For all readers who prefer to read my Spanish version, please click on http://themusingsoffritz-espanol.blogspot.com/ or click on the link (links to my other blogs) on the right hand side
History shows us that serious bubbles (eg South Sea Bubble) ended with riots. How long will it take until the American people will be on the street? Remember Katrina? Scenes seen on TV might repeat sooner than later. Well dear reader the actual crisis is not over at all that means in my opinion that there is more to come; to me it will not be a surprise to hear sometime in the future (possibly near future) of Americans rioting because of the economic situation. Some fiction movies might become non-fiction over the coming months.
FED
Well dear reader the FED delivered almost what was expected. The cut of 75 bps helped the stock market, which went up 420 points after the cut. But wait, for how many days did the market go up? Do you remember for how many days the market went up after the last cuts? How long did it take until the down trend went on?
Well dear reader, this is, as you already know, one of the ways the market is managed. The FED bought itself some time. Time bought at a very high and certainly expensive price. Has anyone wondered what’s going to happen once the FED is at 0.25% or even 0%? Without much manipulation ammunition left, if any. Well they still have some other ways, like increasing the output of their money printing presses. But, isn’t that more of the same? My question is, how much time is really bought with these measures? Well my guess is as good as any ones guess. However trying to find out what’s going to happen, I think one should look at similar situation in the past. As far as I know neither the South Sea Bubble nor the Weimarer Republic nor the Tulip bubble or any similar situations did end well. Well, dear reader I am ready to learn new things in that sense I am open to the possibility that history might be different this time. Although I still have my serious doubts, I truly hope I am wrong with my assumption.
VISA IPO
Yes dear reader VISA (credit cards) had an IPO this week. The IPO was a tremendous success. The shares opened considerably higher the first trading day. What was the reason for the success? Well investors, who missed the Master Card IPO and their success, thought that they couldn’t miss this opportunity. Well those who are in and sell fast with profit will do well, those who do not sell on time will possibly be in for a surprise rather than success. With all the credit mess of which we saw only a few bits so far, I suppose it is just a question of time until the credit card companies will be the next casualties.
Next crisis Credit Default Swaps
As Bear Stearns headed toward its fire sale to JPMorgan Chase last weekend, the cost of protecting its debt, through an instrument called a credit default swap, began to rise rapidly as investors feared that Bear would not be good for the money it promised on its bonds. Not familiar with credit default swaps? Well, we didn't know much about collateralized debt obligations (CDOs) either — until they began to undermine the economy. Credit default swaps, once an obscure financial instrument for banks and bondholders, could soon become the eye of the credit hurricane. Fun, huh?
Please read on by copying and paste the following link
http://www.time.com/time/business/article/0,8599,1723152,00.html?xid=rss-business
Bear Stearns
Alf Field
17 Mar, 2008
The bail out of Bear Sterns has validated all the worst fears and forecasts expressed in these newsletters over the past few years. The Fed has once again verified that it will create whatever new liquidity is required to prevent any particular crisis from developing into a deflationary debt implosion.
The bail out was undertaken not because Bear Stearns was "too big to fail". It was done because of something called "inter-connectivity".
What does this mean? It is Fed-speak for concern about the $600 Trillion notional value of derivatives outstanding, with just about every bank in the world participating to greater or lesser extent. By far the biggest player in the derivatives market is J P Morgan.
The problem with derivatives is that these are individual transactions between 2 or more parties. Often the transactions are arbitraged onwards to several other players. Everyone in the chain relies on all the other parties to meet their obligations. If one party in the chain goes bankrupt, it can cause a domino like collapse of all the other parties in the chain if the bankrupt party is a large player in derivatives. They are all "inter-connected".
Bear Stearns is known to be a big player in the derivative markets and must have been a major counter party to many transactions with JP Morgan, given Morgan's huge derivative positions. Hence Bear Stearns had to be rescued because of "inter-connectivity"; to prevent a melt down in the derivative markets. It can hardly be a coincidence that the bail out was routed through J P Morgan.
Let us be clear about where this will end. It will end with the Fed and/or the US Government owning or guaranteeing all the bad debts and losses from all sources in order to preserve the existing system. It has serious implications for the value of the US Dollar, the international monetary system and for inflation. The vast quantity of new liquidity that needs to be created will almost certainly result in runaway inflation.
Morgan Adds to Derivatives Muscle
By Serena Ng and David Reilly
The Wall Street Journal
Wednesday, March 19, 2008
With J.P. Morgan Chase & Co.'s rescue of Bear Stearns Cos., a behemoth in the complex world of derivatives trading has become even bigger, and the business is now more concentrated.
J.P. Morgan has a derivatives portfolio that is the largest by far among U.S. commercial banks. At the end of last year, its portfolio hit $77 trillion in "notional value," which is the value of the assets underlying these contracts, according to its regulatory filings.
The company's positions were more than twice as large as those of Citigroup Inc. and Bank of America Corp., according to data from the Office of the Comptroller of the Currency. They run the range from straightforward stock futures contracts to interest-rate swaps and more complex agreements with individual trading partners.
Analysts say J.P. Morgan's large position in the derivatives markets meant it had an interest in seeing Bear Stearns's problems sorted in an orderly way, because Bear is another big derivatives player. Bear's failure might have weakened the entire market.
Now the planned acquisition of Bear means the risks that derivatives are meant to disperse may be getting more concentrated among fewer players. J.P. Morgan's influence in the market has risen because it is now standing behind Bear's derivatives book.
"'Many pathways through this maze of derivatives lead back to J.P. Morgan," said Martin Weiss, president of Weiss Research, an investment-research firm in Jupiter, Fla. "The domino effect of a major firm like Bear defaulting on its derivative transactions may have hurt other counterparties in the marketplace, many of which trade with J.P. Morgan."
According to its regulatory filings, Bear had derivatives covering notional amounts of $13.4 trillion at the end of November. Around $1.85 trillion of these were in futures and options contracts that trade on exchanges. Nearly $11 trillion were more complex agreements with individual parties.
In the fast-growing credit derivatives market, the 10 biggest players were parties to nearly 90% of the volume of contracts traded in 2006, according to a survey last year by Fitch Ratings. J.P. Morgan was ranked third. Bear was ranked No. 9.
While most investors are more familiar with stock and bond markets, the world of derivatives linked to debt, interest rates, and currencies is far larger and more opaque.
Some derivatives, such as popular futures and options contracts, trade on organized markets such as the Chicago Mercantile Exchange. The vast majority trade directly between big banks and financial institutions in the over-the-counter market.
Customers in that market, which can range from companies looking to protect against swings in currencies to banks betting on the direction of interest rates, deal either directly with each other, or through intermediaries called interdealer brokers.
The market is vital to the functioning of companies and the financial system. The total amount of interest-rate, currency, and credit derivatives outstanding at the end of 2007 was about a notional $400 trillion, the International Swaps and Derivatives Association says.
Eye-popping notional amounts can be somewhat deceptive. They represent the total value of the underlying securities affected by a contract, although actual contract values could be a fraction of that. J.P. Morgan, for example, said in its regulatory filings that while its total derivative notional amounts were $77 trillion, what it is owed on these contracts is 0.1% of that, or $77 billion.
