Ben's Helicopters Now Dropping 120,$$$,$$$,$$$ Over Brazil, Mexico, Korea, Singapore

Wednesday, October 29, 2008

Only 75 minutes after the Federal Open Market Committee (FOMC) slashed Fed Funds half a point to the lowest recorded level of 1%, chairman Ben Bernanke started his money dropping helicopter fleet in order to shower the world with another $120 billion. This time it is the central banks of Brazil, Mexico, Singapore and South Korea that will receive up to $30 billion each in newly established swaplines.
A Fed press release states that each country will enter into $30 billion swaplines with the Fed,
in order to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.
In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore.
The Fed has now established swaplines with 14 central banks responsible for 28 countries in order to market its only product: Federal Reserve Notes (FRNs) that are backed by nothing than the belief that today's FRN will buy you the same amount of goods and services in the future.
The other central banks helping to fly the FRN helicopters are the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank.
IMF Will Dish Out Still More FRNs
In its efforts to flood the whole world with FRNs the Fed
welcomes the announcement today by the International Monetary Fund of the establishment of the Short-Term Liquidity Facility, which is designed to help member countries that are facing temporary liquidity problems in the global capital markets. The Federal Reserve is supportive of the IMF's role in helping countries address and resolve their ongoing economic and financial difficulties.
Jumping to the IMF website one finds more details how the IMF will dish out more FRN loans all over the world with the newly established Short-Term Liquidity Facility (SLF). This comes one day after the IMF warned that Latin America would not escape the global turmoil.
According to the release members can borrow up to 500 percent of their quota.
Quoting IMF head Dominique Strauss-Kahn the new facility is a better design than usual standby agreements. He said the IMF would use its full financial force to stem the crisis.
Here are the details of the SLF:
  • Purpose. Provide large, upfront, quick-disbursing, short-term financing to help countries with strong policies and a good track record address temporary liquidity problems in capital markets. 
  • Eligibility. Countries with a good track record of sound policies, access to capital markets and sustainable debt burdens may qualify (the IMF's standard debt sustainability analysis should indicate a high probability that both public and private debt will remain sustainable). Policies should have been assessed very positively by the IMF's most recent country assessment. 
  • Conditions. Financing is made available without the standard phasing and loan conditions of more traditional IMF arrangements. However, borrowers are expected to certify that they are committed to maintaining strong macroeconomic policies. 
  • Size of loan. Disbursement of IMF resources can be up to 500 percent of quota, with a three month maturity. Eligible countries are allowed to draw up to three times during a 12-month period.
Altogether it appears as the global banking machine requires more and more grease with every week but the engine is sputtering worse than at the beginning of the credit crisis.
We have entered the stage where even hundreds of billion of freshly created money will not be enough to deflate the biggest credit bubble in an orderly way.
Stocks reacted to the news of the rate cut in a classical "buy the rumour, sell the news" fashion. Early gains fizzled away as soon as the widely expected rate cut was announced as was the case after a second late bounce.
The near 10% advance in crude oil signals that commodities are again bought as as an inflation hedge.
Make no mistake: Only because recent inflation figures looked better than in summer does not mean that all this poisonous "liquidity" will not result in monetary inflation. What we see here is monetary inflation by the textbook and it will be felt dearly within the next 12 months. Central banks have gone wild since they found themselves behind the curve, rather following the wishes of Wall Street than insulating the inflation virus and absorbing all the liqudity that allowed the leverage excesses of this millennium.
Oh, and by the way; IMHO gold as the oldest inflation hedge has seen its low of the year with a very high probability based on the fundamentally bad outlook.

Forex Borrowing Will Take a Heavy Toll on Eastern Europe - IMF

Looking for a way to evaluate the risks in banking in Eastern Europe? The International Monetary Fund (IMF) has produced a graph that shows the forex exposure of several CEE (Central East European) countries that might be helpful when tracking down Eurozone banks with extended risk in this region.
According to an IMF survey from Tuesday,
Europe's emerging markets are increasingly exposed to currency risk, heightening these countries' exposure to the banking crisis that is currently sweeping across Europe, and raising the alarm among those concerned with financial stability.
New research by the IMF shows that 15 percent of outstanding private sector credit in Eastern Europe today is either denominated in or indexed to foreign currencies, compared with only 4 percent a decade ago. Euroization (taking out loans in euros rather than the local currency) has also accelerated, adding to the risks.

GRAPH: The IMF attributes the strong growth of forex loans to a number of factors. The strongest incentive to borrow in other currencies was certainly the differential in interest rates and a growing willingness of people in EU member states to transact their real estate dealings in Euros.
The IMF has defined four main factors that drove forex lending.
  • The difference in interest rates between domestic and euro zone interest rates drives foreign currency borrowing, as suggested by economic theory. But unlike other parts of the world (for instance, Latin America), past exchange rate volatility has no statistically significant effect. One reason may be that EU membership increases people's willingness to assume currency risk. If anything, people expect their currencies to further appreciate as their countries converge towards Western European price and income levels.
  • The banking sector's dependence on foreign capital, as measured by the loan-to-deposit ratio, is a strong contributor to foreign currency borrowing. Banks refinance themselves abroad and then pass on the currency risk to their clients, if only because they often are not allowed to hold open currency positions.
  • Openness, captured by the relative size of foreign trade, matters also. Revenues from abroad make it easier for companies to hedge their foreign currency exposure. However ,this does not seem to be the case for households—remittance flows do not seem to increase foreign currency borrowing.
  • Regulatory policies (for instance, higher risk weights for foreign currency loans) have some measurable effect, but it is pretty weak. The impact of such policies disappears entirely if direct borrowing from abroad is included.
It concludes that,
In sum, foreign currency borrowing is a by-product of EU membership. First, by fully liberalizing the capital account, the EU offers borrowers increased access to foreign funding, both through domestic banks affiliated with foreign parents and directly from abroad.
Second, by increasing trade openness, the EU provides hedging opportunities, especially for the corporate sector. Finally, EU membership seems to boost the private sector's confidence in exchange rate stability and imminent euro adoption, making devaluation seem like a low probability.
Hungary and the Ukraine have already tapped the IMF for fresh funds. Hungary today finalized a €20 billion loan package coming from the IMF, the EU and the World Bank. Ukraine has already negotiated an IMF loan package worth $16.5 billion. Others will be banging the door of the IMF soon, it can be predicted safely.

East European Crisis May Hit Overexposed Euro Members

Tuesday, October 28, 2008

Emerging East European countries are set to become the worst nightmare of Eurozone banks with a heavy exposure to these once so profitable markets. Looking at the share prices of Italian Unicredit or Austrian Erste Bank and Raiffeisen International - all down more than 60% from their record highs seen a year earlier - the worries appear to have a very real background.
Ambrose Evans-Pritchard offers the saucy details in today's web edition of the Telegraph. After a wave of Eurozone bank insolvencies that lead to a industry concentration through rescue mergers in Germany, the Netherlands, Spain, and the UK, it now appears that tiny Austria may be left holding the bucket in Eastern Europe. Lendings to Eastern emerging markets have reached a critical level of 85% of Austria's GDP which is around €240 billion or €32.600 per inhabitant.
According to the Telegraph,
Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.
Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
While the world has so far focused on the US banking crisis, the centre of attention will soon shift to Europe as loans in danger of default dwarf the US losses.
“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.
Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.
They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.
Recent interest rate moves to defend national currencies show the grade of desperation.
Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.
It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon.
Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.
Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.
The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.
The Euro's Stress Barometer: German-Italian Spread
So far European banks have found support in state guarantees that have shifted the burden of the financial crisis to the shoulders of taxpayers. Traders now watch every political move,
Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union.
The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.
The crisis won't stop here. Excess credit of the past decade has to be written off, leaving a bloody trail in more or less all banks' balance sheets.
UPDATE: Find all relevant figures in this quarterly report from the Bank for International Settlements (BIS.)

