Rotorua

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Rotorua

Dear reader the last few days we got hit by a considerable amount of really bad news. However since my last musings it seems that the storm has calmed down somehow, at least from a bad news point of view. This fact as such is of course already great news. Anyway as there is not so much to report, this musings will rather be short.

Having spent the last days of my trip in New Zealand and having visited Rotorua, which is a very nice city in one of the most active volcanic areas worldwide, my thoughts came across a few items that I believe are worth some musing.



1. Rotorua and it's volcanic activity
I was really impressed by the pure power that our mother earth keeps below its surface. Rotorua, as mentioned before, is a city located in one of the most active volcanic areas worldwide. Just by walking through some parts of Rotorua you can observe holes with boiling water and boiling mud in it. It is really impressive to see houses where you have this boiling water in the backyard or garden. Although the spectacle is nice to look at, the smell on the other hand, is not to the liking of everybody. Sulfur smell is maybe best described as the smell of rotten eggs. Of course in the area around and close to Rotorua one can find many tourist attractions of different volcanic activities (Geysers, boiling pools in different shapes and colors from yellow to pink). Seeing these natural spectacles makes one understand the pure and enormous power that is boiling within the tomb of our mother earth. A power that can burst out or explode at any time. In fact in 1886 there was an enormous explosion of a Volcano near Rotorua. The explosion/eruption made disappear huge parts of the countryside and caused a few fatalities. This part today is one of the most interesting and certainly wonderful sights to visit. Well anyway my point in writing about Rotorua and it’s volcanic activity is not so much to promote tourism, although New Zealand is really nice and worth visiting, it is rather to let you know that the volcanic activity I saw reminded me very much of what is happening with the precious metal markets. Both, the volcanic activity and the precious metals markets are kept under control by a certain kind of force, be it natural or organized. Both are kept from flowing or rising unto the level where by nature they should be. Therefore in both the pressure is building due to no escape possibility. In both, the pressure to explode to the upside is increasing everyday. In fact, in the case of the precious metals, the pressure has been building up for more than 25 years. The high number of years with built up pressure will make the eruption a lot more powerful than most expect. What we have seen over the last few years regarding rising prices is just the boiling of the water but certainly not the eruption/explosion yet. Those of you dear readers who know me, know that I used the example of a balloon full of air, kept under water while the water level is rising. At some point the pressure of the air will be so strong that the powers that want to keep the balloon at the same spot will not be able to keep it there. Therefore the balloon will pop out of the water and after a few seconds will arrive on the water surface. I still believe it is a good example of what possibly will happen. Seeing the volcanic activity and musing a bit about it, made me believe even more in this theory. Like the balloon, the pressure to the upside will be so strong that prices will shoot through the roof. I expect prices of the precious metals, like the ball or the ash or stones from the volcano, to explode to above the “normal, inflations adjusted price level” before they fall back to the normal, inflation adjusted level. A price level, which in my opinion, will be much higher than today's price level. Well dear reader, my feeling is that the built up pressure is so strong that it could happen anytime.



2. Black Swan
Black Swans are beautiful birds indeed. I had the chance to see a few times several of them while visiting New Zealand. Seeing these beautiful birds made me remember Talebs book with the title The Black Swan. Although I did not yet have the time to read the book entirely I remember well his example of the Turkey. As a reminder for the readers who did not have the chance to read my musings with the Turkey example, following a copy of it.
"Consider the turkey that is fed every day. Every single feeding will firm the bird's belief that it is a general rule of life being fed by a friendly member of the human race (it is quasi the bird's right) until one day shortly before Thanksgiving something unexpected happens. Well it would certainly incur in a revision of belief."
Yes dear reader I truly believe that many if not most of the people still believe or are made to believe that nothing serious can happen in the stock markets. Yes many of the commentators now talk about recession. A recession which by the way has been so far negated by most of the commentators. Interestingly the same commentators who negated it say now that we are already through half of this recession that supposedly did not even exist a few days ago. However although it is now accepted that we are in a recession we are constantly being told that it will be a mild and short one and that there is nothing to worry about. Looking at John Williams numbers the US has been in a recession for more than 6 years. This I would not necessarily consider mild and much less short. That, dear reader, makes me have my serious doubts that a) the recession will be mild b) will be over in a short time c) that there is nothing to worry from an investment point of view, especially investments in equities and finally that we will not see a black swan event sometime soon. In fact my feeling about the markets is that there is a whole flock of black swans (events) circling the sky over the financial landscape. It might occur tomorrow or it might take some weeks to months until eventually a black swan event occurs. Maybe Publava is right and we will go through the sweet filling of the Oreo first. However I still see the flock circling. As long as I see this flock around I will try to stay in my shelter and will try to watch/observe it from as far as possible.



