1984

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1984

Well dear reader there were over the past 8 years many moments where I was reminded of George Orwell. Many situations we had to face made me think of George Orwell’s famous book. I even got the book I bought some 30 years ago, out of my library in order to read it again. Wow. It is so real. How could someone decades ago see so clearly how our future will be? In fact there is not much more to say. We are basically already where Orwell thought we are going to be. If you look for example at how they try to keep the markets from collapsing with this load of bad news, it is really Orwell at it’s best. In fact sometimes it seems almost comical to see how they operate. They are able to keep the market from collapsing although the bad news are hitting the tape more or less on a daily basis now. The public still remains calm and is not aware of what is coming. Really, a job well done by the Orwellians. Not only are they able to make the bad news look more or less good, as soon as there is a bit of neutral or even good news (which is of course already a tremendous exception) they are able to turn this piece into a super bullish piece of news. The people described in Orwell’s book couldn’t really make a better job than their clones of today. They truly control the media and spin all the news, good (if we are lucky) or bad, into a piece of information that fits to what they want us to believe.

Well dear reader, are we now on the safe side? If yes, for how long? Well our Orwellian leaders want us to believe that we are OK, but are we really? Please read on.

Well dear reader, last week we were on the brink of financial meltdown as the fuse of the $500 Trillion derivatives neutron bomb was lit due to Bear Stearns being pulled toward the black hole of counterparty default. Well dear reader, are we safe now or do we live on bought time? Well the derivatives are still out there. Somebody has to pay, at least that is what is expected. But what happens if the counterparty simply does not have the funds to fulfill it’s obligation? Being perfectly hedged does not mean anything if the counterparties do fail. It is like Domino. The first stone falls the others follow. Well dear reader, although we have some more time until reckoning, the amount of risks is still the same. You remember that I mentioned several times that the derivatives market with it’s size and it’s counterparty risks could explode at any moment. Yes it can and it will be a complete disaster. It can happen tomorrow or in a few months. It will be a mess because there are so many complex derivative structures outstanding that in fact nobody really knows what risks they have on their books and much less who the counterparty is. It seems to me like the mortgage mess. Like with the mortgage bubble, the derivative bubble is full of investments with only speculative caracter. There are so many complex structureas that hardly anybody (if any indeed) can really know what the risks involved is. We cannot afford to have any significant player fail. It would be ugly,

Well dear reader, history shows us that markets tend to move back to normal over time. However when the pendulum moved too much to one side, we will see the same pendulum move the same extend to the other side before it will average out. That means we will not go back to normal in a smooth way. Just going back to normal would mean that there will be some victims on the road. Moving first to the other extend of the pendulum will of course be a lot more of what we do not want. Well dear reader my advice is, be prepared. Guess what my favorite investment is in the sense of being prepared.

Talking about derivatives, it is important to mention that the notional amount of outstanding derivatives of approximately 500 trillion USD or even more is more or less close to 10 times world GDP or with other words what the whole world produces in one year. Knowing that the official GDP numbers are grossly overstated, especially in one of the biggest economies, namely the US, I guess that the total amount of outstanding derivatives is possible above 15 times what the whole world produces in one year. Yes dear reader the production of fantasy constructions such as derivatives and complex structures including a derivative has been much more efficient that the production of real stuff. Incredible indeed. This is not the monopoly we were used to play. This is the fantasy monopoly. Is it really different? Maybe. Maybe the numbers are a bit different. However the paper money still has the same value, be it the traditional monopoly or the new monopoly. The only difference regarding the paper money is, that people still accept the new monopoly money for payment. They have not yet understood that the green/black piece of paper in fact has exactly the same value as the traditional monopoly money. It is the value of a commodity called paper, which originally was timber and nothing else.


Central Banks Float Rescue Ideas
By Chris Giles and Krishna Guha
Financial Times, London
Friday, March 21, 2008

http://www.ft.com/cms/s/0/a233faa2-f789-11dc-ac40-000077b07658.html?ncli...

LONDON -- Central banks on both sides of the Atlantic are actively engaged in discussions about the feasibility of mass purchases of mortgage-backed securities as a possible solution to the credit crisis.

Such a move would involve the use of public funds to shore up the market in a key financial instrument and restore confidence by ending the current vicious circle of forced sales, falling prices, and weakening balance sheets.

The conversations, part of a broader exchange as to possible future steps in battling financial turmoil, are at an early stage. However, that such a move is being discussed at all indicates the depth of concern that exists over the health of the banking system.

It shows how far the policy debate has shifted in recent weeks as the crisis has spread to prime mortgage assets in the US and engulfed Bear Stearns, the investment bank.

The Bank of England appears most enthusiastic to explore the idea. The Federal Reserve is open in principle to the possibility that intervention in the MBS market might be justified in certain scenarios, but only as a last resort. The European Central Bank appears least enthusiastic.

Any move to buy mortgage-backed securities would require government involvement because taxpayers would be assuming credit risk. There is no indication as yet that the US administration would favour such moves. In the eurozone it would require agreement from 15 separate governments.