Kristin Lemkau, a J.P. Morgan spokeswoman, said the bank didn't feel overly exposed to Bear before the deal. "We are comfortable with the risks we are taking in acquiring Bear at the price we paid," she said.
Policy makers are deeply worried about the threat of a big player in these markets failing, which could cause problems for many of its trading partners.
Sunday night, in unveiling its acquisition of Bear, J.P. Morgan said it would immediately guarantee the Wall Street firm's trading obligations and its counterparty risk. "J.P Morgan Chase stands behind Bear Stearns," the bank's chief executive, James Dimon, said in a statement.
J.P. Morgan's guarantees effectively provided a backstop for Bear, whose credit ratings were cut Friday by the major rating services to the low-investment-grade rung of triple-B from single-A because of the firm's funding problems.
Those downgrades could have forced Bear to fork over significant amounts of cash or collateral to some of its swap counterparties, demands that could have bankrupted the firm. The backing of J.P. Morgan, with its stronger credit rating, prevented that from happening.
"The immediate counterparty problem we tried to avert is tabled for now," said Carlos Mendez, a senior managing director at Institutional Credit Partners, a boutique investment firm in New York. "However, widespread credit problems persist, and no solutions are on the table."
Well dear reader, JPMorgan Chase added a considerable position to it's already enormous derivative book. Is that healthy or scary? My opinion is crystal clear. Do you believe it is healthy to have a derivative book which is several times the balance sheet total? Well dear reader for this time, I leave this judgment to you.
Some more about financial institutions
WILL CITIBANK SURVIVE?
by James Turk
The center of focus this past week on Wall Street – and indeed, much of the financial world – was whether or not Bear Stearns will go belly-up. As questions arose about the quality of its $395 billion of assets that were carried on only $12 billion of equity, its customers and other brokers became unwilling to accept the counterparty risk that arises from transacting with Bear, while its lenders began worrying about repayment. Being leveraged to that extent, even a small decline in the value of its assets can significantly erode the firm's equity base. But given that Bear is no more than the fifth largest broker in the US, it is a relatively small fish in the financial World
http://www.financialsense.com/editorials/turk/2008/0317.html
From www.lemetropolecafe.com
King Report
M. Ramsey King Securities, Inc.
Wednesday March 19, 2008 – Issue 3837 "Independent View of the News"
It’s déjà vu all over again!
Exactly one week from yesterday we had a 416-point DJIA rally after historic Fed intervention. It was extensively heralded as a clear sign of a bottom in everything, including Yankee pitching. The Street went CNBC jiggy. Three days later, the financial system almost imploded.
The rally on March 11, just like yesterday’s 420-pt rally, occurred because the Fed, US solons and their Street stooges had to manipulate markets to prevent a financial system at the abyss from implosion.
Once again Bubblevision and their barkers proclaimed ‘bottom’ and ‘buying opportunity’.
If the March 11, 416-points DJIA rally was a lark, a ruse, a product of legerdemain, what is different now - except Bear is gone, the Fed has less bullets and a worse balance sheet, the dollar is substantially lower and credit markets continue to flounder (see ABX chart below)?
There have been consecutive weeks of unprecedented Fed intervention in order to prevent a system implosion. Will we need weekly market interventions and manipulations to keep the system functioning? How about bi-weekly? Bi-monthly? Bi-quarterly? Is everything now okay?
How many times will people fall into traps sprung by crafted bear market rallies, market intervention & manipulation and strident shilling by the fin media and Street?
The answer is almost every time, because most people will lose the most money ‘all the way down.’
On Sunday, Hank Paulsen asserted that the US would do ‘what it takes’ to avert a financial system implosion. The various actions that appeared on Monday and Tuesday validate Paulsen’s vow. Tuesday was a smorgasbord of manipulation, rigging and arm twisting. The WSJ reports (below) that Street executives and workers were ordered to not say anything negative about other brokers.
Bear Stearns earnings continued to be delayed. Goldie recommended Lehman, upgraded financials and averred that its competitors are ‘in good shape’. Pundits ignored the 0.5% jump in Core PPI.
The largest IPO ever, Visa ($17.9B), and Goldie’s earnings were rushed to market yesterday, instead of their scheduled appearance on Wednesday. Goldman and JPMorgan are the lead underwriters. Banks will gain billions from the issue. No wonder Goldie upgraded financial stocks on Tuesday!
Goldman and Lehman’s earnings exceeded Street estimates. So why is there a crisis and intervention?
As Buffett asserts, "If you’re in a poker game and after thirty minutes you cannot figure out who the patsy is; you’re the patsy!" Have you figured out the patsy in this game?
Please recall that over a week ago we warned that the Fed had been contacting operators to alert them to looming intervention. The only problem was the Fed’s first intervention on March 11 was negated by L’Affaire Bear.
Don’t forget the impact of expiration. As we constantly note, there is almost always a triple-digit DJIA rally orchestrated to exploit expiration by gammaing to death derivative traders.
Lehman reported a 31% decline in revenue and earnings of $489m. An astute money manager tells us that Lehman used an accounting gimmick to produce earnings. LEH gained $600m on an accounting rule that allows it to book a gain on the declining value of its credit – a gain from conceptually being short your own debt. The money manager notes that Lehman’s balance sheet actually grew vs. November.
Perhaps instead of de-leveraging, Lehman is increasing leverage. Do they have to?
Yesterday’s missive made the case for an SEC investigation into the possibility that traders purposely ‘ran’ Bear Stearns to profit on derivatives and short sales. The SEC has opened such an investigation.
We’re a long way from a bottom. The sentiment is way too bullish and the calls for a bottom or to do bargain hunting are far too pervasive and far outnumber the calls for capital preservation.
Our friend Ferruccio alerted us to David Rosenberg’s (Merrill) latest research piece: There is a legitimate case to be made that as bad as things are, we may only be at the halfway point of this bear market in equities in general and consumer cyclicals in particular…
Mr. Rosenberg echoes our view that few people on the Street have experienced a credit cycle turn or a vicious recession. The problem is that so many of the economists that are calling for a recession believe it will be mild. We are not sure why, except that many Wall Street pundits have lived through at most two downturns, and indeed, the last two recessions (2001 and 1990-91) were mild by historical standards, both in terms of magnitude (a peak-to-trough 1.3% decline in real GDP for the former and -0.4% for the latter) and duration (both lasted just eight months). The models that economists use may be skewed by undue reliance on the experience of the last two recessions.
David also asserts, "monetary policy alone will not solve the problem; Current backdrop has more in common with 1973-75 cycle."
How bad was it last Friday? The WSJ: At 4 p.m. Friday, just as markets closed in New York, Chief Financial Officer Erin Callan's phone rang with a worried call from a top Lehman bond trader.