3. Food
Dear reader as you certainly remember I mentioned already in a past post that tensions regarding high food prices will increase and that we will see more and more riots around the world. Food prices are going up everywhere. Today a friend of mine from a Central American country told me, just to give you an example, that in short time the price of bread has gone up more than 40%. This adds to the growing list of food items that become almost on a daily basis considerably more expensive. Prices are already at such high levels that it is basically impossible for many people to buy the most needed food items. Not having the possibility to get the food legally, means that some will tend to take it away from others and certainly will lead to more riots down the road. The problem of stealing food is so acute that, according to a Kiwi newspaper, farmers in Thailand are already sleeping in their rice fields in order to avoid having their rice being stolen. Yes dear reader more riots due to high food prices is already a fact. People cannot afford their food anymore. It seems that this trend will increase.

Well even the World Bank warned and said that 33 countries are at risk of riots because of food prices — the risk is already becoming a reality in several of them. Food riots were reported in four West African nations yesterday, and a nationwide strike was called for today in a fifth. Plans for a general strike in Egypt to protest rising food prices have been squelched, but only because police arrested more than 200 people.

Bettina Leuscher from the World Food Program commented
“I think what we are facing is a perfect storm”. “More and more people are going hungry and need food aid. At the same time, we’ve got the lowest food reserves in some 30 years on the markets. And prices have gone up tremendously, sometimes doubled in the last few months and you’ve got climate change with less harvest, droughts, floods.”
Well dear reader it certainly looks like there will be some stormy weather ahead of us. Personally I do not like the word perfect storm. Why? Because perfect for me is something positive while a storm as described of course is quite the contrary.
Well anyway this of course is just playing with words. Let’s go back to the topic.
Riots in the Big Apple? Nope, no way!! (at least not yet). Anyway food pantries report major shortages because donations are way down.

Food prices and agricultural commodities

Well dear reader you know it already, yes food prices are rising. Following some news.

April 3 – Bloomberg (Jeff Wilson): “Corn rose above $6 a bushel for the first time ever in Chicago as cool, wet weather in the Midwest threatens to saturate fields and delay planting in the U.S., the world’s largest producer and exporter… Corn futures for May delivery rose 4.25 cents… Most-active futures have risen 73% in the past year on record world demand for corn used to feed livestock and to make ethanol.”

April 2 – Financial Times (Alan Beattie): “Governments across the developing world are scrambling to boost farm imports and restrict exports in an attempt to forestall rising food prices and social unrest. Saudi Arabia cut import taxes across a range of food products on Tuesday, slashing its wheat tariff from 25% to zero and reducing tariffs on poultry, dairy produce and vegetable oils. On Monday, India scrapped tariffs on edible oil and maize and banned exports of all rice except the high-value basmati variety, while Vietnam, the world’s third biggest rice exporter, said it would cut rice exports by 11% this year. The moves mark a rapid shift away from protecting farmers, who are generally the beneficiaries of food import tariffs, towards cushioning consumers from food shortages and rising prices.

April 3 - Financial Times: “Faced with the prospect of street riots, it is no wonder emerging market governments are opting to shoulder some of the burden of more expensive food. From India to Egypt, governments are slashing import tariffs on food and curbing exports, as well as cranking up subsidies. Longer term, however, the side effects of this largesse are ugly. Forgoing revenues and footing the bill for subsidies takes a toll on national budgets. India, for example, spent $600m on rice and wheat subsidies in 2004-05… In the Philippines…the rice subsidy is expected to reach $520m this year… Indonesia will cough up a whopping $2.2bn for food subsidies…”
Yes it will get tougher. Everybody will try to assure their part.


Other commodities
Oil
Oil above 110 USD barrel. Yes dear reader, oil prices are going up steadily. As you know Pickens expected a weak 2nd quarter but revised his opinion just a few days ago. It seems he did well revising his opinion and making the respective changes in his oil portfolio. Well fortunately I was able to buy oil investments in the range of 100 to 106 USD barrel. Of course I wanted more but not all my order went through. I certainly will increase my oil position one we will be around 105 or lower.

Precious metals
Precious metals are holding well, after prices fell considerably lately. The precious metals still might go lower, however, for the moment being they hold surprisingly well. The lower prices would go or the longer prices remain at lower or actual levels, the more the upside pressure will be and as mentioned at some point in the future the ball will move up.

John Williams on Hyperinflation
Dear reader the following information is just a small part of John Williams essay. If you want to read the complete information please go to www.shadowstats.com

The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement.