One argument among policymakers and bankers has been that new international rules have exacerbated the credit squeeze by requiring assets to be valued at their current record lows rather than at face value.
But a strongly held view at one European central bank is that it is not "mark-to-market" accounting that is to blame for severe weaknesses in banks' balance sheets but that prices of MBS securities have fallen to levels that imply unrealistically high rates of default.

If public authorities were to buy and hold sufficient mortgage-backed securities -- rather than simply lend against them as they have until now -- at prices well below face value but above current prices, they would set a floor in the MBS market.
The Fed does not believe that the point has yet been reached when such drastic action is necessary and considers the discussions it has had with its counterparts to represent "blue-sky thinking" rather than the formulation of a definitive policy proposal.

Fed officials are monitoring the impact of the latest barrage of Fed liquidity moves and interest rate cuts. They also believe the United States has not exhausted all the options short of wholesale public intervention and further intermediate steps are available to them.

These could include still more aggressive use of the Fed's own balance sheet to boost liquidity in the markets.
Analysts say the US government also has plenty of scope to boost support for the markets indirectly through the Federal Housing Administration or Fannie Mae and Freddie Mac.

The UK lacks these institutions, which could be one reason why the Bank of England is keenest to explore outright intervention. The UK government has already become heavily involved in buying mortgages since September with the recent nationalisation of Northern Rock, the mortgage lender.

Michael Coogan, the director-general of the UK's Council of Mortgage Lenders, said this week: "Demand for mortgages remains strong but cannot be fully met from existing funding sources." He predicted higher prices and reduced lending.
It is not just central banks that think the MBS market prices are too low and imply a unrealistic level of mortgage default. Some US states' pension funds are investing small sums in the mortgage market.

Robert Gentzel, a spokesman for the Pennsylvania State Employees Retirement System, told the AP news agency: "Some of the securities that have dropped in value were really very solid securities."
To read more about the above topic I recommend to visit

Quiet Coup Towards Nationalization

http://globaleconomicanalysis.blogspot.com/2008/03/quiet-coup-towards-nationalization.html

The information on above webpage is excellent. Yes dear reader, what happened over the last days is practically the beginning of a nationalization of the financial system. Moral hazard is a topic without doubt. What does that mean. It means that all the crooks that got us into this mess will get away without having to face responsibility. Furthermore it means that the money of the taxpayer will be used to help those who on a moral point of view should not be helped at all. That means that the printing presses have to work full and that of course means a lot more of the same, namely inflation.

More on the JPMorgan bailout

Yes Dear reader I wanted to say JP Morgan Chase bailout and not Bear Stearns bailout. Why? Well dear reader, in fact it was a JP Morgan Chase bailout because JPMorgan was and is the counterparty of a huge number of the derivatives that were on the Bear Stearns book. Than means if Bearn Stearns would have gone down, JPMorgan Chase too, at least that is what I believe. That means that the FED had to step in. The whole deal in fact is to save all those who have derivatives with Bear Stearns as counterparty on their books. As simple as that.

Last week was a really bad week for the Bear Stearns shareholders. They went skiing or fishing on Friday evening. When they heard the news on Monday morning they found out that they lost practically all of their investment in the former mighty Bear Stearns. Bear’s bridge-champion chief, Jimmy Cayne, for example, had more than a billion dollars’ worth of Bear stock. But when the dust settled last week it was worth only $30 million. Well toward the end of the week the situation got at least a bit better for the BS shareholders. JP Morgan increase it’s offer. Did they have to do it? Some say they had to do it in order to avoid legal actions from the shareholders, which would have had the effect of huge costs and the risk that some information they do not want to be public, would have gotten public. Well for the shareholders the real reason does not matter at all.
Talking about JP Morgan, I found the following piece of information, which in my opinion is very interesting. So dear reader, please copy paste the link and read on.

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

Following a part of the above just to let you get the feeling.

to understand the grim outlook for JPM, start the analysis with derivatives. Because of its huge market share in all manner of OTC derivatives, JPM represents a "super sample" of overall OTC market risk. In terms of total size vs the bank's balance sheet, JPM's derivatives book is more than 7 standard deviations above the large bank peer group. 


Because of this huge OTC derivatives book, the $1.6 trillion asset bank can tolerate just a 15bp realized loss across its aggregate derivatives position before losing the equivalent of its regulatory Risk Based Capital (RBC). And much like the GSEs, JPM's positions are too big to hedge - despite what Mr. Dimon may say to the contrary about laying off his bank's risk. And note that we have not even mentioned subprime assets yet.


