For the week, the S&P500 gained 2.2% (up 13.6% y-t-d), and the Dow rose 2.0% (up 8.3% y-t-d). The Banks jumped 2.8% (up 6.3%), and the Broker/Dealers added 1.2% (up 43.4%). The Morgan Stanley Cyclicals increased 1.5% (up 51.7%), and the Transports gained 1.7% (up 6.5%). The Morgan Stanley Consumer index jumped 3.0% (up 11.4%), and the Utilities rose 2.0% (up 0.7%). The S&P 400 Mid-Caps rallied 2.1% (up 22.5%), and the small cap Russell 2000 surged 3.1% (up 16.4%). The Nasdaq100 gained 1.6% (up 35.2%) and the Morgan Stanley High Tech index rose 1.7% (up 48.3%). The Semiconductors increased 2.3% (up 42.0%), and the InteractiveWeek Internet index gained 1.6% (up 53.7%). The Biotechs jumped 2.4% (up 35.9%). With Bullion up $5.60, the HUI gold index added 0.3% (up 18.5%).
Gold ended the week up 0.6% to $954 (up 8.2% y-t-d). Silver declined 3.9% to $14.19 (up 25.6% y-t-d). October Crude surged $4.39 to $73.99 (up 66% y-t-d). September Gasoline rose 3.4% (up 89% y-t-d), while September Natural Gas sank 13.7% (down 50% y-t-d). September Copper added 1.5% (up 105% y-t-d). September Wheat fell 4.5% (down 25% y-t-d), while September Corn increased 0.8% (down 20.9% y-t-d). The CRB index added 0.7% (up 12.9% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 2.6% (up 34.7% y-t-d)
In this post you will find:
The wise man and my musings about recession
Jim Willie with information regarding banking holidays
FDIC: after more bank failures is the FDIC bankrupt? Will this be a trigger to other failures
FASB157 rule change of the accounting rules to a more transparent and correct way?
Bank and banksters finally some good news for battered UBS
The great bank robbery
GEAB report news from the European think tank
Bonds The USTreasury auctions now have domestic hidden elements, and global hidden monetization elements
Gold We are just entering the strongest seasonal period for gold
Commercial real estate Collapse
Doug Noland: The Depressed U.S. Consumer And Global Reflation
The wise man
There once was a village that had among its people a very wise old man. The villagers trusted this man to provide them answers to their questions and concerns.
One day, a farmer from the village went to the wise man and said in a frantic tone, “Wise man, help me. A horrible thing has happened. My ox has died and I have no animal to help me plow my field! Isn’t this the worst thing that could have possibly happened?” The wise old man replied, “Maybe so, maybe not.” The man hurried back to the village and reported to his neighbors that the wise man had gone mad. Surely this was the worst thing that could have happened. Why couldn't he see that?
The next day, however, a strong, young horse was seen near the man’s farm. Because the man had no ox to rely on, he had the idea to catch the horse to replace his ox – and he did. How joyful the farmer was. Plowing the field had never been easier. He went back to the wise man to apologize. “You were right, wise man. Losing my ox wasn’t the worst thing that could have happened. It was a blessing in disguise! I never would have captured my new horse had that not happened. You must agree that this is the best thing that could have happened.” The wise man replied once again, “Maybe so, maybe not.” Not again thought the farmer. Surely the wise man had gone mad now.
But, once again, the farmer did not know what was to happen. A few days later the farmer’s son was riding the horse and was thrown off. He broke his leg and would not be able to help with the crop. Oh no, thought the man. Now we will starve to death. Once again, the farmer went to the wise man. This time he said, “How did you know that capturing my horse was not a good thing? You were right again. My son is injured and won’t be able to help with the crop. This time I’m sure that this is the worst thing that could have possibly happened. You must agree this time.” But, just as he had done before, the wise man calmly looked at the farmer and in a compassionate tone replied once again, “Maybe so, maybe not.” Enraged that the wise man could be so ignorant , the farmer stormed back to the village.
The next day troops arrived to take every able-bodied man to the war that had just broken out. The farmer’s son was the only young man in the village who didn’t have to go. He would live, while the others maybe not.