Chart of the Day: Market Mania

Monday, October 27, 2008

Hat tip to Alex Stanczyk of the rapidtrends newsletter who dug out this chart depicting the various stages of a bull market/bear market.

China Wants the Dollar to Drop Dead

China pounds the conference table hard for a new currency order. After a first commentary a month earlier, China now shoots straight against Federal Reserve Notes (FRNs), accusing the USA of plundering the world's wealth with its own fiat currency.
The attack does not stop here. Other, unspecified, currencies urgently need to replace FRns as the world's reserve currency.
The commentary on the front page of the oversea's print edition of People's Daily had some advice for Asia and Europe as well. In a not too polite style - a far step from traditional Chinese reserve - both economic regions were told they "should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies."
From the Reuters report:
The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.
The People's Daily is the official newspaper of China's ruling Communist Party. Its articles do not exactly pronounce the leadership's view, but its opinion pieces reflect a growing criticism on the current Euro-American dominated financial system.
Although China remained quiet on the subject when hosting a financial summit with 43 countries over the weekend their drive towards a financial order reflecting the importance of Asia will not stop. China is well known for its polite stubbornness and a very long term oriented policy while steering the most populous country of the world towards more prosperity.

Yuan's Currency Controls Make It a Non-Contender for Reserve Currencies
A Reuters analysis from Monday concludes that the Yuan is not going to become a reserve currency anytime soon, citing officials of the Chinese central bank. It also said that criticism in the US' affairs are overshadowed by the risks for China of holding so many dollars in its reserves. China's FRN reserves have surpassed the TRILLION mark long ago, it is estimated.
Interestingly, the People's Bank of China website links from the front page to its balance sheet from 2004 only. A lot has changed since, considering the foundation of China's sovereign wealth fund, that used part of its $1.3 TRILLION treasure to buy stakes in US corporations and now registers heavy losses on these early investment ventures abroad.
Getting Out of the Dollar With As Little Damage As Possible
China's long breath on the issue may be part of the tactics applied. First it will want to divest out of US debt with as little damage and losses as possible. Chinese economists know very well that the country could choke the US debt market any minute. I would not count on any friendly support from the dragon country.
Britain's opium war plays as much a historical role as the long reign of Communist leader Mao Zedong as does the reintroduction of university classes in Confuzianism, a philosophy once regarded as "overcome" by the communists. What feelings would you have for your former oppressors?
While playing it on the moderate side at the financial summit, official Chinese media drove home a couple of points on Monday, showing the muscles China has while suffering from the global slowdown.
According to a release on China's government website,
China's share of the world's combined gross output rose to 6 percent at the end of 2007, compared with just 1.8 percent in 1978 when its reform and opening-up began, the National Bureau of Statistics (NBS) announced on Monday.
Fast economic growth over the last 30 years had lifted China's GDP ranking in the world from 10th in 1978 to fourth after the United States, Japan and Germany.
It stood at 3.28 trillion U.S. dollars in 2007, about 23.7 percent of that of the U.S., 74.9 percent of Japan's and 99.5 percent of Germany's, said an NBS statement on its report on China's development since 1978.
By the World Bank rankings, China was a developing economy falling into the category of lower middle income, with per capita income ranging between 936 and 3,705 U.S. dollars.
Per capita income jumped to 2,360 U.S. dollars in 2007 from 190 U.S. dollars in 1978.
Take such news as a strong sign that China will insist on a bigger international role according to its phenomenal growth in the past 3 decades. In stark contrast to the slowdown in Europe and the USA official Chinese figures confirm the expectation that China will manage a controlled cooling of its economy that was in danger of overheating only a year earlier.
According to Chinadaily,
China's economy, one of the fastest-growing economies in the world and the biggest contributor to global growth, grew 9.9 percent year-on-year in the first three quarters of this year.
In the third quarter, the gross domestic product (GDP) growth rate slowed down to 9 percent, the lowest in five years, from 10.6 percent in the first quarter, 10.1 percent for the second quarter and 10.4 percent in the first half of 2008.
China's economic growth has been on a steady decline since peaking in the second quarter of 2007.
Inflation in a Downward Spiral
At the same time China managed to contain inflation:
Another widely watched indicator, the consumer price index (CPI) - an important measure of inflation - rose 4.6 percent in September, over the same period last year.
The figure, coupled with 7.1 percent in June, 6.3 percent in July, 4.9 percent in August and a nearly 12-year-high of 8.7 percent in February, shows the CPI in a downward spiral.
Analysts mainly attribute the decline in the CPI to ample grain supply and lower-than-expected income growth of Chinese residents, as the housing and stock markets take heavy toll, which dented residents' desire to consume.

GRAPH: China has managed a controlled economic slowdown despite external and natural disasters. Chart courtesy of
Chinadaily has another commentary today that clearly signals that the country aspires to much more than just an also-ran in the international world order. Or how would you interpret the headline "New order needed to meet global challenges?"

Hyper Inflation Preview

Thursday, October 23, 2008

As I notice a lively discussion in cyberspace whether we are in an inflationary or deflationary period here is a preview of how "rich" everybody was in the Great German depression 1922/23. These 2 banknotes should sober up everybody.
At the beginning of the Germany's monetary downfall one Federal Reserve Note was worth 4 Reichsmark. Only 2 years later one FRN was worth 4.2 billion Reichsmark. So much about the stability of unbacked currencies. This may also be a reason why especially Germans but also many other Europeans fear nothing more than inflation that ultimately destroys their savings.

The 2 banknotes have some collector's value that exceeds their past purchasing power. I bought both banknotes via ebay and paid around €12 for both of them. "Eine Milliarde" is one billion, or about a loaf of bread then.

Indians Regain Appetite for Silver

Wednesday, October 22, 2008

The massive correction in silver brings back Indian buyers. According to a Reuters story, Indians also shift to silver as the high silver/gold ratio of 80:1 makes the white metal appear cheaper to its competitor gold. Imports have jumped to 250 tons every month since August after a dull first half 2008 when record prices repelled buyers.
Silver dramatically undershot my worst case scenario of a low at $14, trading briefly below $9 before it recovered to the current level around $10. The silver miners got knifed accordingly, playing out the bad side of beta with losses of up to 90% this year. But the Indian buying spree and losses in production because base metals mines are closing due to the price slump may be a solid base for the next upleg on fundamentals.
From Reuters
By Ruchira Singh
MUMBAI, Oct 20 (Reuters) - Indian traders may not be buying much gold with prices close to all-time highs, but are scrambling to stock up on silver that fell to its lowest in a little more than a year, dealers said.
"There is already a shift from gold to silver... people are very comfortable with silver prices," said Ajay Singh of Kiran Jewellers, a wholesaler in Jaipur.
Singh said his silver sales had risen five-fold from the same period last year, ahead of key festivals, Dhanteras and Diwali, next week. On the continuation charts of the Multi Commodity Exchange of India Ltd (MCX), silver futures MSVc1 were at 17,541 rupees per kg, close to a 13-month low struck late on Friday at 16,857 rupees.
The current price is down 36 percent from its record high at 27,500 rupees on March 17.