"Rumor has it ING is pulling all its lines to all the Street firms," Ms. Callan was told. Without credit from firms such as ING Groep NV, the Netherlands-based financial-services company, Lehman and other investment banks could face a severe crimp in short-term funding vital to their day-to-day survival…
Around 8 a.m. Saturday morning, some Lehman executives began trickling in to work. Lehman was bracing for the worst when the markets opened Monday…
Nearby, Ms. Callan and her team were in a conference room on the firm's 31st floor, meeting with officials from the Securities and Exchange Commission, who on Saturday visited almost every Wall Street firm to get an update on each firm's liquidity position…
http://online.wsj.com/article/SB120580318748743953.html
?mod=yahoo_hs&ru=yahoo …
Agricultural commodities
From Ned Schmidt:
Quote
Agri-Food prices have been strong for some time as needs of China, India, and others have grown. Today, China is driving force on demand for Agri-Foods. These markets are now global in nature more so than ever before. Vegetable oil, for example, is one of those foods feeling the pressure of rising needs in China. According to Commodity News for Tomorrow, Chinese production of edible oils will rise slightly in 2008, but still cause them to increase imports by 14%. Chinese government will have little choice but to bid aggressively in global markets and raise domestic prices. Producers of palm oil(world's largest edible oil), soybeans, corn and canola will all benefit from the growing short supply situation in edible oils. Perhaps the time has arrived for forward looking investors to do their research on the beneficiaries of the globally short supply situation in Agri-Foods.
Unquote
Other commodities
Well dear reader, this week we saw a down correction in precious metals. The reason apparently was that the market expected a higher cut by the FED. This is ridiculous. Well anyway, we know that the precious metal market is managed. Contrary to the stock market, the precious metals are managed to the downside whenever possible. What does that mean? It means that you should go out of leveraged positions from time to time, especially if you have a nice profit. Don’t forget to take profits. So far nobody got broke by taking profits. People normally get broke when they do wait too much time until a potential profit turns into a loss. Furthermore it means that we get another opportunity to buy at lower prices. What will the immediate future be? If the history over the last 6 years proves right, the second quarter of each year brought a correction in commodities. That means we have to expect a correction sometime between February and March. Did we see already this correction? We will see. Anyway I still expect to see higher prices at the end of the year. As we do not yet know if this correction is over, I would wait with purchases maybe until July or early August. Bothe month proved to be excellent in the past. If you are worried about the financial institutions and further Bear Stearn cases, maybe buying physical bullion at any price is not so bad an idea.
Oil
Well we saw oil prices come down a bit. Maybe T.Boone Pickens got it again. He expects prices to be lower in the 2nd quarter. He thinks that prices could go down to 85 USD barrel. Well if we see prices below USD 100 I will start to add to my positions.
Thursday, March 20, 2008
Monday, March 17, 2008
heading south
For all readers who prefer to read my Spanish version, please click on http://themusingsoffritz-espanol.blogspot.com/ or click on the link (links to my other blogs) on the right hand side
Consumer confidence heading south
Well dear reader this week, I saw the above headline somewhere. There is not much of a possibility to be more south than I am actually unless one would be in the Antarctica. Well dear reader I can confirm that being south is not necessarily a bad thing, especially if one talks about New Zealand. However the consumer confidence heading south is certainly not a positive item.
Well, dear reader, the big Picture is, that we have still the same scene: America is getting poorer. Its money buys less stuff. Its working people earn less money. Its assets are worth less than they used to be.
Therefore it should not come as a surprise that the consumer confidence is down. The surprise in my opinion is rather that consumers in the US were able to live for such a long time with the money from other people. It was a real surprise to me that the lenders did not stop the orgy much sooner.
Maybe the lenders thought that the happy situation would go on for ever (they must have missed their classes in history or must have forgotten to study the economic history of late) and as interest were kept artificially low, they were happy to get some of the crumbles that literally fell down of the table (I still cannot believe that people were willing to lend at such low rates accepting high risks).
So dear reader, we are now where we should have been some month ago. How can one be surprised that the consumer confidence is heading south?
Well without a cent in the pocket the consumer confidence should never have been “north” at all.
Fixed income
Well dear reader, above I mentioned that I still cannot understand how investors accepted or still do accept low interest for high risks. If you read the following we have at least one explanation.
Moody's, S&P Defer Cuts on AAA Subprime, Hiding Loss
March 11 (Bloomberg) -- Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.
None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent…
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=areM7a9s02ko
Yes dear reader, you are absolutely right, it is outrageous that these rating companies still keep up the fantasy and thus still being a part of the ongoing game. Their self-interest cannot be an excuse for not doing their job properly. It is outrageous because millions of honest investors trust them. Millions of investors invest in so called excellent quality bonds because these rating agencies told them that the bond are of good quality. It is like convincing your folks to invest all their money in a soap bubble although you know the bubble will plop in a few seconds.
Another kind of Tsunami
Yes dear reader, tsunamis normally are a natural disaster. However now we have to face a man made tsunami in the form of new liquidity created by the central banks. If you are not on a safe spot investment wise, it can hurt you. Please be careful.
Ever wondered if the information about the PPT or the presidents working group for financial markets is really true?
By James Vicini and Tim Ahmann
Reuters
Saturday, March 15, 2008
http://www.reuters.com/article/ousiv/idUSN1546284420080315
WASHINGTON -- President George W. Bush plans to meet on Monday with top U.S. financial policymakers, the White House said, with the meeting coming at a time of increased strains in credit markets.
The White House said on Saturday that the meeting, scheduled at 2:10 p.m. EDT, is with members of the President's Working Group on Financial Markets.
The group is led by U.S. Treasury Secretary Henry Paulson and also includes Federal Reserve Chairman Ben Bernanke as well as the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The meeting comes as a sharp downturn in the U.S. housing market has led to a full-blown credit crisis that has reverberated throughout the U.S. financial system.
On Friday, Bear Stearns, the fifth largest investment bank, said it was turning to JPMorgan Chase and the Fed to secure emergency financing, an effort also involving the Treasury.
The president's working group on Thursday issued a wide-ranging set of recommendations for changes that would toughen rules for mortgage brokers, lenders, and credit agencies to try to prevent a recurrence of the problems roiling credit markets.
Democrats in Congress are pushing for legislation under which the Federal Housing Administration could play a larger role in helping to stem the rising tide of home foreclosures that threatens to swamp the financial system.
However, the Bush administration has been cool to any proposals that would expand the government's role.
Well dear reader, the presidents working group for financial markets meets and oil is down more than 4 USD (almost 4%) , Gold down more than 20 USD and as the big surprise (really? ) stocks are up.
Well, of course prices are not managed at their meetings only but on a constant basis. As mentioned a few times, stock markets are kept up artificially and the rise of the precious metals and oil&gas is managed in the sense that prices do not rise too fast. This is a fact dear reader.
Anyway that does not mean that they will be able to reverse the ongoing trend. What they might be able is to slow down certain moves but not stop it.
Gold
Gold hit for the first time in history the 1,000 mark.
Dear reader, I do not remember from where I got the following quote. Although I know that the quote is not mine to me it feels like my own words.