I hope dear reader that the above will help you through the coming weeks that seem to become challenging. Don’t forget the following:
For many people recessions or depression are a very bad situation. Well it is true that for many a recession or even more a depression means real hardship. Of course I do not wish for anybody to have to go through such a hardship. On the other side I must say and I strongly believe, that recessions are good. Why? Well because recessions happen due to a previous overheating of the economy. That means that many if not most people consume lot’s of stuff (maybe crap is the better word) they do not need, companies are producing more than really is needed and the environment really suffers. So we need the recessions in order to cool down an overheated situation. So recessions in fact are healthy. Well than, why do some suffer in the recession? Well first of all in the time before a recession the growth and wonderful times seems like going on forever. Only a few think of changes and corrections. These few are called Mr. Doom or similar. As everything goes on that well so do our dreams. That means that people do not make reserves as their forefathers used to do. It means that very intelligent businessmen do listen more to their young and in fact inexperienced advisors/investment bankers in their expensive business suits, telling them how to do the business. Well none of these young shooting stars has lived through a previous recession and it is, in my opinion, a bit lack of caution and common sense if one follows these “bright” guys blindly, especially as most of them earn nice bonuses depending on the commissions generated and as most of them are told by their employers what commission producing product should be sold. Of course the well paid CEO’s who normally only hold a couple of shares of the company they run and therefore do not really participate as risk takers, need millions of bonuses in order to show everybody that they are really successful. In order to justify their horrendous bonuses they have to take risks, risks that the shareholders have to bear (nowadays the tax payers too) and not these genius CEO’s. That means they have to show growth. A strategy to keep the status quo is not accepted and if a wise CEO really would follow such a strategy he most probably will not be able to stay in his position for more than a maximum of 24 months. So the name of the game in such a situation is strive for growth. In case there would some grey clouds, as indicators that a considerable thunderstorm is approaching us, appear on the horizon the wise CEO might take some precautionary measures but most CEO’s certainly would just ignore the clouds and let everybody including all their stakeholders let know that everything is fine and that the future is bright.
As everything goes so well we certainly will weather the storm well, is what they and their highly paid advisors dressed in Brioni suits believe. But dear reader, history tells us that from time to time a really heavy storm hits us, especially after an extremely hot summer day. Like these thunderstorms in summer are good for nature, the economic thunderstorms are good for the economy as well. Well as mentioned some suffer but many suffer because they did not prepare well. Of course there are as well some stakeholders like the employees that are laid off because of miscalculations of their bosses and mostly these are the least prepared. I am sorry for all these folks. However even so we need a recession from time to time. Trying to avoid any recession at any price is a mistake. The mess we are in right now is precisely because of such a misguided previous policy in order to avoid a recession in 2001. Now we know that Mr. Greenspan’s policy of low interests in 2001 has had an delaying effect (the orgy did not stop) but the wake up calls and the headaches we have to face since fall 2007 are without doubt much stronger than the headaches of a “normal” recession, like the one in 2001 possibly would have been. So yes dear reader a recession is healthy because this is the way to eliminate inefficient enterprises. Well if I look at the economy of today, I still can see countless inefficient and useless enterprises (apart from giving some folks a job). Therefore I believe that we have not yet touched the bottom of the recession, which probably will be a depression and not a recession.
For the environment a depression is great dear reader. Why? Well because in the past couple of years we have consumed like crazy. In order to consume useless things we do not really need (or only need to satisfy our ego because we think we need this “thing” because our friends, neighbours etc. bought the same useless “crap”), we needed commodities and we needed energy to make these “things” and more energy to move these “things” the point of sale. So we got used to destroying our environment to fulfill our desires for useless crap (and all we throw away will have a long lasting effect as well). With other words dear reader, this is a rape of our mother earth. We treat our mother earth like there are many more. Like we could change the planet if we wish so. Well there might be parallel worlds and certainly other planets with live form (I believe live form that is a lot more intelligent the we are), but there is, at least for us here on earth, only one mother earth and we simply cannot let this planet be destroyed. I am afraid that we are really out of balance and a rebalancing of everything on this planet is really needed. We can make a difference if we want. Please be part of it.
