it get's more ugly

Last week
Well Monday started with weak stock markets. Swiss Reinsurance Co. reported a $878 million after-tax loss on Monday because of its exposure to the subprime mortgage crisis, sending shares of the world's largest reinsurer plummeting. Fannie and Freddie followed; Shares of Fannie Mae and Freddie Mac fell sharply Monday following a report that the mortgage finance companies are more vulnerable than expected to anxiety about rising mortgage defaults. These news and others certainly did not help the stock markets to stay in positive territory. Well anyway the PPT was hard on work again and although bad information hit the tapes, the markets recovered as usual on Tuesday. Wednesday once again was not such a good day but on Friday, after the US markets have been closed for Thanksgiving, the PPT worked full steam and achieved that the Dow recovered 4/5 of Wednesday lost. AS ALWAYS, after a messy and sharp downturn (with the Dow Theorists now calling for a bear market as both the DOW and Transport averages took out their August lows), the DOW rockets right back up for no apparent reason, It indeed seems to be a though Sisyphus work.


Credits
Received from a friend and musings reader
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This is perhaps the best 7 minute explanation of the sub prime mess I have ever come across. It is comedy, none the less I would bet a lot that you will enjoy it.
http://www.dailyreckoning.us/blog/?p=619
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Well that was the funny side of the mess. As you, dear reader, certainly recall I have been warning for month that the problem is not solved at all and that there is more to be expected. The ugly news pieces are certainly popping up more and more. Although we now already know about substantial amounts to be written down, please keep in mind that we are still only at the beginning. So far the French banks have not yet announced to have to write down anything. However on Friday on the Financial Times there was a notice that the French are considering a SIV Superfund to aid banks hurt by liquidity crunch. The leading banks are working on putting together a fund to buy asset-backet securities to ensure liquidity for asset management funds. Well I think it is a good guess that the frenchies do hold considerable amounts of the toxic trash of papers related to the US mortgage sector. A few months ago, I came already across the information that apparently the French government agreed that the French banks can hide their losses. This planned superfund (SIV) seems to be a vehicle to do that. Apart from the French I do expect the Spanish Banks to hold substantial amounts of the same worthless papers too (please keep in mind that Spain has it's own local housing bubble and that the Spanish banks are heavily exposed to their local sector). From England we got a few bits of information (some of it really ugly as for example Northern Rock which was not so rock solid as the name suggest) but I guess we did not hear all yet. Well dear reader we certainly will hear soon of more and more companies and entities holding worthless papers that have to be written down. Not only the Insurance companies are starting to feel the problem but any kind of investor holding these papers. For example several small townships in northern Norway went along with a securities firm's advice and invested as much as NOK 4 billion in complicated American commercial paper sold by Citibank. They now risk losing it all. http://www.aftenposten.no/english/business/article2111026.ece
Well the “old” risk calculation models definitely did not work well in this crisis. Maybe the use of common sense would have been much more intelligent than to rely on computer models. Common sense might have, at least I hope, led some people to look back more than the last 25 years. If one studies the Kondratieff cycles and past crisis such as the one in 1929 and 1907 the conclusion of risk and therefore the calculation of risk (including the program input into computers) might have been different.

Fixed Income
Last weeks Treasury data revealed that apart from China and Japan, who have been sellers of Treasuries for the last 3 months in a row, further countries such as the Caribbean banking centers, Luxembourg, Hong Kong, Korea, Germany, Singapore, Mexico, Switzerland, Turkey, Canada, the Netherlands, Sweden, France, Russia, Ireland and Israel were all net sellers of Treasuries. The question is of course who (or which entity) are the buyers?