Sudden Jump in Demand
Suresh Hundia, president of Bombay Bullion Association, said silver imports had accelerated since August, and demand was heavy early this month, when prices were in the range of 19,000 rupees and 20,000 rupees.
"Earlier in the year, there was hardly any demand but now since August, about 250 tonnes is being imported every month," Hundia said.
Yet, imports stood around 800 tonnes so far this year as against around 2,280 tonnes in all of last year, he added.

Supplies "Starting to Get Tough"
Many traders said silver imports hit bottlenecks even at high premiums, with a global demand resurgence, difficult credit market and logistical woes. "Many banks are unable to get silver even if we tell them we will give them the full sum of money for the consignment," said Daman Prakash, director of MNC Bullion Pvt Ltd, a wholesaler in Chennai.
"There is shortage of space in flights and that is curbing the supplies," said Prithviraj Kothari, director at Riddisiddhi Bullions Ltd.
A prominent Geneva-based supplier, Afshin Nabavi, senior vice president at MKS Finance S.A., said supplies were "starting to get tough."
"There is a huge demand for silver... it has not been this cheap for a while now," Nabavi said.
Banks are ill prepared for the resurgence in demand and at least one large bank has chosen not to sell silver this year, traders said.
"Earlier this year banks were stuck with stocks and some had to think about re-exporting it," said Kiran Jewellers' Singh.
"Now they are not being able to arrange supplies.. whoever reaches them first or those who have good contacts are getting the little silver that is coming in."
Silver was being imported at a premium of 35 cents as against 10 cents in normal times, dealers said.
Demand for the white metal could intensify if prices fell further, said Nayan Pansare, an analyst.
"At 15,000-16,000 rupees we could see a bigger rush for silver and more switches from gold to silver," Pansare said.
I would say this is another sign that the dichotomy between COMEX silver prices and prices paid is more then questionable. Both the metal as its producers may be a a once in a lifetime opportunity at current price levels that are destined to change dramatically, only to catch up with inflation. The inflation adjusted all time high of silver is in excess of $135 per ounce and there are so many signs of a physical shortage when silver sold short on the COMEX now exceeeds one year of global production.

ECB Balance Sheet Grows Exponentially to Almost €2 Trillion

Tuesday, October 21, 2008

Politicians in the Eurozone are relieved these days as they see commodities and especially crude oil prices retracting to levels last seen a year earlier. But the improving outlook on the price front comes at the heavy price of monetary inflation.
The hope for a slowdown in price inflation is overshadowed by the terrifying numbers on the ECB's balance sheet that almost touched the €2 TRILLION level with a balance sum of 1,973 billion as of October 17. This is 57% more money YOY while the European economy started slipping into a recession.
Lending to banks immediately took off to never before seen levels since the ECB changed its rules and now takes more or less any crap paper as collateral.
Monetary inflation is now clearly written on the wall as the expansion of the ECBs weekly financial statement has become ballistic.
Within only one week the ECB's lending increased 4.8% overall, according to latest figures. The unlimited swaplines of the Fed begin to show up here without a doubt.
Banks Doubled Borrowing Within a Year
In a YOY comparison Eurozone bank lending more than doubled from €471 billion to currently €1.057 trillion. This comes hand in hand with a continuous flow of downgraded expectations for the Eurozone economy that may record a contraction in the last quarter of 2008.
The ECB's loose hand may have prevented a systemic disruption so far, but if the speed of money creation does not get reduced Europe could find itself saddled with runaway monetary inflation as there is an explosive lot of money sloshing around a steady pool of products and services.
IMF Warns of Sharp Slowdown
The IMF warns of a sharp slowdown as the financial crisis takes its toll on Europe. According to its latest outlook released on Tuesday,
Europe is facing its worst financial crisis in decades. Credit growth is slowing and domestic demand is weakening across the continent. At the same time, past commodity price increases have boosted headline inflation, depressing consumption.
In advanced Europe, a mild recession is expected in the near term. Real GDP growth is projected to drop to 1.3 percent in 2008 and 0.2 percent in 2009 (down from 2.8 percent in 2007). Growth is weakening in the emerging economies as well.
The IMF predicts a mild recession for Italy, Spain and the UK in 2009.

TABLE: The latest forecasts for Europe from the IMF
In order to avoid a sharper downturn the IMF pledges for coordinated action of European governments. This call went so far unheard. European politicians may be setting up common meetings, but so far each country has taken its own way in order to end the credit crisis.

Income Inequality and Poverty Rising in Most OECD Countries

The gap between rich and poor has grown in more than three-quarters of OECD countries over the past two decades, according to a new OECD report .
OECD’s "Growing Unequal?" finds that the economic growth of recent decades has benefitted the rich more than the poor. In some countries, such as Canada, Finland, Germany, Italy, Norway and the United States, the gap also increased between the rich and the middle-class.
The Rich Take Off
Countries with a wide distribution of income tend to have more widespread income poverty. Also, social mobility is lower in countries with high inequality, such as Italy, the United Kingdom and the United States, and higher in the Nordic countries where income is distributed more evenly.
Launching the report in Paris, OECD Secretary-General Angel Gurría warned of the dangers posed by inequality and the need for governments to tackle it. “Growing inequality is divisive. It polarises societies, it divides regions within countries, and it carves up the world between rich and poor. Greater income inequality stifles upward mobility between generations, making it harder for talented and hard-working people to get the rewards they deserve. Ignoring increasing inequality is not an option.”
A key driver of income inequality has been the number of low-skilled and poorly educated who are out of work. More people living alone or in single-parent households has also contributed.
Child Poverty Increases
Some groups in society have done better than others. Those around retirement age have seen the biggest increases in incomes over the past 20 years, and pensioner poverty has fallen in many countries. In contrast, child poverty has increased. (The OECD defines poor as someone living in a household with less than half the median income, adjusted for family size.)
Children and young adults are now 25% more likely to be poor than the population as a whole. Single-parent households are three times as likely to be poor than the population average. And yet OECD countries spend 3 times more on family policies than they did 20 years ago.
In developed countries, governments have been taxing more and spending more on social benefits to offset the trend towards more inequality. Without this spending, the report says, the rise in inequality would have been even more rapid.
But new ways of tackling this issue need to be found, Mr Gurría said. “Although the role of the tax and benefit system in redistributing incomes and in curbing poverty remains important in many OECD countries, our data confirms that its effectiveness has gone down in the past ten years. Trying to patch the gaps in income distribution solely through more social spending is like treating the symptoms instead of the disease.”
“The largest part of the increase in inequality comes from changes in the labour markets. This is where governments must act. Low-skilled workers are having ever-greater problems in finding jobs. Increasing employment is the best way of reducing poverty,” he said.
Better education is also a powerful way to achieve growth which benefits all, not just the elites, the report finds. In the short-term, countries have to do better at getting people into work and giving them in-work benefits to provide working families with a boost in income, rather than relying on unemployment, disability and early retirement benefits.

Find the specific data on all OECD countries here.

Hongkong Reintroduces Gold Futures Trading After 10 Years of Absence

Hongkong has relaunched trading in gold futures on Monday, Platts reports:
Gold futures in Hong Kong relaunched trading on Monday on the back of an increased interest on gold, the Hong Kong Exchange and Clearing (HKEx) said in a statement on Monday.
Gold futures were first introduced to the Hong Kong Futures Exchange in 1980 but trading of the product was suspended in 1998.
Gold futures's trading hours in Hong Kong are from 8:30 am to 5:00 pm(0030 GMT to 0900 GMT), with no break for lunch. The contract size is 100 troyoz [one troy oz equals 31.1 grams], with the three contract months available for trading, including spot month and the next two calendar months.