Quote
With respect to the markets, we saw a few days ago gold breach the US $1,000 barrier for the first time in its history and the strange part about it is that few people are aware of it and almost no one can explain it. To say that gold is the best kept secret in the financial world is an understatement and it is certainly no exaggeration to say that it is misunderstood. Most knowledgeable investors think gold is a commodity, but they are mistaken. Simply put, gold is money. The problem lies in the fact that the Federal Reserve has done everything possible to convince America that it is obsolete, even useless, in today’s world. Nothing could be further from the truth. What’s more, gold is in the process of delivering a message to the world, and the first part of the message is that it is about to take its rightful place on the planet as the only true real money. The second part of the message is that we are in serious trouble; not just recession type trouble but 1929 or 1907 type trouble where grown men took their own lives due to the devastation the financial collapse brought about. I know that because the Federal Reserve has spent over a trillion dollars in seven months, cut interest rates by more than 2%, and all the stock market does is continue to decline. The best efforts of the invisible hand have produced five consecutive down months.
Unquote
More about gold
WEEKEND EDITION Rewriting the golden rules Have 'gold bugs' finally won the respect of mainstream investors?
By Polya Lesova & Nick Godt, MarketWatch NEW YORK (MarketWatch) --
Long snubbed by most investors as doomsday-conspiracy crackpots, gold bugs aren't the only ones hording the precious metal anymore. It turns out that the rest of the investment world has gotten caught up in the buying frenzy too. And market blowups like the one surrounding Bear Stearns Cos. Inc. only embolden buyers further. Gold's breakneck surge over the past year was largely the work of mainstream investors, who have been forced to reckon with the biggest credit crisis in decades, the very type of financial tsunami that gold bugs have long been dreaming of -- and betting on. 'I used to dismiss these guys as a little whacked out. Now, I wish I'd listened a little more.' — Hugh Johnson, Johnson Illington Advisors With gold breaking the barrier of $1,000 an ounce this week and surging over 40% over the last year, a growing number of investors that joined the fray are finally acknowledging that gold bugs' plans for apocalypse weren't so kooky after all.
"There's no question," said Hugh Johnson, chairman of Albany, N.Y.-based Johnson Illington Advisors. "I used to dismiss these guys as a little whacked out. Now, I wish I'd listened a little more."…
Well dear reader, you were lucky in the sense that you had to accept my insisting on letting you know for a long time now, that I truly believe that we will see much higher gold prices. Because of doing so, I know many of you did in fact invest in precious metals with the respective positive results. Yes dear reader, I am very happy for all of you that followed my advice on time. I’d like to mention, that my positive opinion about gold was not necessarily due to the apocalypse view but rather on fundamentals, at least so far. However I must admit that with what lately is going on in the markets and the many entities in trouble the safety part of owning physical gold becomes more important every day.
General Information
From the excellent Ambrose Evans-Pritchard
U.S. Losing Confidence Vote as Investors Flee
By Ambrose Evans-Pritchard The Telegraph, London Monday, March 17, 2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/17/ccview...
As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.
Asian, Mideast, and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."
The share of foreign buyers ("indirect bidders") plummeted to 5.8 percent, from an average 25 percent over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.
Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.
It is not my view. I believe the forces of debt deflation now engulfing America -- and soon half the world -- are so powerful that nobody will be worrying about inflation a year hence.
Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.
The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60 percent of the $11,000 billion market for US home loans.
With the "financial accelerator" kicking into top gear -- downwards -- we may need everything Ben Bernanke can offer.
"The situation is getting worse, and the risks are that it could get very bad," said Martin Feldstein, head of the National Bureau of Economic Research. "There's no doubt that this year and next year are going to be very difficult."
Even monetary policy a-l'outrance may not be enough to halt the spiral. Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults. "It is like fighting a virus with antibiotics," he said.
We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.
But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.
The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.
Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.
Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?
As The Wall Street Journal wrote this weekend, the entire country is facing a "margin call." The US has come to depend on $800 billion inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.
As of June 2007, foreigners owned $6,007 billion of long-term US debt. (Equal to 66 percent of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?
The Chinese have quickened the pace of yuan appreciation to choke off 8.7 percent inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states -- overheating wildly -- are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.
The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6 percent in a year. The greenback is nearing parity with the Swiss franc -- shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350 million in revenues for every one-yen move. That is an $8.75 billion hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.
Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400 billion trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go.
It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies." The monetary order is becoming unhinged.
I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit -- starting with Europe.
Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of the European Monetary Union, Italy failed to sell a full batch of state bonds.
The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Fermany's "Exportwunder," for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian, and Spanish politicians. The Latin property bubbles are deflating fast.
The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.
Bear Stearns
Well dear reader, last week the problems of Bear Starns were still rumors. Now it is a fact, on Monday the markets opened to see Bear Stearns, the venerable Investment bank that has been around for 80+years, acquired for $2 when it had traded at $57 only last week. Please read on
from different sources:
JPMorgan and NY Fed to provide financing to Bear Stearns (57.00) JPMorgan announced that, in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. Through its Discount Window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase. Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company. BSC is trading at $62.48 from yesterday's $57.00 close. * * * * * Good grief! I didn’t even have time to say that it has been my opinion for some time, and still is, that the US stock market was no place to be because the US financial market system is imploding. That has been the MIDAS rant for MANY months, going into last year. Just a sample of some past headlines again…
JP Morgan Closes Deal on Bear Stearns
Associated Press
Sunday, March 16, 2008
NEW YORK -- JPMorgan Chase said Sunday it will acquire rival Bear Stearns in a deal valued at $236.2 million, a stunning collapse for one of the world's largest and most venerable investment banks.
JPMorgan Chase & Co. said the $2 a share, all-stock deal has received the required approvals from the federal government and the Federal Reserve. Bear Stearns shares closed Friday at $30 a share.
http://news.yahoo.com/s/ap/20080316/ap_on_bi_ge/jpmorgan_bear_stearns
NY Times says that the bailout of Bear Stearns crosses a line (30.00) Columnist Gretchen Morgenson says that the loan by the Fed to Bear was the most explicit sign yet of the Fed’s "Rescues ‘R’ Us" doctrine that already helped to force the marriage of Bank of America and Countrywide. She asks why should we save Bear since "until regulators came along in '96, it was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades." She points to some of its credit clients, like New Century, and notes that the default rates on its Alt-A mortgages that it underwrote are almost double the industry average. Plus, Bear refused to join the Long Term Capital Management bailout in '98. She says this is proof that we have become Bail-Out Nation and have refused to let any financial fail, allowing them to become so big that they cannot fail. The loan by the Fed is harming the U.S.'s standing in the world's financial markets and harming the trust investors have with the market
Well the Fed’s action is really questionable. How many more entities will have to be bailed out? Of course not everybody is happy with this action. Following one of the reactions
Housing Group Challenges Fed's Bear Stearns Deal
By REUTERS
Published: March 16, 2008
Filed at 1:07 p.m. ET
WASHINGTON (Reuters) - A housing and fair lending activist group has challenged the legality of the Federal Reserve's quick approval of financing for Bear Stearns via JPMorgan Chase , questioning the Fed's authority to approve the deal because it involves a non-bank institution.
Inner City Press Community on the Move, in a complaint filed with the Fed late Saturday, called the central bank's brokering of the deal "entirely illegal" and anticompetitive, and questioned whether sufficient Fed members had voted for it.
In a first step toward challenging the bailout, Inner City Press questioned the legality of the Fed approving the deal without public notice, on the grounds Bear Stearns "is not a banking holding company and does not own a bank."