So once again the recession/depression should, as a positive side effect, give us the chance to have more time to help rebalancing this planet. We truly need it.
Once again, dear reader, recessions or depressions are not negative at all. It’s us that believe it is negative because we do not see the real function or the real positive sides of a recession. So the negative part is only in the heads of those that see it as negative and not in the heads of those that warn in a timely manner to get prepared. Right? So let’s take the time and spend more quality time with family, friends, reading or whatever you like to do.
Yes spend quality time that will help to rebalance our planet but do not forget to stock up your reserves. The winter just began and will last a couple more months if not years.
About the inexperienced advisors following a joke
A shepherd, far away from any village, was watching his flock. Suddenly a brand new BWM appears at high speed and in front of the shepherd, gets on the brakes, producing a huge cloud of dust. The driver, a young man with a Brioni suit, Cerutti shoes, Ray-Ban sunglasses and a YSL tie jumps out of the car and asks the shepherd: “If I guess right the number of sheep you have, will you give me one?” The shepherd first looks at the young man than overlooks his flock and says calmly: “ OK”.
The young man parks his BMW connects his notebook to his cellular phone, starts the NASA Internet page, scans the area with the help of the GPS satellite navigation system, opens the database with a huge amount of excel files with high-sophisticated calculation models. Finally he prints a 150-page report on his high-tech mini printer, turns toward the shepherd and says in a convincing way: “you have exactly 1586 sheep”.
The shepherd says: “that is right, so take one”. The young man picks one and puts it in his BMW. The shepherd watching him finally says: ”If I guess correctly what your profession is, will you give me back my sheep?” The young man answers: “ sure why not”. So the shepherd says: “you are a business consultant.”
“That is right, how did you know?” asks the young man.
“Simple” answers the shepherd. “First you come here although nobody asked you to do so. Secondly you ask me to give you one of my sheep as payment for telling me something I already know and thirdly you have not the slightest idea what I am doing and now please give me back my dog.
Jim Willie
Well dear reader I come across more and more rumors mentioning banking holidays. Especially Jim Willie beliefs that this can happen soon. Recently he mentioned the following;
Quote
For those looking to dismiss the rumors of a widely orchestrated plan to shut down the US banking system, for whatever stated or actual reasons, perhaps attention should be directed at the US Dept of Homeland Security (HSA) and the Federal Emergency Mgmt Agency (FEMA). Not only are they spanning the nation in making tentative preparations for a series of bank holidays, but they are working to enlist the police forces at the state and city level under the federal law enforcement system, in addition to the national hospital system. Anecdotal stories stream in from around the country, impossible to ignore. Who knows what legal grounds or unfolding events precede such a development? Watch a turf battle perhaps between HSA and the FBI. To be sure, tremendous stress is at work within USGovt agencies, ministries, and elsewhere. My focus is primarily on the financial impacts, never to be swayed by official stories and pronouncements.
Unquote
FDIC
Well dear reader there are many landmines around that could blow up immediately and could become the trigger for a declaration of a bank or banking holidays. On of these possible triggers is certainly the bank failures and therefore the low funding of the FDIC which could become bankrupt in the next days.
Saxo Bank analyst Robin Bagger-Sjoebaeck had the following report on August 12.
FDIC’s Shrinking Deposit Insurance Fund –
A Testimony of Current Accounting Standards
As late as in the end of April just before the release of the bank stress tests, Ms. Bair Chairman of the FDIC said they would not need any additional bailouts from the U.S Treasury within the immediate future according to The Bulletin. After three new bank failures last Friday, the FDIC’s Deposit Insurance Fund (DIF) diminished by another $185 million for a total remaining balance of $648.1 million. After just passing half-year 2009 the FDIC have already used up roughly $16 billion of the fund.
Attached in the document you can find a spreadsheet with a complete table showing banks that have been insured by the FDIC and have failed under the period 2000-2009. The list is arranged by the closing date. Most importantly one will find the recorded assets at the closing date and the estimated losses covered by FDIC’s DIF.