Hongkong is mainland China's biggest gold trading partner and launched the contracts in order to satisfy investors demand. China started trading gold futures earlier this year.
"This is an ideal time to have gold futures in Hong Kong, not only because of the interest in the commodity, but also the greater volatility we are seeing in its price," HKEx Chairman Ronald Arculli said at gold futures launch ceremony in Hong Kong.
"The annualised 30-day volatility of gold has jumped from 10% in August 2007 to 50% in August this year. So gold futures trading here will enable investors to guard against unexpected moves in the international gold market as well as capture trading opportunities."
According to Arculli, Hong Kong is also mainland China's largest trading partner for gold, which, according to the World Gold Council, has been the world's largest gold producer since 2007. "Our city accounts for 20% to 30% of Asian gold exports, making it an important trading hub," he added.

Stimulus Checks Now Going To The Banks

Monday, October 20, 2008

After the helicopter drop of stimulus checks for Americans on Main Street in summer Ben Bernanke's money printing armada will point the flow of ever more Federal Reserve Notes (FRNs) on Wall Street, taking it from his testimony to Congress on Monday.
It is actually quite shocking to see the one-trick pony theory proven, as all the Fed can - and certainly will - do is create more debt.
An excerpt From the Testimony
In collaboration with governments and central banks in other countries, the Treasury and the Federal Reserve have taken a range of actions to ameliorate these financial problems. To address ongoing pressures in interbank funding markets, the Federal Reserve significantly increased the quantity of term funds it auctions to banks and accommodated heightened demands for funding from banks and primary dealers. We have also greatly expanded our currency swap lines with foreign central banks. These swap lines allow the cooperating central banks to supply dollar liquidity in their own jurisdictions, helping to reduce strains in global money markets and, in turn, in our own markets. To address illiquidity and impaired functioning in the market for commercial paper, the Treasury implemented a temporary guarantee program for balances held in money market mutual funds, helping to stem the outflows from these funds. The Federal Reserve put in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds, thus providing some relief for money market funds that have needed to sell their holdings to meet redemptions. Moreover, we soon will be implementing a new Commercial Paper Funding Facility that will provide a backstop to commercial paper markets by purchasing highly rated commercial paper from issuers at a term of three months.

Bernanke did not say anything really new. The Fed's decision to officially print unlimited of FRNs happened a week ago and markets are still reeling for more "liquidity." It is quite disturbing to see it proven again that all the Fed can is to offer more of its only product, i.e. fresh debt.
It is doing so at record rates, reports the Mogambo Guru. in America, we destroy our money by creating more and more of it, which I measure with Total Fed Credit, which is the magical stuff that appears in the banks as an increase in credit available for lending.
And not only lending, but lending as a huge multiple of the increase in TFC, which went up by a staggering US$103.6 billion last week!
This is So Freaking Bizarre (SFB) that I slobber down my own chin when I say it exceeds the staggering irresponsibility of the days of Alan Greenspan since 1997 when he was driving the Federal Reserve over the dead, dying body of the dollar by increasing Total Fed Credit by $10 billion a month, which was enough to produce the current terrifying bubbles in stocks, bonds, housing, derivatives and growth of government!
Now, if $10 billion a month of new money and credit is enough to create all of that inflationary horror, then what in the hell is $103.6 billion in One Freaking Week (OFW) going to do? Gaaaaaah!
I find no consolation in the fact that the ECB conducted a €310 billion repo last week, outnumbering the Fed on the daily race into monetary inflation as never seen before in the past 35 years.
Is the Fed Only Buying Time Until After The Election?
One gets the impression that the Fed and especially Treasury secretary Henry Paulson are not really interested to find a solution to the gordian financial knot that threatens the global economy.
As Paulson has already made clear he won't be part of the next government it may be tempting to leave the mess to a Democratic president.
President Bush, probably having a hard time to grasp all these problems erupting in a place called Wall Street, New York, will also be more than happy to hang it all on the shoulders of his successor, no matter whether it will be Obama or McCain.
This may bring the current FRN strength to an end in November, once the realization sets in that the US is the world's biggest debtor and may only be able to repay after a good dose of hyper inflation. Then FRNs will be no exemption from the rule that all unbacked fiat currencies have ultimately returned to their intrinsic value.
With McCain in the drivers seat it may be a quick ride.
David Shvartsman has more analysis on Bernanke with a funny conclusion

Link to Jim Rogers Blog

Sunday, October 19, 2008

Seeing a lot of Google queries on Jim Rogers landing at this earlier post, I am happy to have found a link to Jim Rogers' blog.
Taking from what one can see this blog is NOT edited by the legendary investor himself but documents all (or most?) of Rogers' appearances in the media. Its full title is "Jim Rogers - Investments."
I hope the editor of this useful resource will add a RSS or XML button to the blog in order to keep it easy for readers.
And just in case the real Jim Rogers stumbles upon this post, I'd love to do an exclusive with him too. Please contact me to balance the MSM news feed that sees no monetary inflation. Wish you a happy birthday, Jim!

Former "Terrorist" State Now Bailing Out Italian Banking Giant

In a bizarre twist of fates the former Italian colony Libya, once branded a terrorist state by the USA, takes part in bailing out Italy's second largest bank, Unicredit.
Reuters quoted Libyan central bank governor Farhat Omar Bin Guidara who told the Italian daily Il Messaggero that Libya aims to raise its current stake of 4.23% to 5%. Libya paid €500 million for a 3.67% stake, making it the second largest shareholder of Unicredit. It already owned 0.56% of Unicredit since 1997.
Business daily Il24 Ore reported that Libya would push for a seat on Unicredit's supervisory board. Citing an unnamed source, it said the Libyan central bank was aiming for a vice-chairman post and had put Bin Guidara forward as candidate.
Libyas shopping spree does not end here. Italy is OPEC member Libya's main European trade partner and Italian oil company ENI holds stakes in pipeline, natural gas and oil projects in Libya.
"We have bought Eni shares for 50 million euros. A modest number, but an indication of the faith we have in your oil company. And probably we will buy some more, but always keeping in mind the desire of diversification and not necessarily to control," Bin Guidara said.
A fact box courtesy of Reuters says the cross border bank has the most foreign exposure of Italy's banks. Unicredit aquired Bank Austria, by now renamed to Unicredit, and the German banking giant Hypo Vereinsbank in 2005.