The Fed approved financing to Bear Stearns through JPMorgan in an emergency meeting Friday morning.
It was the Fed's first rescue of a broker since the Great Depression and its latest effort to soothe financial markets roiled by fallout from rising mortgage defaults.
But Matthew Lee, executive director of Inner City Press, vowed to take all needed legal actions against the deal.
"The Fed has hit a new low with this, they did nothing to protect consumers from predatory lending and now their response is to bail out one of the most notorious enablers of predatory lending with no benefit to struggling consumers," said Lee.
"This should be taken as far as it can go to finally bring the Federal Reserve to account that they work for the public interest and not only Wall Street, particularly in a time of crisis," he told Reuters on Sunday.
The Fed could not immediately be reached for comment.
Inner City Press, a nonprofit group that has challenged the nation's key bank mergers over the past decade in an effort to ensure poorer communities are served fairly, also questioned why only four of the five Fed governors approved the measure.
The Fed approved the deal between JPMorgan and Bear Stearns under Depression-era laws allowing it to do so under "unusual and exigent circumstances." This provision, however, requires an affirmative vote of not less than 5 members of the board.
At present, there are only five members on the board with two vacancies, but only four approved the measure because governor Frederic Mishkin was not present, according to the Federal Reserve.
But current law mandates that no less than five members can vote on the matter and states that members can be contacted through any electronic means, including by telephone and e-mail.
"There has been no showing that, given technology in 2008 (as opposed to the 1930s when this language was enacted), the required attempts to contact Gov. Mishkin were made," Lee wrote in the complaint.
Inner City Press also questioned whether the deal could be finalized without antitrust review.
"Third, to allow this relation between the nation's third largest bank and fifth largest brokerage, without any antitrust review, even with the required votes (which the Fed) did not have, is unlawful," the complaint stated, requesting public hearings on the matter.
The complaint also asks for a probe into Bear Stearns' disclosure of its financial condition, citing an interview the firm's chief executive gave on CNBC television earlier in the week during which no mention of the scope of the firm's financial troubles were made.
(Reporting By Joanne Morrison; Editing by Tim Dobbyn)
Well dear reader, we have now a couple of hedge funds out of business, a high number of other hedge funds in serious trouble, Bear Stearns in trouble, Fannie Mae, Freddy Mac in trouble and? who else. What names will be added to above list in the coming months? I think it is safe to assume that we will hear more on the same.
Commodities
Water another commodity. Well dear reader as you know I have been positive for water related investments for a long time. Water is a renewable resource but there are less and less people having access to drinkable water. On the other side we have more and more people with the need of water.
Well dear reader we have seen flying the prices of practically all commodities over the last few weeks. Some of the commodities are now clearly in an overbought situation and therefore a correction at any time is possible. Corrections could be up to 20%. However although these corrections will occur, I believe they will be relative short in time (up to 90 days) and will not be a change of the secular bull market in commodities, which in my opinion will last several years. Therefore any bull backs are in my opinion buying opportunities.
Consumer confidence heading south
Well dear reader this week, I saw the above headline somewhere. There is not much of a possibility to be more south than I am actually unless one would be in the Antarctica. Well dear reader I can confirm that being south is not necessarily a bad thing, especially if one talks about New Zealand. However the consumer confidence heading south is certainly not a positive item.
Well, dear reader, the big Picture is, that we have still the same scene: America is getting poorer. Its money buys less stuff. Its working people earn less money. Its assets are worth less than they used to be.
Therefore it should not come as a surprise that the consumer confidence is down. The surprise in my opinion is rather that consumers in the US were able to live for such a long time with the money from other people. It was a real surprise to me that the lenders did not stop the orgy much sooner.
Maybe the lenders thought that the happy situation would go on for ever (they must have missed their classes in history or must have forgotten to study the economic history of late) and as interest were kept artificially low, they were happy to get some of the crumbles that literally fell down of the table (I still cannot believe that people were willing to lend at such low rates accepting high risks).
So dear reader, we are now where we should have been some month ago. How can one be surprised that the consumer confidence is heading south?
Well without a cent in the pocket the consumer confidence should never have been “north” at all.
Fixed income
Well dear reader, above I mentioned that I still cannot understand how investors accepted or still do accept low interest for high risks. If you read the following we have at least one explanation.
Moody's, S&P Defer Cuts on AAA Subprime, Hiding Loss
March 11 (Bloomberg) -- Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.
None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent…
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=areM7a9s02ko
Yes dear reader, you are absolutely right, it is outrageous that these rating companies still keep up the fantasy and thus still being a part of the ongoing game. Their self-interest cannot be an excuse for not doing their job properly. It is outrageous because millions of honest investors trust them. Millions of investors invest in so called excellent quality bonds because these rating agencies told them that the bond are of good quality. It is like convincing your folks to invest all their money in a soap bubble although you know the bubble will plop in a few seconds.
Another kind of Tsunami
Yes dear reader, tsunamis normally are a natural disaster. However now we have to face a man made tsunami in the form of new liquidity created by the central banks. If you are not on a safe spot investment wise, it can hurt you. Please be careful.
Ever wondered if the information about the PPT or the presidents working group for financial markets is really true?
By James Vicini and Tim Ahmann
Reuters
Saturday, March 15, 2008
http://www.reuters.com/article/ousiv/idUSN1546284420080315
WASHINGTON -- President George W. Bush plans to meet on Monday with top U.S. financial policymakers, the White House said, with the meeting coming at a time of increased strains in credit markets.
The White House said on Saturday that the meeting, scheduled at 2:10 p.m. EDT, is with members of the President's Working Group on Financial Markets.
The group is led by U.S. Treasury Secretary Henry Paulson and also includes Federal Reserve Chairman Ben Bernanke as well as the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The meeting comes as a sharp downturn in the U.S. housing market has led to a full-blown credit crisis that has reverberated throughout the U.S. financial system.
On Friday, Bear Stearns, the fifth largest investment bank, said it was turning to JPMorgan Chase and the Fed to secure emergency financing, an effort also involving the Treasury.
The president's working group on Thursday issued a wide-ranging set of recommendations for changes that would toughen rules for mortgage brokers, lenders, and credit agencies to try to prevent a recurrence of the problems roiling credit markets.
Democrats in Congress are pushing for legislation under which the Federal Housing Administration could play a larger role in helping to stem the rising tide of home foreclosures that threatens to swamp the financial system.
However, the Bush administration has been cool to any proposals that would expand the government's role.
Well dear reader, the presidents working group for financial markets meets and oil is down more than 4 USD (almost 4%) , Gold down more than 20 USD and as the big surprise (really? ) stocks are up.
Well, of course prices are not managed at their meetings only but on a constant basis. As mentioned a few times, stock markets are kept up artificially and the rise of the precious metals and oil&gas is managed in the sense that prices do not rise too fast. This is a fact dear reader.
Anyway that does not mean that they will be able to reverse the ongoing trend. What they might be able is to slow down certain moves but not stop it.
Gold
Gold hit for the first time in history the 1,000 mark.
Dear reader, I do not remember from where I got the following quote. Although I know that the quote is not mine to me it feels like my own words.