Not surprisingly the rate of bank failures has increased during the last two years. Throughout the period 2000-2002 FDIC handled 17 banking failures with the majority (11) occurring during the recovery period in 2002. In 2008 and so far in 2009 FDIC has assisted some 90 banks through closure. The much larger number of failed banks can easily be explained by the type of recession we are currently facing compared with the tech-bubble.
On January 1st 2009 FDIC reported they had $17,276 million in their deposit insurance fund (DIF) and according to press releases for each failed bank, the estimated total costs for FDIC’s DIF during Q1 amounted to $2,146 million, leaving $14,997 million in the fund. However, according to the latest FDIC Quarterly report the fund counted $13,007 million at the start of Q2, thus a difference of $1,990 million. In other words the estimated spending on failed banks during Q1 was $2,147 million, but the bill ended up around $4,137 million instead (and probably still counting).
This is why Q2 is even more interesting, since the estimated costs are $11,504 million, thus leaving only $833 million in the fund for supporting failing banks in the future. Moreover the real total cost for Q109 turned out to be almost twice the amount of the estimates the second quarter showed. If that will be even close to reality for Q209 the FDIC’s DIF will (very) soon be out of funds completely.
However, we have detected that DIF costs/bank assets have steadily increased under the period of discussion.
We believe the main reason for this observation lies in a de facto relaxation of accounting standards, even before the FASB 157 amendment on March 15th earlier this year. Basically the relaxation allows banks to only write-off parts of their losses due to market impairment and they may themselves decide a fair price that the asset could have been sold for during normal market conditions to keep in their books. Allowing banks to control how they mark-to-market their assets, will likely backfire and when they ultimately end up failing, imply greater closure costs for the FDIC. From the graph above one can infer that the average yearly DIF costs/bank assets have increased at an alarming rate to almost reach 31% in 2008 and 2009.
So, what does that imply? Basically it means that when valuating any U.S bank, their assets should probably be marked down significantly relative to their book value, much because of how they nowadays are allowed to manipulate their balance sheets in order to appear more solvent than they in fact are.
E.g. if we look at the ten biggest banks in the U.S and assume conservatively that their accounting standards are comparable to the most truthful 15% of banks that have failed under FDIC and we sort on the 15th percentile, it would result in a $75.3 billion (10.78% of combined assets $698.53) write-down. In other words, if banks would quit operating in their dream-world where accounting standards obviously are next to absent and join the real world that would leave serious gaps in their balance sheets of some $75.3 billion. For clarification, the 15th percentile of DIF costs/bank assets equals 10.78%.
Below is a graph showing the DIF capital as a percentage of total bank deposits insured by the FDIC. Note that this graph is based on the old insurance limit with a maximum coverage of $100.000/account. This limit has been changed to cover up to $250.000/account until January 1st 2014. Estimates say that the change increases the deposits covered under FDIC insurance to approximately $6 trillion in total.
The current reserve ratio of 0.014%1 strongly indicates how bad this crisis has affected U.S financial institutions. However, this is not the entire story. If we take a closer look at non-current loans and charge-offs from banks one realizes that the FDIC still has a lot of work to be done. Combined non-current loans and charge-offs amounted to nearly $100 billion in Q109 compared to $15 billion/quarter pre-crisis. Moreover, according to analysts at the Royal Bank of Canada the U.S still has banking failures in the thousands to face before the crisis is over.
In turn that should result in the FDIC requesting the pre-approved funding signed by the Congress in May 2009, including $100 billion from the U.S Treasury Department.
