to 6 percent. Royal Bank of Canada and Barclays Plc also said they would pay 6 percent.
"This is an old-fashioned credit crunch," Chris Low, the chief economist at FTN Financial in New York, said in a report today. "This is not a small thing. A credit crunch, when the short-term credit markets seize up, is extraordinarily serious, almost always the precursor of a significant recession."
Bear Stearns
The euro overnight deposit rate rose as high as 4.62 percent at 8:13 a.m. in London today before falling back to 4 percent by 1 p.m., according to data compiled by Bloomberg.
Bear Stearns triggered a decline in the credit markets in June after two of its hedge funds faltered, leaving investors with a near-total loss and forcing the New York firm to put up $1.6 billion in emergency funds to keep one of the funds from collapsing.
Default rates on home loans to people with poor credit, known as subprime mortgages, are at a 10-year high. American Home Mortgage Investment Corp. this week became the second- biggest U.S. home lender to file for bankruptcy this year, joining more than 70 mortgage companies that have had to close or seek buyers.
The credit crunch also tainted the market for corporate takeovers, as investors became increasingly wary of buying the high-yield bonds and leveraged loans that private equity firms used to finance deals.
Commercial Paper
"Somewhere out there, there are several people that are in trouble - it's hard to put your finger on it," said Andrew Busch, global foreign-exchange strategist at BMO Capital Markets in Chicago. "I cannot name names. We know BNP has issues with three funds. But you do not see a movement in overnight rates like that unless there is a huge concern about liquidity and funding."
Companies are extending the maturity of existing short-term debt. Units of American Home Mortgage Investment, Luminent Mortgage Capital Inc., facing margin calls from lenders, and Aladdin Capital Management LLC this week exercised options allowing them to delay repaying debt, Moody's Investors Service said.
The three companies borrow using short-term debt that is backed by assets, known as asset-backed commercial paper. They are probably the only companies to defer payments since extendible asset-backed commercial paper was first sold 12 years ago, according to New York-based Moody's.
The average yield on U.S. asset-backed commercial paper rose 20 basis points to a six-year high of 5.56 percent today, the steepest one-day climb since September 2005.
Anybody still doubting the process of monetary inflation?

Hedge Fund Implode-O-Meter Created

Once your hedge fund is listed here it is too late. So far it lists 11 hedge funds since it went online 2 days ago.
The creators of this website also run the Mortgage Lenders Implode-O-Meter which is currently adding 1 to 3 failures per day, standing at a count of 115.
Check both sites daily for the realtime consequences of the latest credit crunch.

RED ALERT - Bush Enters Markets DIscussion, Sees Soft Landing

Wednesday, August 08, 2007

Given the past divergences between the forecasts of president George W. Bush and the actual development of affairs investors should dive for cover. Bush today said he expects a that markets would work their way through safely and achieve a soft landing, the International Herald Tribune reports. Wall Street stocks turned around on his remarks published just before the markets' close and rallied to end more than 1% higher.
Read the story here for more Bush comments.
Bush struck a reassuring tone Wednesday about recent turbulence on Wall Street, saying he believes the markets will work their way through safely and achieve a "soft landing."
Bush, in his most extensive remarks on a gyrating stock market, expressed confidence that investors would eventually calm down. The president said he expects investors to smoothly reassess their risk and begin to focus more on the economy's fundamentals, which he said are solid and sound.
Investors are worried about a worsening housing slump and possibly a widening credit crunch - an uneasiness of recent weeks that has permeated the financial system and the national economy.
"The underpinnings of our economy are strong," Bush told a small group of reporters Wednesday. He said such conditions should help the markets make their way through the current problems.
"So the conditions for a - you know - for the marketplace working through these issues are good, and that's how I look at it, " Bush said.
As signs of housing turmoil mount, Bush seeks to calm fears.
Bush noted that the economy is growing modestly and generating jobs, despite the ill effects of the sour housing market.
After nearly stalling in the first three months of this year, the economy rebounded in the April-to-June quarter, growing at a solid 3.4 percent pace, the best in more than a year. The nation's unemployment rate edged up to 4.6 percent in July yet remains low by historical standards. Inflation - outside a recent burst in energy and food prices - has shown signs of improving.
However, stocks have been swinging wildly.
The president indicated he was not overly worried. He said the market has gone through periods of ups and downs before. "It's the nature of the markets," he said.
On Wall Street, the Dow rebounded to finish up more than 150 points Wednesday.
Although Bush insisted his economic policies have helped the economy grow and his tax cut let workers keep more of their own money, the president has been coping with weak public-approval ratings for his economic stewardship. Only 37 percent approve of his performance, close to a record low, a recent AP-Ipsos poll indicated.
"I do understand there is disquiet out there," Bush said.
On one hand, he blamed the war. "I happen to believe the war has clouded a lot of peoples' sense of optimism," Bush said. On the other hand, he noted that consumer confidence, as measured by the Conference Board, soared to a six-year high. He said there have been conflicting measures about Americans' moods and their feelings about the economy.
Looking ahead to the Democratic-controlled Congress' return in September, Bush made his case anew for keeping taxes low and restraining spending. He also urged policymakers to avoid protectionist trade measures.
Lawmakers and some Americans are losing patience with China, which they blame for the loss of millions of factory jobs, unfair trade competition and a flood of harmful food, toys and other products flowing into the United States. The U.S. trade deficit with China last year swelled to $233 billion (€168.9 billion), the highest with any single country.
The president acknowledged China "is on a lot of Americans' minds" these days. He said the administration is working to protect Americans from unsafe goods and deal with trade problems. Bush said one of his big concerns is the rampant piracy of U.S. movies, computer software and other intellectual property rights. The administration is also working to curb that and wants to make sure "people don't steal our ideas," he said.