Quote
With respect to the markets, we saw a few days ago gold breach the US $1,000 barrier for the first time in its history and the strange part about it is that few people are aware of it and almost no one can explain it. To say that gold is the best kept secret in the financial world is an understatement and it is certainly no exaggeration to say that it is misunderstood. Most knowledgeable investors think gold is a commodity, but they are mistaken. Simply put, gold is money. The problem lies in the fact that the Federal Reserve has done everything possible to convince America that it is obsolete, even useless, in today’s world. Nothing could be further from the truth. What’s more, gold is in the process of delivering a message to the world, and the first part of the message is that it is about to take its rightful place on the planet as the only true real money. The second part of the message is that we are in serious trouble; not just recession type trouble but 1929 or 1907 type trouble where grown men took their own lives due to the devastation the financial collapse brought about. I know that because the Federal Reserve has spent over a trillion dollars in seven months, cut interest rates by more than 2%, and all the stock market does is continue to decline. The best efforts of the invisible hand have produced five consecutive down months.
Unquote
More about gold
WEEKEND EDITION Rewriting the golden rules Have 'gold bugs' finally won the respect of mainstream investors?
By Polya Lesova & Nick Godt, MarketWatch NEW YORK (MarketWatch) --
Long snubbed by most investors as doomsday-conspiracy crackpots, gold bugs aren't the only ones hording the precious metal anymore. It turns out that the rest of the investment world has gotten caught up in the buying frenzy too. And market blowups like the one surrounding Bear Stearns Cos. Inc. only embolden buyers further. Gold's breakneck surge over the past year was largely the work of mainstream investors, who have been forced to reckon with the biggest credit crisis in decades, the very type of financial tsunami that gold bugs have long been dreaming of -- and betting on. 'I used to dismiss these guys as a little whacked out. Now, I wish I'd listened a little more.' — Hugh Johnson, Johnson Illington Advisors With gold breaking the barrier of $1,000 an ounce this week and surging over 40% over the last year, a growing number of investors that joined the fray are finally acknowledging that gold bugs' plans for apocalypse weren't so kooky after all.
"There's no question," said Hugh Johnson, chairman of Albany, N.Y.-based Johnson Illington Advisors. "I used to dismiss these guys as a little whacked out. Now, I wish I'd listened a little more."…
Well dear reader, you were lucky in the sense that you had to accept my insisting on letting you know for a long time now, that I truly believe that we will see much higher gold prices. Because of doing so, I know many of you did in fact invest in precious metals with the respective positive results. Yes dear reader, I am very happy for all of you that followed my advice on time. I’d like to mention, that my positive opinion about gold was not necessarily due to the apocalypse view but rather on fundamentals, at least so far. However I must admit that with what lately is going on in the markets and the many entities in trouble the safety part of owning physical gold becomes more important every day.
General Information
From the excellent Ambrose Evans-Pritchard
U.S. Losing Confidence Vote as Investors Flee
By Ambrose Evans-Pritchard The Telegraph, London Monday, March 17, 2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/17/ccview...
As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.
Asian, Mideast, and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."
The share of foreign buyers ("indirect bidders") plummeted to 5.8 percent, from an average 25 percent over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.
Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.
It is not my view. I believe the forces of debt deflation now engulfing America -- and soon half the world -- are so powerful that nobody will be worrying about inflation a year hence.
Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.
The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60 percent of the $11,000 billion market for US home loans.
With the "financial accelerator" kicking into top gear -- downwards -- we may need everything Ben Bernanke can offer.
"The situation is getting worse, and the risks are that it could get very bad," said Martin Feldstein, head of the National Bureau of Economic Research. "There's no doubt that this year and next year are going to be very difficult."
Even monetary policy a-l'outrance may not be enough to halt the spiral. Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults. "It is like fighting a virus with antibiotics," he said.
We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.
But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.
The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.
Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.
Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?
As The Wall Street Journal wrote this weekend, the entire country is facing a "margin call." The US has come to depend on $800 billion inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.
As of June 2007, foreigners owned $6,007 billion of long-term US debt. (Equal to 66 percent of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?
The Chinese have quickened the pace of yuan appreciation to choke off 8.7 percent inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states -- overheating wildly -- are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.
The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6 percent in a year. The greenback is nearing parity with the Swiss franc -- shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350 million in revenues for every one-yen move. That is an $8.75 billion hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.
Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400 billion trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go.
It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies." The monetary order is becoming unhinged.
I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit -- starting with Europe.
Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of the European Monetary Union, Italy failed to sell a full batch of state bonds.
The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Fermany's "Exportwunder," for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian, and Spanish politicians. The Latin property bubbles are deflating fast.
The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.
Bear Stearns
Well dear reader, last week the problems of Bear Starns were still rumors. Now it is a fact, on Monday the markets opened to see Bear Stearns, the venerable Investment bank that has been around for 80+years, acquired for $2 when it had traded at $57 only last week. Please read on
from different sources:
JPMorgan and NY Fed to provide financing to Bear Stearns (57.00) JPMorgan announced that, in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. Through its Discount Window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase. Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company. BSC is trading at $62.48 from yesterday's $57.00 close. * * * * * Good grief! I didn’t even have time to say that it has been my opinion for some time, and still is, that the US stock market was no place to be because the US financial market system is imploding. That has been the MIDAS rant for MANY months, going into last year. Just a sample of some past headlines again…
JP Morgan Closes Deal on Bear Stearns
Associated Press
Sunday, March 16, 2008
NEW YORK -- JPMorgan Chase said Sunday it will acquire rival Bear Stearns in a deal valued at $236.2 million, a stunning collapse for one of the world's largest and most venerable investment banks.
JPMorgan Chase & Co. said the $2 a share, all-stock deal has received the required approvals from the federal government and the Federal Reserve. Bear Stearns shares closed Friday at $30 a share.
http://news.yahoo.com/s/ap/20080316/ap_on_bi_ge/jpmorgan_bear_stearns
NY Times says that the bailout of Bear Stearns crosses a line (30.00) Columnist Gretchen Morgenson says that the loan by the Fed to Bear was the most explicit sign yet of the Fed’s "Rescues ‘R’ Us" doctrine that already helped to force the marriage of Bank of America and Countrywide. She asks why should we save Bear since "until regulators came along in '96, it was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades." She points to some of its credit clients, like New Century, and notes that the default rates on its Alt-A mortgages that it underwrote are almost double the industry average. Plus, Bear refused to join the Long Term Capital Management bailout in '98. She says this is proof that we have become Bail-Out Nation and have refused to let any financial fail, allowing them to become so big that they cannot fail. The loan by the Fed is harming the U.S.'s standing in the world's financial markets and harming the trust investors have with the market
Well the Fed’s action is really questionable. How many more entities will have to be bailed out? Of course not everybody is happy with this action. Following one of the reactions
Housing Group Challenges Fed's Bear Stearns Deal
By REUTERS
Published: March 16, 2008
Filed at 1:07 p.m. ET
WASHINGTON (Reuters) - A housing and fair lending activist group has challenged the legality of the Federal Reserve's quick approval of financing for Bear Stearns via JPMorgan Chase , questioning the Fed's authority to approve the deal because it involves a non-bank institution.