US Dollar
From Agence France-Pressevia Yahoo NewsFriday, November 16, 2007http://news.yahoo.com/s/afp/20071116/wl_mideast_afp/oilopecsummitiransaudidollar_071116195012RIYADH, Saudi Arabia -- A blunder by OPEC on Friday exposed a disagreement between Saudi Arabia and Iran about the falling dollar when a private meeting of ministers was broadcast to journalists by mistake.
In an embarrassing oversight, the private meeting of foreign, finance and oil ministers from the 12 members of the Organisation of Petroleum Exporting Countries was broadcast for 30 minutes on closed-circuit television in the media room.
Iran's Foreign Minister Manouchehr Mottaki said in a written proposal that a final declaration by OPEC leaders, who arrive here Saturday for a two-day summit, should express concern by member states over the fall of the US dollar.
Reacting to the request, Saudi Foreign Minister Prince Saud al-Faisal Saudi Arabia's foreign minister warned that mentioning the falling dollar could lead to the "collapse" of the US currency."There are media people outside waiting to catch this point and they will add to it (exaggerate) and we may find that the dollar collapses," he said.
Member states should express concern over "the continued depreciation of the US dollar" in the final declaration, Mottaki said.
US foe Iran was joined in its attempt to put the falling dollar on the agenda by another of Washington's antagonisers, Venezuela.
Prince Saud, who was chairing the meeting, described the Iranian proposal as "sensitive.""This is a sensitive issue. It will cause the dollar to drop further, thus complicating the problems we are facing from the dollar's fall," Prince Saud said.
The fall of the US dollar, which has declined by about 15 percent in 12 months, has affected the revenues of OPEC members because most of them price and sell their oil exports in the US currency.
The remarkable insight into the inner workings of the Organisation of Petroleum Exporting Countries, which produces 40 percent of world oil, ended when an official emerged to switch off the television.
Ironically, Iran has moved away from the dollar and now prices nearly all of its exports in local currency, meaning most of its revenues are in euros and yen, a source in the Iranian delegation told AFP earlier.
He said that this had saved the country about 10 billion dollars (14 billion euros) this year.He also said that OPEC was unlikely to make a statement on the dollar because the organisation believed the issue of pricing oil was a sovereign issue that should be dealt with individually by members.
The summit, which begins on Saturday, is only the third gathering of OPEC head of states in the organisation's 47-year history.The 12-member organisation, dominated by US ally Saudi Arabia, produces about 40 percent of world oil and attempts to regulate production of its members through a quota system.

Well the oil producing countries might not be very happy holding USD and they certainly do want to change their holdings into something else. This is medium to long term certainly not positive for the USD. On the other hand at this level intervention in favor of the USD can be/should be expected anytime. To start with, the central banks try to manage the exchange rate by pure messages. In that sense one of the governors of the FED mentioned that the FED possibly will not make any further rate cuts, while a governor of the Bank of England mentioned that it seems that they will have to make further rate cuts. The objective of these messages is clearly to support the USD. If these messages will not work out, we possibly can expect some direct interventions.


Inflation
According to http://www.shadowstats.com/ (again I do recommend to subscribe,) the inflation is adjusted to pre-Clinton (1990) methodology, annual inflation was about 6.9%, up from 6.1% in September, while the SGS-Alternate Consumer Inflation Measure (1980 methodology) showed October's annual inflation at roughly 11.1%, versus 10.4% in September.

Yes dear reader real inflation according to 1980 methodology is at 11.1% and has been above the 8% (or slightly below) since the year 1997. That means your mighty USD have lost considerably of it's purchasing power. Basically using a rather rudimentary calculation one (-1-) 1997 USD has now the purchasing power of approximately 38 cents. That means you can today buy approximately 1/3 of what you were able to purchase in 1997.
How can the difference be explained? Well there are basically 4 different ways to make look the real number much nicer these are:

• Hedonic regression: actual prices of consumer goods are revised downwards for quality-adjusted improvements. For example the price change associated with a more technologically advanced radio in your car. The new radio has now 24 buttoms to fix radio stations. The previous models had only 12. According to BLS this is an improvement in quality and therefore, although your car in fact might be a bit more expensive, according to them (BLS) the quality improvement made your new car less expensive. Never mind that you can listen only to one station and most people are not interested in fixing 24 radio stations anyway.
• Substitution: when the price of a higher quality good rises significantly, the BLS assumes that consumers switch to lower-priced alternatives (eating hamburgers instead of steak). In that sense if steak prices have gone up considerably but hamburger not, the BLS just looks at the increase in price of hamburgers and not at the price of steak instead. Of course the reduction of quality of live is not taken into consideration at all.
• Geometric weightings: the arithmetic weighting of CPI components was changed to geometric, resulting in a lower impact from components rising in price and a higher impact from components falling in price
• Intervention: used to moderate swings in the prices of goods subject to seasonal swings. While prices rises are rarely fully reflected, as John Williams notes, “declining prices sure do” John Williams estimates that the changes to the calculation of the CPI have contributed to a systematic understatement of the true inflation rate by around 3% vs the BLS methodology prior to the early 1990s and around 7% vs the methodology before the adjustments in the early 1980s.
  

Gold
John Williams from shadowstats.com as well mentions that the gold price adjusted to the official October 2007 CPI dollars, would be at USD 2,283 oz. (taking the basis of a gold price of USD 850 in January 1980) and that the real gold price would be at USD 6,030 per oz. in terms of October 2007 SGS-Alternate CPI Dollars (the real inflation according to 1980 methodology). That means even if we would take a basis of USD 200 in 1980 (which is a lot less than the top price) we would still talk about a price of far above USD 2,000 per oz. inflation adjusted. Please take note that in 6000 years history the gold price has always adjusted to inflation over a certain period. With a history of 6000 years, I have no doubt that the price of gold will adapt to inflation again and that therefore we will see a much higher price over the coming months.


From Kenneth J. Gerbino: “If you don’t trust gold, do you trust the logic of taking a beautiful pine tree, worth about USD 4,000 to USD 5,000, cutting it up, turning it into pulp then paper, putting some ink on it and then calling it one billion dollars?”

Ever wondered why the PPT tries to keep the Gold price down? From
http://www.gata.org/files/RedburnPartnersGoldReport_11-12-2007.pdf
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From the perspective of governments, and especially the US Government, since the US dollar is the world’s reserve currency and gold is priced in dollars, a low gold price serves several important purposes:
A stronger USD, making it:

• More attractive as the world’s reserve currency and:
• Easier to finance huge US deficits, leading to:
• Lower US interest rates, which means:
• Higher US bond, stock and real estate prices.

A rising gold price is, therefore a challenge to the USD, US monetary policy and the condition of the US economy.
A free market, a significant rise in the gold price implies that other stores of value are being avoided. It acts as a warning that the purchasing power of fiat currencies is being debased by governments and central banks and that the risk of economic crisis are increasing. This is exactly the message being sent by the gold price now.
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Commodities

Please have a look at the following chart. Do commodities seem expensive?

Chart commodities adjusted to inflation 200 years


Copper
Copper is in a correction phase. However to me it seems that this is rather due to the fear of the slowing housing sector in the US than due to a reduction in demand. First of all China still has many infrastructure projects to complete, secondly the huge amount of rural population moving to the cities will keep Chinas demand for industrial metals high. Please have a look at below chart. On this chart we clearly can see that physical stockpiles of copper still are low (although increased a bit lately). Of course the possibility of a worldwide recession does exist. However for the moment being I do not yet believe that this is the beginning of the worldwide recession. Anyway as copper is going down in price, I certainly would not yet invest in copper and wait to see how the whole thing develops. Over the coming days I will check these data for the other industrial metals as well and I intend to give you feedback in my next post.





Hedge Funds
Goldman Sachs Group Inc.'s (GS) Global Alpha hedge fund may show a $6 billion asset loss this year -- a 60% decline -- due to trades that went awry and clients withdrawals, Bloomberg news reported, citing two investors. Global Alpha started the year with more than $10 billion in assets, according to the report.
The star is sinking it seems!!!