Look at the balance sheet of JPM's three main subsidiary banks and the mounting stress from loans losses is apparent. At the end of 2007, JPM aggregated 97bp of gross loan charge offs, 1.25 SDs above peer, and produced a Loss Given Default of 85%, likewise well above peer. The Exposure at Default calculated by the IRA Bank Monitor using data from the FDIC was 202%, more than 2 SDs above peer.
Well dear reader I believe it is a must read because it gives us an idea of the problems that some of the financial institutions can face or are already facing.
Let’s have a look at another Wall Street institution.
Lehman Brothers surprised the market with an excellent result. But wait, was it really excellent? Well in fact it was not. Analysing details of the balance sheet the whole thing does not look as good as it seemed. To read more about it, please copy paste the following link where Mish gives all the important details. Really an excellent piece of information.
http://globaleconomicanalysis.blogspot.com/2008/03/questions-linger-over-lehmans-balance.html


FED

Despite the Fed’s intervention, in both London and New York the cost of money for most borrowers actually went up.
“Fed cuts fail to lower 30-year mortgage rates,” notes the Los Angeles Times . At the long end of the yield curve, rates are determined more by fear of inflation than by the Fed’s price fixing. Thirty-year fixed-rate mortgages have gone up from 5.6% to 6.4%.

But even at the short end, where the Fed is pressing its fat thumb on the scale, “Money market rates rise as banks hoard cash,” says a Bloomberg report.

The banks are holding onto their money because they figure they might need it. That’s what everyone does in the opening stages of a credit contraction. They’re afraid that if they lend it out...they will later discover that the borrower can’t pay it back.


Oil
For what it’s worth, legendary energy investor T. Boone Pickens reversed his oil position yesterday.
The billionaire investor had been shorting light sweet crude through the first quarter, a position that had much of the energy world convinced $100 barrels wouldn’t last long. It’s also a position that kicked Boone’s BP Capital Energy Equity Fund in the teeth. It was down 14% in the last two months.
“I think I made a mistake,” the Texas octogenarian told a CNBC cheerleader by way of explanation. “I thought oil in the second quarter could come off $10, but I don't think that's going to happen. In the second half, you're going to see oil above $100. The major oil companies have peaked on their production. It's awful hard for them to add to their reserves and their production.
“Look at the producer countries. They have all kinds of reasons to keep the price up and they're going to keep the price up. The only way I could see [oil dropping to $50] is a global recession… a serious global recession.
“I don't believe I will ever see $50 oil ever again


Peak Oil

Yes dear reader, I was of the opinion and of course told everybody who dared to listen, that we passed through the peak world oil production in 2006. Do you believe it? Well we will not know until a few years down the road if my assumption was correct or not. However the news I read about oil productions seem to me to be a kind of a confirmation of what I believe.
For example the news from PEMEX is one of the many indicators that my assumption is correct.
Petroleos Mexicanos (PEMEX), the state-owned Mexican oil conglomerate and major U.S. trading partner, announced a 6.4% decline in oil production during the first two months of 2008 yesterday

Please keep in mind that PEMEX is one of the most important exporters to the US. That means more harsh times ahead for the consumers in the US.

Dear reader if you are one of the PEMEX shareholders or if you have considerable investments in Mexico, please keep in mind that PEMEX was for years the most important revenue/tax producer for Mexico. That means that there will be difficult times ahead for Mexico because the income from PEMEX will decrease considerably over the coming months. The Tequilla crisis was due to low earnings from PEMEX (due to low world oil market prices). That crisis showed clearly what it means when the income from PEMEX is not flowing as whished.


Other commodities

Yes dear reader, commodity prices have seen a huge down correction over the last days. Is more to be expected? Maybe. However please keep in mind that basically all commodities have risen a lot over the past months and therefore almost all commodities were clearly in a overbought situation. Furthermore due to the fact that the financial institutions were asking for better or additional collateral, many hedge funds and other investors were obliged to sell some of there positions. Selling the ones with profit is always what they do first. As, apart from the commodities, not many asset classes have shown profits so far this year, it was in fact nothing unusual to see a sell off in commodities, especially taking as well into account that we were in a clear overbought situation.

As mentioned a few times, these corrections are positive as it provides you/us with the opportunity to buy at lower prices. Take grains for example. Prices for grain futures have fallen considerably. However it is my understanding that physical stockpiles of grains are worldwide at the lowest point ever and it means really at the lowest point. That means they physical stockpiles are so low that a lot more people will suffer hunger due to lack of grains or extremely high prices of it. Why? Because we have not only almost NO (and it really is meant to be in capital letters) stockpiles at all but we have too the emerging markets with an increasing demand of almost all commodities including food items. So my guess is that we will see prices move much higher again in a relatively short time. It may take up to 3 months but it will not take a lot more.
Well dear reader that means that I will be a buyer of commodities in the coming weeks. The commodities that are on my buying list are mainly:

Precious Metals
Oil
Natural Gas
Agricultural Commodities (especially wheat)
Palm Oil

Well dear reader, China and India have come out with five year plans which combined will end up with almost 1,5 trillion USD to be spent on infrastructure. A few years ago Chindia was not important at all. Today they have 40% of world’s population and it’s still growing.
Finding enough commodities to meet the ever increasing demand is more and more difficult. We have today simply a few billions more people on this planet than just 3 decades ago. Since then world population more than doubled. These are very important global shifts.