Inner City Press Community on the Move, in a complaint filed with the Fed late Saturday, called the central bank's brokering of the deal "entirely illegal" and anticompetitive, and questioned whether sufficient Fed members had voted for it.
In a first step toward challenging the bailout, Inner City Press questioned the legality of the Fed approving the deal without public notice, on the grounds Bear Stearns "is not a banking holding company and does not own a bank."
The Fed approved financing to Bear Stearns through JPMorgan in an emergency meeting Friday morning.
It was the Fed's first rescue of a broker since the Great Depression and its latest effort to soothe financial markets roiled by fallout from rising mortgage defaults.
But Matthew Lee, executive director of Inner City Press, vowed to take all needed legal actions against the deal.
"The Fed has hit a new low with this, they did nothing to protect consumers from predatory lending and now their response is to bail out one of the most notorious enablers of predatory lending with no benefit to struggling consumers," said Lee.
"This should be taken as far as it can go to finally bring the Federal Reserve to account that they work for the public interest and not only Wall Street, particularly in a time of crisis," he told Reuters on Sunday.
The Fed could not immediately be reached for comment.
Inner City Press, a nonprofit group that has challenged the nation's key bank mergers over the past decade in an effort to ensure poorer communities are served fairly, also questioned why only four of the five Fed governors approved the measure.
The Fed approved the deal between JPMorgan and Bear Stearns under Depression-era laws allowing it to do so under "unusual and exigent circumstances." This provision, however, requires an affirmative vote of not less than 5 members of the board.
At present, there are only five members on the board with two vacancies, but only four approved the measure because governor Frederic Mishkin was not present, according to the Federal Reserve.
But current law mandates that no less than five members can vote on the matter and states that members can be contacted through any electronic means, including by telephone and e-mail.
"There has been no showing that, given technology in 2008 (as opposed to the 1930s when this language was enacted), the required attempts to contact Gov. Mishkin were made," Lee wrote in the complaint.
Inner City Press also questioned whether the deal could be finalized without antitrust review.
"Third, to allow this relation between the nation's third largest bank and fifth largest brokerage, without any antitrust review, even with the required votes (which the Fed) did not have, is unlawful," the complaint stated, requesting public hearings on the matter.
The complaint also asks for a probe into Bear Stearns' disclosure of its financial condition, citing an interview the firm's chief executive gave on CNBC television earlier in the week during which no mention of the scope of the firm's financial troubles were made.
(Reporting By Joanne Morrison; Editing by Tim Dobbyn)
Well dear reader, we have now a couple of hedge funds out of business, a high number of other hedge funds in serious trouble, Bear Stearns in trouble, Fannie Mae, Freddy Mac in trouble and? who else. What names will be added to above list in the coming months? I think it is safe to assume that we will hear more on the same.
Commodities
Water another commodity. Well dear reader as you know I have been positive for water related investments for a long time. Water is a renewable resource but there are less and less people having access to drinkable water. On the other side we have more and more people with the need of water.
Well dear reader we have seen flying the prices of practically all commodities over the last few weeks. Some of the commodities are now clearly in an overbought situation and therefore a correction at any time is possible. Corrections could be up to 20%. However although these corrections will occur, I believe they will be relative short in time (up to 90 days) and will not be a change of the secular bull market in commodities, which in my opinion will last several years. Therefore any bull backs are in my opinion buying opportunities.
Dr.Neville Bennett, 19 wasted months
Dear reader
Below you find an essay from Dr. Neville Bennett from Christchurch, New Zealand, whom I had the honor to meet yesterday on March 17, 2008. Neville's opinion, as always, is excellent.
More comments from him can be found on
http://www.interest.co.nz/news/home.asp
The worst fears of investors and consumers were confirmed on Wall Street last week when deepening paralysis in finance and stock markets collided with brutal jobs data and increased fears of recession. The Dow slid to its lowest level in 19 months. 19 wasted months! Will the next 19 months be any better?
Some brokers are already giving the not-disinterested advice that there are bargains out there. I strongly suggest that while some individual stocks will thrive, most will follow declining indices.
My working hypothesis is that the bear market is established, and that it will continue for some years as it did after the 1907 crash, 1929 crash, and throughout the 1970’s. The market will not recover, if previous nadirs are indicative, until P/E ratios fall to about 9 (8.7 in 1980-82).
The bear market thrives on endemic problems in the financial sector: by a declining US housing market; and the on-going destruction of housing -related financial instruments. It is driven also by the implosion of take-over groups, whose activities through 2006-August 2007 had driven the Dow over 14,000. Firms like Carlyle Capital that were the market darlings less than a year ago, cannot now meet margin calls. Their collateral is being seized, and circulated on bank “bid lists”.
Unfortunately, Wall Street cannot be ring-fenced. The remainder of the world is decoupling somewhat from the US economy. The Euro is the more important currency, the Euro bond market is also bigger than the USA, and the Euro is gaining as the preferred reserve currency. Wall Street’s woes drag down all other stock markets.
Recoveries and rallies will be undermined by bad news. It is almost predictable that the market will react negatively each month to record repossessions, the difficulties of a bond-insurer or buy-out specialist, the collapse of banks and hedge funds, or even the problems of Freddie Mac and Fannie Mae.
The USA is in recession, as it was in 2001 and 1990. The latest jobs data is appalling. Employers slashed the most jobs in 5 years. It showed a fall in manufacturing although the low dollar is stimulating exports. Moreover, a series of lay-offs in retail presages a steep decline in consumer confidence and spending.
This is alarming. The Financial Times’s Lex column on March 7, wonders if the present crisis is “the big one, the worst crisis since the 1930’s”. It is worse that the 1990 Savings and Loan Crisis that saw bank losses worth more that 3% of US output. Lex is moderate. The situation is ugly; a US recession, rising corporate defaults and perhaps banks in trouble. “But”, Lex says, “it would take a substantial further deterioration before things get scary”.
Wow! I am glad that things are not scary now! Perhaps someone should reassure the Federal Reserve! This would take the pressure off Bernanke to lower rates further. Nor will he see the need to increase loans to banks this month by $100 bn. The Fed announced last Friday that it would increase auction sizes from $30 to $50 bn, in order to inject the cash the banks need to lubricate the economy. It has departed from precedent in the amount it will release, and in saying it will maintain the auctions for 6 months if necessary. In a second step, it allocated another $100 billion to other players.
It will be noted that the big five central banks intervened massively in market this week to prevent the demise of the US’s major public mortgage lenders. I will be writing later about the merits or otherwise on the Fed effectively treating CDO’s as collateral.
Some people might believe the Fed has the recession under control. It has shaken the money tree, but the money is not going into growth, it is driving oil and gold into the stratosphere.
The Fed’s $160 bn injection to preserve inter-bank lending is not enough as markets are seizing up, confidence crumbling, and insurance rates soaring. Banks cannot get the money they need on commercial markets, so the Fed feels compelled to act. The US auction rate market is closed. Bank shares are collapsing. Debt spreads are ballooning. A meltdown has made banks reluctant to lend to each other.