More information about the FDIC
http://www.howestreet.com/articles/index.php?article_id=10496
http://globaleconomicanalysis.blogspot.com/2009/08/as-of-friday-august-14-2009-fdic-is.html
http://seekingalpha.com/article/156901-the-fdic-is-broke-now-what-part-ii
FASB157 rule
Please take especially note of the information about his remarks regarding the change of the FASB157 rule; as this is very important following his comments again
We believe the main reason for this observation lies in a de facto relaxation of accounting standards, even before the FASB 157 amendment on March 15th earlier this year. Basically the relaxation allows banks to only write-off parts of their losses due to market impairment and they may themselves decide a fair price that the asset could have been sold for during normal market conditions to keep in their books. Allowing banks to control how they mark-to-market their assets, will likely backfire and when they ultimately end up failing, imply greater closure costs for the FDIC. From the graph above one can infer that the average yearly DIF costs/bank assets have increased at an alarming rate to almost reach 31% in 2008 and 2009.
So, what does that imply? Basically it means that when valuating any U.S bank, their assets should probably be marked down significantly relative to their book value, much because of how they nowadays are allowed to manipulate their balance sheets in order to appear more solvent than they in fact are.
E.g. if we look at the ten biggest banks in the U.S and assume conservatively that their accounting standards are comparable to the most truthful 15% of banks that have failed under FDIC and we sort on the 15th percentile, it would result in a $75.3 billion (10.78% of combined assets $698.53) write-down. In other words, if banks would quit operating in their dream-world where accounting standards obviously are next to absent and join the real world that would leave serious gaps in their balance sheets of some $75.3 billion. For clarification, the 15th percentile of DIF costs/bank assets equals 10.78%.
http://www.tradingfloor.com/EN/Documents/Research%20Note/2009-08-12%20Saxo%20Bank%20Research%20Note%20-%20FDIC%20DIF.pdf
Banks and Banksters
UBS and Citibank
Well dear reader some positive news came from UBS this week. On one side UBS finally got of their problem in the US in a favorable way. However some of the employees still have to face legal problems due to having executed activities in the US without proper authorizations. Well the 4,500 clients of which UBS has handed out information in a hurried way to the US government possibly are not so happy with that fact. To them it might seem especially cynical to read that UBS basically claims to be the victim and as the victim having had to suffer for months being basically in the middle of negotiations between the Swiss government and the US government. To them it might seem cynical that UBS claims that the Swiss government was really the negotiating part while in fact the Swiss government only stepped in to help UBS who was in a really dire situation due to the reckless behavior of some staff and the legal actions taken by the US government. Ironic indeed, that the financial institution who created the problem in the first place now claims to be the victim.
Well anyway the US problem was in my opinion only a side problem for UBS, although lately it was prominently represented in the news. The real problem for UBS, like with all big banks, is in my opinion the assets they still hold on their books. Well let’s first look at the positive side. The Swiss government has sold its participation in UBS this past week, a participation they were forced to take over last year when UBS was in deep troubles. Furthermore the Swiss government was able to sell its stake with a nice profit. This is really good news for the taxpayers. However the Swiss taxpayers still will have to bear the risk of the billions of toxic assets that the Swiss Nationalbank had to take over from UBS November last year. There are still billions of these assets in the books of the Nationalbank. Personally I doubt that the Nationalbank will be able to sell these toxic assets before the value of the assets will fall to zero or close to zero. Well I must admit that the Swiss government made a really good deal by selling the UBS stocks last week. I really do applaud them for the perfect market timing. Of course they do not know yet that their market timing most probably will turn out to have been almost perfect. Why do I say so? Well because dear reader, as I have mentioned in previous posts, and as I state again in this post, I do expect major troubles in September/October or November and I do expect the financial sector to be hit particularly and the big banks and insurance companies especially. Therefore I do see the share prices of these companies, including UBS and Citibank, which rose due to the UBS news too, at a much lower price soon.
What might be the trigger for the negative impact on the financial sector?
Well for example a change of the FASB157 rule, which as I understand, should happen in the 3rd quarter of this year.