It is notable that the president does not see any problems with the lack of fiscal discipline that has roughly doubled US debt during his reign.
But maybe he has watched developments in Zimbabwe, where dictator Robert Mugabe recently was happy to see his budgetary problems solved by printing more money. Ahem, it did not work.

Floettl's Fall From Grace

Seeing numerous search queries for former Austrian investment banker Wolfgang Floettl (very often wrongly spelled Flottl) landing at this blog here is an update about the current lawsuit unfolding in Vienna as no other English language media covers this story. This is a write-up of stories that appeared in Austrian media.
Floettl, the son of former Bawag CEO Walter Floettl, who brought down Austrian Bawag bank with speculations on a falling Yen in the late 1990s that resulted in losses of $640 million, is in court together with former members of Bawag's supervisory board and management. Judge Claudia Bandion-Ortner wants to find out whether Floettl still has assets that could be used to partially plug the holes he caused.
Bawag, formerly majority owned by the Austrian Trade Union Congress, has been sold to private equity fund Cerberus earlier this year who wants to turn it around and cash in afterwards with an IPO. Bawag is Austria's fifth-largest bank.
Floettl jun; once hailed as a financial whiz-kid who started out into the hedge fund world in the early 1990s, now describes himself as without almost any assets since he transferred his private estate to Bawag in order to make up for his losses.
Most of these were in the form of his collection of paintings that had an aquisition value of more than $150 million. In the process Floettl also got rid of his Gulfstream lear jet and prime real estate in Bermuda. But it is believed that he managed to save part of his assets through a divorce and re-marriage with Anne Eisenhower.
Floettl jun. started his ventures with money from Bawag, then run by his father Walter. It is not known whether his former hedge fund company Ross Capital had any other clients.
The relationship between Floettl and Bawag was very cozy. When Floettl admitted the losses in 1999 the bank decided to advance him another $250 million so that he could win back the money lost in his bets on the Yen. Alas, that never happened but Floettl was still allowed to keep his lear jet, an apartment in New York and his house in Bermuda along with paintings valued at $10 to $15 million.
Not bad for a wrong bet.
Floettl said his private fortune peaked out at around $250 to $300 million, but he lost $120 million soon afterwards. He owned "Portrait of Dr. Gachet" by Vincent van Gogh and sold the painting in 1998 at a then-record for a painting of $100 million. This money was used to cover his debts with auction house Sothebys where he was a frequent customer trying to cultivate an image as a major collector.
Court gawkers have been witnessing a wild match of words between Floettl and former Bawag CEO Helmut Elsner who has been stripped of most of his assets by the court. Elsner was certainly the most despotic CEO Austria's banking industry has ever seen. He is infamous for his quick loss of temper and a tendency to mistreat subordinates.
The lawsuit is expected to last until mid-November.