UPDATED - Financial Crisis Spreads To Eastern Europe

Saturday, October 18, 2008

East Europe has a sudden awakening these days. After a decade long shopping spree mainly focused on cars and home improvements consumers in the Baltic and Balkan countries are tripping over loan payments and sustaining inflation. Edward Hugh's blog Global Economy Matters leads the blogging pack with an unsurpassed depth of information on Hungary's economic situation as the country is sucked into the global credit crisis.
Attributing the crisis to the usual wrongdoings of politicians like running up fiscal and current account deficits Hugh highlights the country's fragile exposure to foreign currency mortgages which rose by some 50% since 2007. As if that were not enough for a country whose trade partners are slipping into recession too, Hungarians have also more than tripled their outstanding Forint-denominated loans since 2006.
Hungary was thrown a €5 billion lifeline by the ECB last Thursday to prevent a currency crisis and is in talks with the IMF about a rescue.
Foreign banks in Hungary stopped or scaled back forex lending earlier this week, reports Hugh:
Oesterreichische Volksbanken AG's Hungarian unit suspended Swiss Franc and U.S. dollar loans in Hungary on Wednesday. The bank, which has declined to elaborate to the local press on its decision, will continue to lend euros it says. Swiss Francs are however the key currency in the Hungarian context, since around 80% of new mortgage lending has been in CHF. Bayerische Landesbank local subsidiary MKB was the first bank in Hungary this week to announce (on Tuesday) the suspension of new foreign-currency personal loans, saying the volatility of the forint made them too risky for clients. One by one the other banks in the market have all been following suit.
Hugh points to one more interesting nuance in Hungary's crisis. A majority of loans granted in the past year were forex denominated and Hungarian debtors are now in for a revaluation shock.
BTW, Austria's debtors face the same problem. Swiss Franc loans were aggressively marketed in the past years and now the hard Swissie will erase all interest rate gains made earlier, resulting in higher payments.
Suddenly The IMF is en vogue Again
Being not able to withstand the crisis with domestic means, the International Monetary Fund is getting a lot of calls from the troubled East European Countries. Check out Hughs post on the Ukraine's troubles here. As in so many bear market stories, the crisis was not noted until a day before.
Even as late as yesterday central bank Governor Volodymyr Stelmakh had been saying IMF help wasn't needed. The banking system is "normal and reliable,'' he said in an interview.
Providing a blog for most European regions, Hugh features Claus Vistesen at his Baltic Economy Watch who reports about economic contraction and a downgrading of sovereign debt in Estonia, Latvia and Lithuania.
The core problem is, again and again, credit-funded consumption:
Head of sovereigns in Europe Edward Parker from Fitch consequently noted that the worse than expected correction in financial markets coupled with the vulnerable macroeconomic enviroment as the main reasons for the downgrade. More specifically, the mixture of external deficits funded to a large extent by inflows of credit (e.g. some 30% for Lithuania) supplied by foreign banks lies at the root of the decision and incidentally, as it were, also at the root of the macroeconomic vulnerabilities of the Baltic economies.
All three countries are pounding the doors of the IMF, following Hungary and Iceland, reported Hugh in a post from last Tuesday.
Not Much Hope in Romania
Romania Economy Watch paints a bleak picture too. Producer prices rise around 20% and wages by 25% YOY. Combine this with a real estate market gone wild - condos in Bucarest cost more than in Vienna - and you get the picture that Romania won't escape the global credit crunch.
Czech Shares Plunge To 4-Year Low
The Czech Republic begins to feel the strain on Eastern Europe as well, reports Czech Republic Economy Watch. The stock market plunged to a four-year low on Friday, reflecting growing fears that the Czech banking sector may be set for a shakeout.
An index of investors' and analysts' expectations for the CEE region over the next six months plunged to minus 51.1 points in October from minus 30.6 in September according to latest the survey from the ZEW Center for European Economic Research and Erste Bank AG.
Goldman reduced the Czech Republic's 2008 growth forecast to 4.3 percent this year from 4.4 percent, while the 2009 outlook was changed to 2.5 percent from 3.8 percent.
Komercni Banka AS, the third-largest Czech bank, fell the most since 1999. OTP Nyrt. slid to its lowest level in almost five years after HSBC Holdings Plc downgraded Hungary's largest bank on concern its loan expansion may slow and credit quality worsen, while Bank Pekao SA, Poland's biggest bank, posted its steepest drop on record.
Komercni lost 530 koruna, or 17 percent, to 2,510 in Prague trading.
Austria Will Be Hit Hard By East Europe's Downturn
The downturn in East Europe has already hit my home country, Austria. The Austrian ATX has declined roughly 60% from its peak as all the "Ostfantasie" (East fantasy) has suddenly turned into a live horror scenario for Austrian banks that have scouted the Balkans since the end of Communism in 1990.
This financial recolonization may backfire now as we find out that all that expansion was built on a base made from rapidly expanding credit that did not correspond with the economic strength of these countries where wages have not caught up with the latest bouts of monetary inflation.
UPDATE: Bloomberg has several stories on the East European credit crunch that do not exactly instill hope. Arguing that Russia's de facto chief Vladimir Putin may use the credit crunch to dethrone the oligarchs certainly makes sense. Read more about Russia's credit crunch and its results in this New York Times piece.
Bloomberg was also quick with a follow-up on fading hopes for a near-term solution in the Hungarian crisis, reporting a clash between government and opposition. The NYT explains what it all means to the average Hungarian.

The Euro Has Very Real Problems - And Nobody Really Stands Behind It

Thursday, October 16, 2008

Sorry for missing out on such first-in-a-lifetime-headlines like "Eurozone Throws €2.3 TRILLION At Banking Debacle and It Will Not Be Enough" or "Politicians Still Not Realizing What Kind Of Financial Tsunami Is Right Ahead Of Us" due to a stubborn flu.
But I think a lot of the political talk that fills airwaves and newswires as a recession is engulfing Europe will never have been more than hot air.
Reasoning that we are at the point of no return on the way into a drawn out recession if not depression because politicians are only demonstrating helplessness while the global margin call would have required action since 2006, I stand by my opinion that Euroland is destined for surging monetary inflation in the near future.
The latest datapoint is a very remarkable one. While EU politicians keep on talking about a unitary solution to the banking debacle, the ECB quietly rumps up its money creation to Weimar style.
While TV would have offered me Madonna's divorce settlement and all details around, the more interesting information is to be found on the ECB's website
Just watch the chronological order and discover that the ECB will flood the market with any amount of new debt until a political situation will be found. The latter may take a lot longer due to the varying size of the EU banking debacle in its member states.
ECB president Jean-Claude was on tour de calm on Monday with a speech titled "The financial turbulence: Where do we stand?" At that stage he suggested more and more fresh Euros to come until politicians would find a solution to the crisis that begins to hurt the real economy almost overnight.
Trichet also suggested there will be more government intervention.
This plan has six dimensions: ensuring appropriate liquidity; facilitating the funding of banks through various means (guarantee, insurance or similar arrangements for new medium-term – up to five years – bank senior debt issuance); providing additional capital resources to financial institutions; recapitalisation of distressed banks; ensuring appropriate implementation of accounting rules; and enhancing cooperation among European countries.
Tuesday was filled with various governments reassuring savers that their money would be safe in the bank. That day European taxpayers were taking on a risk of potentially €2.3 TRILLION. Prove me wrong for €500 million up or down from that figure.

More Shots In The Back Of The Euro 
It does not matter anymore as the ECB will continue to print Euros without any shyness. They did not lunch for long. According to a press release the ECB announced more limitless funding, this time with the Swiss National Bank (SNB),
Each Monday, starting on 20 October 2008, the Eurosystem and the SNB will conduct EUR/CHF foreign exchange swaps providing Swiss francs against euro with a term of 7 days at a fixed price. The fixed price and the maximum amounts allotted by ECB and SNB will be announced before the operation.
Still the same day the ECB came out with more shots in the back of the Euro. Check the release for much more detail than the 3 main points of action:
  • The list of assets eligible as collateral in Eurosystem credit operations will be expanded as set out below, with this expansion remaining into force until the end of 2009.
  • As from the operation settling on 30 October 2008 and until the end of the first quarter in 2009, the provision of longer-term refinancing by the Eurosystem will be enhanced as set out below.
  • The Eurosystem will start offering US dollar liquidity also through foreign exchange swaps.
The details offer the expected: As long as you have any crap to offer as collateral, we will take it and give you unbacked Euros. As much as you want.
The threshold is very low and so are the haircuts to the securities the ECB will accept as collateral.
The Eurosystem will add the following instruments to the list of assets eligible as collateral in its credit operations:
  • Marketable debt instruments denominated in other currencies than the euro, namely the US dollar, the British pound and the Japanese yen, and issued in the euro area. These instruments will be subject to a uniform haircut add-on of 8%.
  • Euro-denominated syndicated credit claims governed by UK law.
  • Debt instruments issued by credit institutions, which are traded on the accepted non-regulated markets that are mentioned on the ECB website; this measure implies inter alia that certificates of deposits (CDs) will also be eligible when traded on one of these accepted non-regulated markets. All debt instruments issued by credit institutions, which are traded on the accepted non-regulated markets, will be subject to a 5% haircut add-on.
  • Subordinated debt instruments when they are protected by an acceptable guarantee as specified in section 6.3.2 of the General Documentation on Eurosystem monetary policy instruments and procedures. These instruments will be subject to a haircut add-on of 10%, with a further 5% valuation markdown in case of theoretical valuation.
  • Furthermore, the Eurosystem will lower the credit threshold for marketable and non-marketable assets from A- to BBB-, with the exception of asset-backed securities (ABS), and impose a haircut add-on of 5% on all assets rated BBB-.
All these measures spell I-n-f-l-a-t-i-o-n to me.