The issue with Hedge Funds is that simply speaking there are too many of them. 20 years ago the few existing hedge funds were able to find inefficiencies in the markets and by betting (investing) against these inefficiencies they were able to eliminate them. Today with over 8,000 hedge funds, they are rather creating inefficiencies. Why? Because many of them are chasing the same trades and thus moving prices into a certain direction. Once all of them want to take profits (or limit/stop losses) and therefore do the closing trade (sell, close etc) the move the price into the other direction. The pure size of these trades make move the markets and with these moves, as there are no other buyers or sellers, they in fact create the inefficiencies.

Derivatives
Global Derivatives Market Expands to $516 Trillion.
Nov. 22 (Bloomberg) -- The market for derivatives grew at the fastest pace in at least nine years to $516 trillion in the first half of 2007, the Bank for International Settlements said.
Credit-default swaps, contracts designed to protect investors against default and used to speculate on credit quality, led the increase, expanding 49 percent to cover a notional $43 trillion of debt in the six months ended June 30, the BIS said in a report published late yesterday.
Derivatives of debt, currencies, commodities, stocks and interest rates rose 25 percent from the previous six months, the biggest jump since the Basel, Switzerland-based bank began compiling the data. Investors have been turning to credit derivatives as a way to speculate on a growing risk of defaults amid record U.S. mortgage foreclosures
The casino is growing!!!
http://www.bloomberg.com/apps/news?pid=20601087&sid=a58EF32GpHeg&refer=home


Peak Oil
Please find below the conclusions of M Payne who attended the ASPO Houston conference a month ago

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My observations and comments:

• The peak in oil production might have occurred in late 2005, and most in this group believe it will certainly happen prior to 2011 - 2012. If it hasn't occurred, my bet would be 2008, as I have believed since 2001 or so.
• It sure looks like Saudi has produced about half of its recoverable oil, meaning it is at or near peak, in turn meaning the world is at or near peak.
• Cantarell (second largest field in the world, in Mexico) peaked in 2004 as I previously communicated to you, and is down from 2 MMBO/D (late 2005) to 1.6 MMBO/D today. It is on a trajectory near to the "worst case" scenario, as described by Pemex in early 2005, and later confirmed by the WSJ.
• Oil Export Withholding (Hirsch) seems quite likely, and was a new one to me. Means things will happen even faster.
• Jeffrey Brown's "Export Land Model" is similar, but is a “physics” rather than an economic/geopolitical phenomenon. Namely, when consumption in exporting nations is increasing in a low, but compounding fashion (as it is), and production begins decreasing in a compounding fashion, then those nations soon have NONE to export - much sooner than if they hadn't been growing their consumption. To wit: Indonesia, UK - both exporters until very recently.
• GDP will drop about like the oil rate will decline - and continuously, year over year. (Hirsch)
• Rationing of gas and diesel are in our near (0 - 3 years) future.
• Inflation is far understated, and will rear its head soon. And at a time when the economy is deteriorating.
• There could be a series of "head fakes", ie prices drop for a time, due to new Rockies Express pipeline, LNG, Independence Hub online - or due to a rapid run-up in price causing demand destruction (for a short while) (Petrie)
• There is no simplistic "smoking gun, no reason" for Peak Oil, hence the public and the media can't "get it". So, the politicians won’t get it. (Whipple)
  Not yet a critical mass to move people and politicians.(Whipple)
  Behavior is not likely to change until there is a pronounced shortage at the pumps, hoarding.(Whipple)
• Politicians, in general have a "Don't have enough? Well, just get more." attitude.
  Although not related to Peak Oil, many minerals are now in short supply, controlled by foreign govts, either in our country or theirs. (Matthews)
• Still no battery or electricity storage solution for plug-in hybrids or pure electric vehicles
  Please read his blog with more information:
  http://peakopps.blogspot.com/2007/11/aspo-1007-mps-comments.html

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Cartoon of the week

http://www.time.com/time/cartoonsoftheweek/0,29489,1687200_1490578,00.html

A final remark:

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