FOMC Stands Pat, Acknowledges Credit Crunch

The Federal Open Market Committee (FOMC) decided to leave the Fed Funds rate unchanged at 5.25%.
The statement equals the one from the July meeting except for one new sentence in which the FOMC acknowledged that investors and consumers are suffering from tighter credit. Apart from that the FOMC kept its cautionary outlook unchanged, saying that economic growth was moderate in the first half of 2007 while the correction in housing was ongoing.
The complete statement:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.
Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; William Poole; Eric Rosengren; and Kevin M. Warsh.
The Fed's decision comes amid a string of not too good looking economic indicators.
Last Friday the BLS reported an increase in the unemployment rate to 4.6%. 11 months earlier unemploment had stood at 4.4%.
Productivity has picked up in June though, with a monthly gain of 0.5% (May: minus 0.1%), but still below analysts expectations.
Average hourly earnings came in 6 cents or 0.3% higher.
Capacity utilization for total industry moved up to 81.7 percent in June; the rate was 0.6 percentage points below its level in June 2006 but 0.7 percentage points above its 1972-2006 average.
With inflation outpacing earnings consumers have to look for other sources to raise the money needed for mortgage payments, especially when about haf of all variable mortgages are in for a costly hike in interest in the next 16 months.
The temporary solution was a rush into more debts by extending their consumer loans. The Fed's monthly release of consumer credit data on Tuesday shows a slightly lower growth rate of 6.5% (May: 7.9%) with revolving (credit card) loans expanding relatively faster than traditional loans.
Loan growth can be expected to slow in line with mortgages as lenders have been upping their lending standards in the face of higher rates.
Markets showed initial relief that the Fed has stuck to its rhetoric of moderating growth, which provides a steady Fed funds outlook.
I am not buying into that optimism as the status of all economic worries has not changed with the latest set of indicators as I am worried about credit markets. The recent partial normalization of the yield curve has not come along with an improved rate outlook but was rather inspired by a flight to Treasuries amidst the subprime meltdown that has reached Alt-A lenders by now. Until now 110 mortgage lenders have thrown in the towel, according to Implode-O-Meter.

10 Year Treasury Yield

GRAPH: Is the 10-year Treasury yield ready for another up-leg after the roller coaster ride since May? Chart courtesy of
Share markets appeared resilient to the modest growth and even interest rate outlook and rose marginally. I would say the Fed has done all it can do now.

ECB and BoE Leave Rates Unchanged As Banks Are Stuck With $500 Billion in Leveraged Loans

Thursday, August 02, 2007

As expected, the European Central Bank (ECB) and the Bank of England (BoE) have left their leading lending rates unchanged at 4% and 5.75%. With the recent stabilization of the Federal Reserve Dollar it can be presumed that the Federal Open Market Committee (FOMC) will repeat the non-action of its European counterparts.
Fed governor Randall Kroszner said today the Fed watches inflation very closely and raised eyebrows when he said at a nomination hearing that the real economy is unhurt by the subprime disaster. The Fed is expected to hold rates steady at next week's FOMC meeting. According to a WSJ report, futures markets now place a 90% probability on a Fed funds rate cut by January, after only 20% a month earlier. And Kroszner should check the Implode-O-Meter, where first worrying reports on non-subprime lenders begin to show up.
In Europe ECB president Jean-Claude Trichet hinted at a rate hike in September as inflations risks were to the upside.
Apart from the old structural macroeconomic problems on both sides of the Atlantic, especially high energy prices, a new problem emerges on the horizon. According to a story by The Times, American and European banks are stuck with almost $500 billion in leveraged loans they are unable to syndicate, putting an end to the recent merger bubble:
Leading investment banks on both sides of the Atlantic are saddled with almost $500 billion in agreed leveraged loans that they are unable to parcel out to other investors.
New figures from Dealogic reveal that in Europe the banks are struggling to clear a backlog of $208 billion worth of leveraged loans that they would normally have sold on through syndication.
In the United States, the figures also show that investment banks are stuck with $269 billion of agreed loans that they are unable to syndicate.
News of the glut of debt on the banks’ balance sheets comes as the shake-out in credit markets produced new casualties as global markets were racked by further volatility.
In Europe, RBS has been left holding the biggest debt pile, with $18 billion worth of leveraged loans, followed by JPMorgan with $17.4 billion and Barclays Capital, which has lent $16.2 billion. All three banks were involved in the £9 billion of debt underwriting Kohlberg Kravis Roberts’ acquisition of Alliance Boots, the British health and beauty retailer, which got stuck this month, forcing the banks to hold more than £7 billion of the loans on their balance sheets.
The last thing markets need are higher rates. But if the ECB and the Fed want to stay credible they will have to follow the examples of their counterparts in Asia which have been raising their rates at a faster pace, adding to the weakness of the greenback.

Wikinvest Wire