Desperate ECB Expands Liquidity By €310 Billion In 7-Day-Repo
The numbers back up the fear gripping credit markets. In order to keep the Eurozone banking system afloat, the ECB accepted all offers with a volume of €310 billion at its latest 7-day tender at the fixed rate of 3.75%.
Okay, in these days where TRILLIONS swarm in the thin air, a paltry €310 billion, basically a tad more €1,000 in future tax payments for every Euroland inhabitant, wont really make one scratch his head. 
But this figure certainly turns into a zombie robbing my sleep. The ECB has lent out "only" €445 billion toxic liquidity since the beginning of the crisis in August 2007.
While this may still sound tame in the face of a looming derivatives default, potentially worth almost $600 TRILLION, the ECB keeps the spigots wide open. Only on Thursday we saw a $170 billion 7-day repo while politicians were still talking about a common solution to the crisis.

Key Structural Deficit Of the Euro
These ongoing fixes may buy some time, but politicians run the imminent risk of skyrocketing monetary inflation if no plausible solution is brought forward in a few days. Markets partially expect this too, but what is a 5 basis point change in the LIBOR these days?
The Euro weakness also reflects the key structural deficit of the common currency. It has no treasury standing behind it. (And I would raise to arms if the EU would propose such a thing.) It is a fiat currency par excellence, backed by nothing than the diminishing belief that today €100 would buy you the same amount of services or goods in the future.
Eurozone inflation will probably bachtrack in October due to the crash in crude prices.
The spiral of fear is pre-programmed anyway already. Merchants are unwilling to lower prices in expectation of a resurge in commodity prices and employees are demanding wage raises in the high single digits.
Always eager to helicopter Euros around the world the ECB also entered into a "cooperation" with the Hungarian Central bank which is no Euro member.
I am confident we will see the ECB lending explode in the unknown world of TRILLIONS of new debt within a few months that may be everything but not the salvation before the sad end of capitalism that has gone bonkers in this millennium.
The next step will be surging government intervention.
After a wave of state guarantees that are anyway coming out of the pockets of taxpayers EU countries will hammer down new sets of regulation of the banking sector. This will come hand in hand with more nationalizations. Tiny Austria may even go so far as to expropriate bank share holders without the possibility of an appeal, the Austrian daily "Der Standard" reported on Wednesday.
Karl Marx must be having a good drink in heaven these days and I will soon come up with another post on the doubtful future of the Euro.

Bullion Shortage and Spot Prices Tell Two Different Stories

Monday, October 13, 2008

Having blogged earlier on a physical silver shortage and the drying up of gold bullion purchases, recent events in the precious metals markets justify an update that again arrives at the conclusion that last Friday's silver and gold price plunge on COMEX has pretty little to do with the actual physical investment demand for gold and silver. Tim Iacono had a good post with the headline "Gold prices getting fishier and fishier," that does away with the myth that the US mint faces unprecedented demand. I stumbled across several more reports that show the ongoing dichotomy between official spot or futures prices and premiums actually paid by investors, if they can get their coins or bars at all.

The British Evening Standard ran a story over the weekend that said, demand in Germany had grown 10-fold and dealers were not taking any more orders:
German gold dealers say demand has skyrocketed this past week to 10 times normal so no more orders can be taken for the foreseeable future.
"The demand exceeds our capacities by a great deal," said Heiko Ganss, head of precious metal company Pro Aurum.
"The requests cannot be satisfied right now," a dealer from the Düsseldorf WGZ Bank confirmed.
"Demand for gold as a conservative investment has risen dramatically," said stephan Henkel. "right now the demand is about 10 times as high as in normal times."
Gold deliveries now take between four and six weeks.
This was confirmed by the Berlin daily "Tagesspiegel," which reported in a very insightful article that German gold dealer Pro Aurum has closed its mail-order business due to demand never seen before. One reportedly has to wait four weeks to take delivery of one kilo gold bars.
Physically backed gold ETCs (Exchange Traded Commodities) see heydays as well, according to a story at investegate.
Physically-backed gold ETCs saw $93m of net inflows, equivalent to 106,000 ounces of gold, in the six business days up to October 6, the largest weekly increase during the past 10 weeks, while silver also saw net inflows.
Despite a fall in gold prices last week, the ETCs' total assets reached $4.5bn, equivalent to 5,340,000 ounces. So far this year the products have seen $992m in inflows, equivalent to 1,530,000 ounces, an increase of 30%.
ETFS Physical Silver experienced a net inflow over the six-day period of USD7m, an increase of 4% or 1,194,729 ounces. Over the past six weeks, the product's volume of silver has increased by 25% to 12.8 million ounces, the highest level since January 30, and its total assets to $141m.
The new gold rush has also taken grip of Dubai's gold market. According to a report from ameinfo,
We have a similar rush in the souks of Dubai. Gold coins are selling at the highest premiums to spot gold price in 30 years, and stocks are running out.
In silver the premium paid for bullion bars is up to 50% above the spot price as dealers are running low and demand remains very strong.
Vietnam saw gold rising strongly last Saturday too. From Vietnam News:
Domestic gold prices increased strongly here yesterday, rising by VND50,000 to between VND17.90 million and VND18.10 million a tael yesterday as the world share situation became more chaotic.
Nguyen Huu Dang, head of the business department of the Ha Noi-based Bao Tin Minh Chau Jewellery Co, said his shop was full of sellers because of the big profits.
Bloomberg fills in the gaps on the world map, reporting excessively strong demand in more places. In Australia,
The Perth Mint, producer of 10 percent of the world's bullion, doubled output in the past six months, joining a global push to boost production as investors seek protection from the credit crisis.
Perth Mint sold so-called Kangaroo and Nugget coins weighing a total of 62,630 ounces in the three months to Sept. 30, compared with 154,501 ounces for the 12 months to June 30, senior manager Bron Suchecki said in an interview from Perth, Australia yesterday, adding there's been a surge in "moms and dads'' buying over the counter in the past three months.
"It's reflecting a real breakdown in trust in financial products,'' Suchecki said at the mint. "People aren't thinking how do I grow my wealth' but 'how do I protect it."
The shortages don't stop there, reported Bloomberg. In Austria, Muenze Osterreich, producer of gold and silver philharmonics has added a third shift.
Muenze Oesterreich, which makes the world's second highest- selling gold coin, increased output of the Philharmonic almost fourfold and doubled production of gold bars in the past year, Vienna-based Marketing Director Kerry Tattersall said yesterday. The 800-year-old mint, located in a former Habsburg palace, has also added a third work shift to press more coins.
The US Mint announced already a week ago that it would expand its production after gold coins have been suspended from sale quite many times since one year.
Now can someone tell me why gold is always falling ahead of the US trading session? Dan Norcini offers daily insights, alleging gold price manipulation for quite some time. Check out his daily commentary at

ALERT - Central Banks Go Insane, Offer Unlimited $ Refinancing

If it were possible to pinpoint the beginning of hyper inflation in the Western world, this Monday October 13 stands good chances to become a historical milestone in hindsight.
Investors woke up to a joint announcement of the major central banks that said that the Fed, the ECB, the BoE and the SNB would provide unlimited $ refinancing.
The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed interest rate, set in advance of each operation. Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures.
By now the statement,
Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets.
raises more fears instead of the calm they are meant to establish in financial markets.