The vicious credit crunch has entered a new phase. There are increasing doubts about mortgages. The Fed has cut interest rates and injected liquidity. The central government has approved a stimulus package. Government help has reached it limits, and it is proving helpless against the gathering negative forces.
Lenders and business are ultra cautious whom they lend to or employ. Banks are in panic mode, and are recalling perfectly good loans and have sold up government supported Fannie Mae, and it shares are at a decade -low level. Fannie Mae loans yield 5.96%; 10-year bonds yield 3.86%. The 2.86% difference between the two yields is significant, its the greatest since 1986.
Last week the record number of mortgage foreclosures spooked the market, and Thornburg Mortgage, the second biggest private mortgage lender, defaulted on some obligations. The enormous Carlyle Capital, a private equity company that epitomised the predatory buy-outs of stocks before mid -2007, also defaulted.
Banks panic also because at the end of 2007, 7.9% of home loans were in foreclosure or past due. The banks fear losing their money, and do not know what to do. They are unloading assets like there is no tomorrow. A tide of forced selling has driven risk premiums sky high. Default insurance on high grade investments is 188 basic points, up from 80 in January.
The municipal bond market is also inflicting pain. In February, the Port Authority of New York had to pay 20% interest, after an auction of $100 bn of bonds failed. The port Authority has a high credit rating, the market has merely seized up.
The credit crunch has reverberations in New Zealand. Property developments have been called off. Business investment may have turned down.
Brokers are encouraging people to re-enter the equity market. The view expressed here is that is will be prudent to wait. An enormous wave of defaults, foreclosures, and auctions is building. The recession has arrived, and a bear market has set it. The market is where it was 19 months ago; it might have dead cat bounces, but it will face more shakeouts as the credit crunch engulfs new victims.
Below you find an essay from Dr. Neville Bennett from Christchurch, New Zealand, whom I had the honor to meet yesterday on March 17, 2008. Neville's opinion, as always, is excellent.
More comments from him can be found on
http://www.interest.co.nz/news/home.asp
The worst fears of investors and consumers were confirmed on Wall Street last week when deepening paralysis in finance and stock markets collided with brutal jobs data and increased fears of recession. The Dow slid to its lowest level in 19 months. 19 wasted months! Will the next 19 months be any better?
Some brokers are already giving the not-disinterested advice that there are bargains out there. I strongly suggest that while some individual stocks will thrive, most will follow declining indices.
My working hypothesis is that the bear market is established, and that it will continue for some years as it did after the 1907 crash, 1929 crash, and throughout the 1970’s. The market will not recover, if previous nadirs are indicative, until P/E ratios fall to about 9 (8.7 in 1980-82).
The bear market thrives on endemic problems in the financial sector: by a declining US housing market; and the on-going destruction of housing -related financial instruments. It is driven also by the implosion of take-over groups, whose activities through 2006-August 2007 had driven the Dow over 14,000. Firms like Carlyle Capital that were the market darlings less than a year ago, cannot now meet margin calls. Their collateral is being seized, and circulated on bank “bid lists”.
Unfortunately, Wall Street cannot be ring-fenced. The remainder of the world is decoupling somewhat from the US economy. The Euro is the more important currency, the Euro bond market is also bigger than the USA, and the Euro is gaining as the preferred reserve currency. Wall Street’s woes drag down all other stock markets.
Recoveries and rallies will be undermined by bad news. It is almost predictable that the market will react negatively each month to record repossessions, the difficulties of a bond-insurer or buy-out specialist, the collapse of banks and hedge funds, or even the problems of Freddie Mac and Fannie Mae.
The USA is in recession, as it was in 2001 and 1990. The latest jobs data is appalling. Employers slashed the most jobs in 5 years. It showed a fall in manufacturing although the low dollar is stimulating exports. Moreover, a series of lay-offs in retail presages a steep decline in consumer confidence and spending.
This is alarming. The Financial Times’s Lex column on March 7, wonders if the present crisis is “the big one, the worst crisis since the 1930’s”. It is worse that the 1990 Savings and Loan Crisis that saw bank losses worth more that 3% of US output. Lex is moderate. The situation is ugly; a US recession, rising corporate defaults and perhaps banks in trouble. “But”, Lex says, “it would take a substantial further deterioration before things get scary”.
Wow! I am glad that things are not scary now! Perhaps someone should reassure the Federal Reserve! This would take the pressure off Bernanke to lower rates further. Nor will he see the need to increase loans to banks this month by $100 bn. The Fed announced last Friday that it would increase auction sizes from $30 to $50 bn, in order to inject the cash the banks need to lubricate the economy. It has departed from precedent in the amount it will release, and in saying it will maintain the auctions for 6 months if necessary. In a second step, it allocated another $100 billion to other players.
It will be noted that the big five central banks intervened massively in market this week to prevent the demise of the US’s major public mortgage lenders. I will be writing later about the merits or otherwise on the Fed effectively treating CDO’s as collateral.
Some people might believe the Fed has the recession under control. It has shaken the money tree, but the money is not going into growth, it is driving oil and gold into the stratosphere.
The Fed’s $160 bn injection to preserve inter-bank lending is not enough as markets are seizing up, confidence crumbling, and insurance rates soaring. Banks cannot get the money they need on commercial markets, so the Fed feels compelled to act. The US auction rate market is closed. Bank shares are collapsing. Debt spreads are ballooning. A meltdown has made banks reluctant to lend to each other.
The vicious credit crunch has entered a new phase. There are increasing doubts about mortgages. The Fed has cut interest rates and injected liquidity. The central government has approved a stimulus package. Government help has reached it limits, and it is proving helpless against the gathering negative forces.
Lenders and business are ultra cautious whom they lend to or employ. Banks are in panic mode, and are recalling perfectly good loans and have sold up government supported Fannie Mae, and it shares are at a decade -low level. Fannie Mae loans yield 5.96%; 10-year bonds yield 3.86%. The 2.86% difference between the two yields is significant, its the greatest since 1986.
Last week the record number of mortgage foreclosures spooked the market, and Thornburg Mortgage, the second biggest private mortgage lender, defaulted on some obligations. The enormous Carlyle Capital, a private equity company that epitomised the predatory buy-outs of stocks before mid -2007, also defaulted.
Banks panic also because at the end of 2007, 7.9% of home loans were in foreclosure or past due. The banks fear losing their money, and do not know what to do. They are unloading assets like there is no tomorrow. A tide of forced selling has driven risk premiums sky high. Default insurance on high grade investments is 188 basic points, up from 80 in January.
The municipal bond market is also inflicting pain. In February, the Port Authority of New York had to pay 20% interest, after an auction of $100 bn of bonds failed. The port Authority has a high credit rating, the market has merely seized up.
The credit crunch has reverberations in New Zealand. Property developments have been called off. Business investment may have turned down.
Brokers are encouraging people to re-enter the equity market. The view expressed here is that is will be prudent to wait. An enormous wave of defaults, foreclosures, and auctions is building. The recession has arrived, and a bear market has set it. The market is where it was 19 months ago; it might have dead cat bounces, but it will face more shakeouts as the credit crunch engulfs new victims.
Subscribe to:
Posts (Atom)
Posts
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/images/live/s_gold.gif)
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/images/live/s_silv.gif)