The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar and related dollar-denominated paper assets.

What lies ahead will be extremely difficult and unhappy times for many. Ralph T. Foster, in his "Fiat Paper Money" (see recommended further reading at the end of this issue), closes his book’s preface with a particularly poignant quote from a 1993 interview of Friedrich Kessler, a law professor at Harvard and University of California Berkeley, who experienced the Weimar Republic hyperinflation:

"It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money."
This Special Report updates and expands upon the three-part Hyperinflation Series that began with the December 2006 SGS Newsletter, exploring: (1) the causes and background of the evolving hyperinflation and great depression; (2) why circumstances will differ from the deflationary Great Depression of the 1930s; (3) implications for politics and the financial markets; (4) considerations for individuals and businesses.

The broad outlook has not changed during the last year. More generally, though, developments in the economy and the financial markets have been in line with projections and have tended to confirm the unfolding disaster. Specifically, the current inflationary recession has gained much broader recognition, while the still-unfolding banking solvency crisis has confirmed the Fed’s and the U.S. government’s willingness to spend whatever money they have to create in order to keep the financial system from imploding. While the dollar has taken a heavy hit — down roughly 20% against key currencies from last year — selling of the U.S. currency still has been far short of the outright dollar dumping that eventually will lead to flight to safety outside of the U.S. dollar. That event is important to the shorter-term timing of the pending hyperinflation.

Regular readers may recognize text from last year’s Series, as well as material from various SGS newsletters, but such is the nature of revisions to prior material. Points that may be repeated from earlier newsletters are done so in sequence to help build the arguments explaining the unfolding crisis. Great thanks are extended to the numerous subscribers who offered ideas, questions and materials that been incorporated in this report.

Well dear reader, I did not read yet the book mentioned. However what I was able to read about the Weimarer Republic and lately about Zimbabwe the hyperinflation szenario is not such a nice szenario at all.

As mentioned at the beginning, I thought it will be a short musing due to no significant news this week. But before finishing my musings the following news popped up.

Goldman Sachs Level 3 Assets Jump, Exceeding Rivals
April 9 (Bloomberg) -- Goldman Sachs Group Inc., the most profitable securities firm, reported an increase in harder-to- value assets during the first quarter, exceeding those at Morgan Stanley and Lehman Brothers Holdings Inc.
Goldman's share of Level 3 assets surged 39 percent to $96.4 billion at the end of February from $69.2 billion in November, according to a filing with the U.S. Securities and Exchange Commission today. The ratio of Level 3 to total assets rose to 8.1 percent from 6.2 percent.
While many subprime-related stakes that lost almost 100 percent of their value since July were categorized in Level 3, other holdings such as private-equity stakes, real estate and rarely traded corporate debt are also included because market prices for them aren't available. More assets have become difficult to value in the last three months as investors shunned a wider array of credit, reducing trading…

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ2Kfr_qt03g&refer=home
Well dear reader having such a high amount in Level 3 makes it difficult for them to convince me that there will be no considerable write downs. Only an absolute top Orwellian masterpiece could avoid the publicity of it.

FED
Following comments from different seasoned investors or newsletter writers.

And the FED pouring billions of liquidity into the market
— Meanwhile, quants behind the scenes are desperately trying to engineer new ways to increase liquidity…without dropping the fed funds rate.

The Fed’s Term Auction Facility (TAF), offering 28-day loans to commercial banks, spat out another $50 billion yesterday, for a total of $310 billion since last December. But they need more, more, more…

“The likeliest option…is for the Treasury to issue more debt than it needs to fund government operations,” surmises Greg Ip at The Wall Street Journal this morning. “The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit, and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasuries in the open market; for legal reasons, it generally cannot buy them directly from Treasury.”
 
“There are good reasons for legal limits on the Fed directly purchasing Treasuries,” comments our Dan Amoss, appalled at the Fed’s gumption. “Doing so basically means the Fed would print dollars to pay for the federal budget deficit — a move that would quickly lead to a total loss of confidence in paper money. History shows that when central banks start directly monetizing government deficits, confidence in paper money collapses quickly.
 
“The idea to expand the supply of Treasuries is also bad. This would put more purchasing power into the hands of a wasteful federal government. Since the government doesn’t produce any goods or services to offset its buying power, this idea would also add pressure to consumer prices.
 
“In short, there are no easy answers to a problem created by easy money and runaway credit growth. Expanding the money supply — no matter how sneakily — will only hurt confidence in the dollar.”

Fed looking at how to beef up lending power -WSJ 

NEW YORK, April 9 (Reuters) - The Federal Reserve is looking at contingency plans for bolstering its lending power in case recent measures it has taken to unfreeze the credit markets fail, the Wall Street Journal reported on Wednesday. 