Weimar Comes Alive Again
The new wave of unlimited cash may prevent a seize up of credit markets, but this will only temporarily alleviate the symptoms but not the root of this crisis which was too easy money in the first place.
Weimar is alive again. In 1923 the German government trumpeted similar news. Lacking computers then, Germany announced that it had installed a total of 23 money printing presses all over the country which would print money 24/7.
What was then a German phenomenon - that ultimately led to the rise of Adolf Hitler - will now happen in a global dimension. There are more parallels. The Nazis organized a huge rearmament and public works program to bring down unemployment rates exceeding 30%. The USA resembles this move with its limitless spending on its military apparatus that has grown exponentially in this millennium.
In the battle to maintain unbacked Federal Reserve Notes (FRNs) as the world reserve currency the Fed pushes more of its freshly digitized money into the market with the welcome side effect of gaining forex reserves that can be used at a later stage to prop up the dollar once fundamentals set in again. And the fundamentals tell us that the USA is the most indebted country in the world sliding into a severe recession, if not depression. Any dollar strength mirrors only the structural problems in the Eurozone, where easy money has led to the same problems as in the US banking sector.

This Week May Bring Another €400 Billion Bill for Germans

Sunday, October 12, 2008

Eurozone politicians want to prepare a concerted multi-billion bank rescue package that may potentially saddle each of the 303 million Eurozone inhabitants with a 4-digit bailout bill. According to German TV reports politicians will present an umbrella package costing €400 billion in order to stabilize Germany's banking sector on Monday. German chancellor Angela Merkel said it was of utmost importance to find a way that gives the Eurozone's nations flexibility in order to stabilize their banks.
In her case this translates into a politically hot €4,870 for each German. France is expected to present its rescue package in sync with Germany and other Eurozone members will probably follow.
Trainwreck In Disguise of an Ambulance
If it will take €400 billion only to rescue the German banking sector, the tab for this Eurozone crisis will soon need a TRILLION-digit. Frances "package" won't come much dearer and now we have only talked about two of the comparatively better economies on the old continent.
It can be safely said that all other Euro members face problems of the same dimension that may be too big to write them off without a systemic disruption.
And the bill has been growing exponentially. 14 months earlier the European Central Bank (ECB) had pumped €47.5 billion "liquidity" into the system in order to prevent a seize up. By now it takes more than five times of that in refinancing to keep the banking machine stuttering along, creating more inflation on the way.
A temporary abatement of lower inflation figures in line with the retracement of crude prices will soon be hailed as proof that the ECB's toxic medicine works.
It won't matter for Eurozone citizens in the end. Fiscal irresponsibility as demonstrated by governments willing to follow advice that will ultimately lead to more inflation in the long run.
Europeans still seem to buy the "guarantees" on savings by their governments, obviously not realizing that it is themselves who will stand up for these guarantees with their future tax services. This is not a rescue, this is a trainwreck in the disguise of an ambulance.

Coming Soon: The 600 Trillion Derivatives Emergency Meeting

Seeing a lot of Google queries regarding the size of the derivatives market landing at an older post of this blog, here is an update with the latest official figures (pdf) from the Bank for International Settlements (BIS.)
Hold your breath, as we are not anymore talking paltry billions but TRILLIONS of whichever fiat currency.
Current emergency meetings on banks and markets are still only in the stage where politicians and central bankers are bickering over how to create a few more hundred billions Euros and FRNs. But toxic MBS pale in comparison to the mushrooming growth of the derivatives market.
According to figures released in the quarterly review of the BIS (pp A103) in September the total notional amount of outstanding derivatives in all categories rose 15% to a mindboggling
as of December 2007.
Two thirds of contracts by volume or $393 TRILLION fell into the category of interest rate derivatives.
Credit Default Swaps had a notional volume of $58 TRILLION, seeing the sharpest relative increase after a volume of $43 TRILLION a year earlier.
Currency derivatives reached a volume of $56 TRILLION.
Oh, and every grand balance sheet comes with a trash can. Unallocated derivatives with a notional amount of $71 TRILLION are looming over the heads of the disintegrating investment community too.
However You Look At It, This Is an Accident Waiting To Happen
Don't lose your sleep because of these numbers that KO my desktop calculator. In an ideal world - in which we are not - long and short derivatives would net out each other, leaving only a fraction of risk.
The BIS tries to assess this net risk with a total of $14.5 TRILLION (2006: 11.1 TRILLION) in gross market value for all contracts but comes up with a second figure. The so called Gross Credit Exposure appears almost moderate at $3.256 TRILLION after $2.672 TRILLION a year earlier.
Even when taking the lowest of these figures shudders run down my spine. All emergency talks have so far focused on a few hundred billions in fiat currencies, but the current nervousness demonstrated by hectic talks of finance ministers and central bankers all over the globe should give everybody a vague idea that something here may blow up any day. This pool of so far silent derivatives without a major bust can come to life any day with the failure of a multinational financial firm.
The BIS review is a good way to grasp the dimensions long term monetary expansion has brought upon us. A net risk of $14 TRILLION compares with the annual GDP of the USA. Nobody, absolutely nobody can afford this tab in the case of an unorderly unwinding of this market that is roughly 12 times the size of the global economy. I conclude a lot more paper promises will be burnt in the coming derivatives tsunami. As a reminder, most of these contracts have been moved off balance sheets into under capitalized subsidiaries that profited from the good rating of the parent company. But in case of a default it is this nasty, nasty huge notional amount that becomes a liability.
As the vast majority of these contracts have no market, failure will come in the form of counterparty risk. This makes all the current emergency meeting a bit more understandable if politicians are already aware of the biggest bubble that may find no other way of deflation than a sudden burst. I base my sense of urgency on the rapid growth of the net risk in only one year, rising a stunning 30% at a time when the first signs of the credit crunch appeared.
German chancellor Angela Merkel said ahead of an emergency meeting with French president Nicolas Sarkozy in a TV interview that she would present a rescue package for German banks on Monday. This is also expected from several other European countries. Italian president Silvio Berlusconi went so far as to suggest a concerted stock exchange holiday. It would fit the other crooked nails in the coffin of free markets.

Worldwide More Pledges To Print More Money

Saturday, October 11, 2008

Rushing from one emergency meeting to the next, global leaders offer a consternating picture of cluelessness while trying to apply an interventionist expansive monetary policy that contravenes all free market principles.
Whatever the problem has been in the recent past, governments and central banks chose the easiest way by creating more fiat money out of thin air.
But the ongoing growth in money supply will turn into an unbearable burden for taxpayers in the medium term who are coerced to pay for the financial mess in what will become the next global trend: A train wreck called fiscal policy in support of the banking industry that may run into a head-on collision with future national outlays like pensions and medical care.
It is outrageous when G7 finance chiefs get together only to indirectly announce more toxic liquidity, negating their own failures by letting money supply run wild via cheap credit in the past years.
"The current situation calls for urgent and exceptional action,'' the finance ministers and central bankers said in a statement after talks in Washington yesterday. They pledged to "take all necessary steps to unfreeze credit and money markets'' without detailing how that would be accomplished.
US taxpayers may soon get confronted with the doubtful joy of nationalization with their money as the imperium in decline plans to take direkt stakes in banks. Don't get angry now, treasury secretary Hank Paulson has tabled a lot of emergency actions by now that have failed to find support on Capitol Hill. 
This is also documented by the recent update on the President's Working Group, aka Plunge Protection Team, which lamely states that some progress has been made since March. 
In Europe taxpayers may "only" be required to pick up the tab while Germany's chancellor Angela Merkel sounded happy when saying her country would not take direct stakes in banks, but the Eurozone would apply the same toolbox of policies, Bloomberg reported.
With all respect to the German chancellor, somebody should remind her, that this toolbox of policies has failed to reduce the stress in credit markets in the past 15 months.

ECB Pumps $100 Billion In Four-Day Repo
Checking on tne open market operations of the ECB, a four-day repo with a volume of $100 billion tells me volumes on how bad the situation is especially for European banks. I have lost track of the steady expansion of the FRN swaplines, but including this mega-giga repo the ECB has pumped some $265 billion in the Eurozone banking system.

Swaplines Bring The USA Forex Reserves
Expect further growth of these swaplines as this is also a most convenient way for the Federal Reserve to aquire forex reserves which can be used to support FRNs on their next downleg against the Euro.
I cannot pinpoint it, but it appears as if European banks are in such trouble that the meeting of Eurozone officials in Paris this Sunday has to come up with a statement that will prevent another wild selling wave in stock markets.
It is certainly the easier task to observe strains in the banking industry than to find a solution for it that will not hurt.
So far politicians and central bankers are trying a cure that has not resolved anything, but has blown up balance sheets even further. Like a junkie in denial the Eurozone tries to end its addiction to cheap money with ever more of it. We know this cannot work.
But other steps, like letting the market sort it out by itself, are highly feared as this would immediately lead to a dramatic economic contraction when credit, the lifeblood of the economy, will dry up completely.
As central bankers and politicians will not be able to come with a thoughtful solution to the crash in progress, expect more market turmoil this week. By now you can buy level 100 calls on the volatility index which ramped up a new record at 69.95 on Friday.
The global margin call and the resulting forced squaring of positions do not leave much room to the upside. When stocks are still in a free fall although crude oil prices have almost halved again there may be more of the same downside momentum to come. This crisis is far from over.

Monetary Madness

Monday, October 06, 2008

Financial news have been coming fast and furious in the past four weeks, taking the nationalization of Frannie as a starting point for the worst turmoil any living market participant has experienced in his/her life. What we have seen since can only be called monetary madness where central banks and governments ultimately saddle more than one generation of citizens with debts for the rescue of a financial system that ultimately cannot be successful by generating still more debt.
It has become almost impossible to follow all inflationary measures disguised as "liquefying operations" by monetary authorities. At the same time governments begin to blow up future inflation expectations with their unlimited guarantees of savings deposits that have a good possibility of blowing up in their face.
Socialism for the haves has become commonplace almost overnight in Europe. After Ireland and Greece governments in Germany, Austria, Denmark, Sweden and the UK followed suit in a move to reassure savers that their money is safe in a bank. We can be confident to hear similar announcements from more countries in the near future.
Not even bankers agree in private that this is the case, being grateful that the non-financial world is still not aware of the debt Himalaya that starts crashing upon the world and has not yet led to a massive run on continental European banks which are bleeding on all ends.
Central banks meanwhile keep trumping themselves who will create more money without a correspondent value. But the pinstriped inflationistas have only a single strong card left in their hands. It is the card of public ignorance and the blessing that nobody can remember the last periods of hyper inflation.
Crisis Engulfing the Broader Economy
This will change as soon as the public will see that the next bank run will not be the last one. At this point of time the banking crisis will have become toxic for the broad economy.
Anything real estate related, insurance companies and the leisure sector will feel the pinch next, either from hard to get credit or falling bond prices or the disappearance of disposable income due to rising prices. Do not mistake the current correction in commodities as a bear market. It is rather another result of the global margin call taking place right now.
Climbing spreads in the fixed income markets show the dichotomy between market reality and the wishful thinking of central bankers who increasingly lose power over their only tool, establishing leading interest rates for the short end of the market. The game can go on as bankers and investors are so foolish to accept negative real rates. This behavior will stop soon, once the tightening continues. And I see no step so far that is designed to restore confidence in a market where participants would like to adapt accounting rules to converge with their wishful thinking.
Sorry, the signs have been on the wall for at least four years. Money supply and debts first grew in the USA and the EU and this dangerous policy was followed by countries at such diverse stages of development like China, India and Russia which are all fighting the same inflation problem by now.
The avalanche of cheap credit pumped out by central banks does not reach the broad economy and consumers in Europe anymore as banks scramble to improve their balance sheets. This may become a roadblock for the ailing economy, already limping ahead at growth rates that fall within the statistical margins of error.
As all measures since August 2007 have not helped to alleviate the crisis we probably have to get ready for a very brute and nasty crash that will do what a crisis is here for: to cleanse out the weak part of the economy and start again with a clean plate. I know this euphemism does no justice to the economic contraction which will cost many their existence the way they have known it. But no authority in the world has ever been able to prevent a depression by decree or by printing money in limitless amounts. It only fuelled inflation further, without any historical exception. Don't think it will be different this time. All economic and financial indicators have long surpassed the toxic levels that led to the 1930s depression. Oh, yes, one thing will be different: This time it will be global.

Greece Guarantees All Saving Deposits

Friday, October 03, 2008

Europe's banking crisis gathers steam with every new day. On Friday Greece announced that it would like Ireland guarantee all savings deposits regardless of their size.
According to The Telegraph,
Greek officials said the state would cover "all bank deposits, whatever the amount." The move follows the dramatic decision by Ireland this week to guarantee the deposits and debts of its six biggest lenders in the most sweeping bank bail-out since the credit crisis began.
"The whole of Europe will have to do same thing, otherwise Europe will have a split banking system," said Hans Redeker, currency chief at BNP Paribas. British banks are already facing a haemorrhage of deposits to Irish banks that now enjoy the AAA sovereign rating of the Irish state.
Greece has so far escaped attention as the financial storm breaks over Europe, but the economy is deeply unbalanced. A torrid credit boom has been allowed to run unchecked, leading to a current account deficit of 15pc of GDP -- the highest in the eurozone.
While property losses are modest so far, the Greek banks have run into trouble rolling over short-term debts after the near total closure of Europe's capital markets. The liabilities of the Greek banks are roughly €320bn euros.
The paper warns of more havoc down the road.
Governments across Eastern Europe were forced to issue statements on Thursday assuring depositors that their banks were safe. Traders said Ukraine is on the brink of a currency crisis.
Individual measures by national governments ahead of a crisis meeting of the leaders of Germany, Italy and the UK in Paris are a strong sign that French president Nicolas Sarkozy's initiative for a pan-European bailout fund will be a stillbirth as it is heavily opposed by Germany.
In Austria industrialists have also raised their voice in the interest of a limitless guarantee on savings. The plan is unlikely to be realized because Austrian banks are split into several sectors which already guarantee unlimited deposits within the respective sector.

Wikinvest Wire