Nothing is imminent, since the Federal Reserve still has room on its balance sheet for additional lending, the report said, adding that the internal discussions were part of efforts to identify options in case the credit crunch got worse. 

One option would be to have the Treasury borrow more money than it needs to fund the government and keep the proceeds on deposit at the Federal Reserve, the report said. 

Other options include issuing debt in the Federal Reserve's name, with the proceeds used to make loans or purchase other assets; and asking Congress for immediate authority for the Fed to pay interest on commercial bank reserves rather than wait until a 2006 law permits it in 2011, the Journal said…
How frightened is the Fed? The WSJ: The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed, which would issue debt under its own name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

The Fed is still in ‘scared-to-death’ mode; so it poured an astonishing $84.75B into the system on Tuesday with $34.75B 2 and 28-day repos and $50B via TAF ($310B total). $10B to $15B of O/N repos was expected because there was $16.5B in repos expiring. Dealers submitted $97B in bids; $62.7B was mortgage-backed. The Fed said the 28-day repos are part of its Single-Tranche OMO Program, which is the direct lending to primarily dealers (that has not occurred sine the Great Depression).

The ECB provided $15B in a dollar liquidity operation with the Fed. Why all the juice? Litany follows.
Perhaps the Fed wanted to insure that investors didn’t go negative after WaMu’s apparent bailout and forecast of a Q1 loss of $1.1B, a $3.5B ‘set aside’ for loan losses and charges, the reduction of its dividend to 1 cent and the closing of all freestanding home loan offices as well as the cessation of offering home loans through brokers. By curtailing these operations, it will be hard to ‘grow’ out of problems…

Yesterday, Paul Volcker said the credit crisis is the "mother of all crises" and the modern financial system has "failed the test of the marketplace."

Paul Volcker: "The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process, certain long embedded Central Banking principles and practices…What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return."

When asked about the possibility of a dollar crisis, Mr. Volcker retorted, "Dollar crisis…you don't have to predict it, you're in it…Let me remind you that the Dollar after all is a fiat currency backed only by the word and policies of our government, policies exemplified by an independent Central Bank committed to maintaining price stability.
These dollar and inflation comments have been mostly ignored by the media.

Mr. Volcker: "The transient causes of extreme leveraging have been exposed by force of circumstance.
The nation’s spending and consumption are being brought into line with our capacity to produce." Theprobable ‘greatest ever’ Fed Chairman issued views that can only be interrupted as extremely negative

IMF
The International Monetary Fund (IMF), for its part, expects a “mild recession” in the U.S. this year. It put a price tag of $945 billion on losses from the credit crisis this morning.

“There has been a collective failure,” says the IMF’s director of monetary and capital markets, Jaime Caruana, “to appreciate the extent of leverage in the financial system and the associated risks of disorderly unwinding.”

Wow dear reader, I am really glad that we will only have to deal with a mild recession. Thanks for the comfort. But wait, is it really that good a news? USD 945 billion losses from the credit crisis? Isn’t this a lot more than the approximately 230 billions of write-downs we have already behind us? Doesn’t that mean a lot more to be expected?

Hedge Fund
Yes dear reader there are more and more people who do not like to be invested in Hedge Funds anymore. Once again there are still some excellent funds out there but there is unfortunately a lot more rubbish than excellent ones.
April 3 – Financial Times (James Mackintosh): “Hedge funds are still reeling after banks unexpectedly pulled credit lines and demanded more security against loans, forcing firesales and heavy losses. Now they face a new threat: investors are abandoning them, raising the risk that the funds will have to sell assets at any price to raise the cash to meet withdrawals. So far redemptions are mainly in out-of-favour sectors such as credit funds, small-cap specialists and event-driven funds, which include activists, along with poor performers unexpectedly hurt by the credit squeeze. But a series of big funds have already been forced to react, restricting withdrawals or restructuring, and more are thought to be considering changes. ‘There are two ways you get squeezed running a hedge fund,’ says one large investor in the industry. ‘One is that you can’t get finance from your prime broker. The other is that the clients take their money away and you can’t get enough liquidity [cash] to meet the redemptions.’”

Credit Default Swaps
Dear reader you might remember that a few weeks ago I mentioned in one of my musings that possibly the Credit Default Swaps will be the next mess to sort out. Now George Soros believes the same

Well dear reader that is it for this time. I am traveling and therefore it is quite difficult for me to get hold of all the news. I will try to post my musings but there might be some delays in the next days. Anyway, I wish you all an excellent time with a lot of fun.