Once the public will see some more realistic numbers from the financial institutions it will become clear to many that the situation is far from being fine. Therefore I do expect, as mentioned in previous posts, a strong down move in the equity markets, lead be the financial institutions and further massive bank failures and most probably massive derivative failures. Please do not forget that the financial institutions that have major exposures in the derivative market are on one side the big banks and the big insurance companies. Knowing that due to the FASB157 rule the balance sheets of the banks do show us a picture that is not correct and knowing that the real situation is ugly furthermore expecting the derivative failures, I for the moment being would not be invested in financial institutions at all. Furthermore I would avoid doing business with big financial institutions and would have my money in custody with state guaranteed banks from a country that still is OK. Therefore I would avoid the US for the moment being. Anyway holding asset with a bank located in the US does not seem to me a good idea for the moment being. Why? Well apart from known problems I do expect that the broad public will soon be on the streets demanding that not only the Wall Street gangsters do get their share but themselves too. I do expect over the coming months major and violent demonstrations and upheavals in the US. The picture I saw one day after Katrina hit New Orleans with a city in complete anarchy, is the picture I do see all over the US over the next 12 months. If that is correct, what I am convinced of, it would mean dear reader, if you would have a bank and custody account in the US and your bank would still be operating more or less normally, it might be that due to the unrests you would not be able to reach that bank. Of course you could always send your instructions by wire or internet. However with major social unrests it might be that the bank employees simply will not be able to get to where they work. Unless they will stay at their offices it might be difficult to reach somebody to help you with your requests.
The great bank robbery
http://www.informationclearinghouse.info/article23243.htm
from GEAB
1. Disappearance of the financial base (Dollars & Debts) all over the world
A very simple image illustrates the global insolvency characteristic of today’s global financial system: the financial base which banks, insurers and global financial institutions were resting upon, is collapsing in the same way as a city built on a huge fault would collapse, suddenly realizing that what was meant to be solid land intended to firmly support the city’s buildings is nothing but a thin crust of earth over a mixture of a void, toxic gas and unstable ballast. Of course the financial equivalent of this mixture is the highly volatile combination of US Dollars, USD-denominated assets and debts, produced in particular by the US, the UK and a number of developed and developing economies (1).
This situation is not at all addressed by any of the measures taken today against the crisis worldwide. US, EU, Japanese and Chinese leaders content themselves with injecting massive amounts of new liquidity in the form of Dollars, Euros, Yen or Yuan, and with trying to substitute public debts for toxic private ones, as if adding more gas and exchanging very unstable ballast for unstable ballast would prevent the city from collapsing. In fact, these massive injections of liquidity, especially in the US where the amounts involved are now beyond belief (close to USD 10,000-billion in one year), result in an even more rarified gas created by a continual depreciation of the value money; while the exponential increase of public debt is making public assets (T-Bonds in particular) as toxic as the private ones they are supposed to replace.
The fact remains that the consequence of this situation is an acceleration of the process of dislocation of the base which supported our world for decades and for the last twenty years in particular.
Estimated loss of UK Commercial Banks and Building Societies as % of UK GDP and public debt - Source Bridgewater - 02/2009
The more a country or a region depends on the US Dollar (2) (and/or on USD-denominated assets) and on the level of indebtedness of its economic players (households, companies, municipalities, states), the more the very fabric of its society will be dislocated starting in the fourth quarter of 2009; or, to be more precise, the more the process of dislocation will become obvious and speed up - in fact it is already well on its way in many cases, as we shall see when we examine the big global players further and in greater detail in this GEAB.
The symptoms are easy to identify: balance sheets less and less balanced, assets continuously losing value, public deficits exponentially growing, frozen public services, growing incapacity in addressing financial commitments of all sorts, multiplication of corporate bankruptcies, loss of confidence in paper money,… (3) . As Jean de la Fontaine said in his fable « The Animals Stricken with The Plague »: « All were attacked, although all did not die» (4). If indeed, according to LEAP/E2020, the US and the UK are the most severely affected, it is obvious that the rest of the world will also suffer from the very severe consequences of the collapse of our decades old financial base (5).
In the last edition of the GEAB (GEAB N°31), we estimated that the amount of « ghost-assets » which went up in smoke since 2006 exceeded USD 30,000-billion. To date, less than a third of this amount has been accounted for in the form of asset depreciation or in the form of public money injected to replace « private ghost-assets ». Contrary to what our leaders think (6), this last measure only results in replacing private ghost-assets by public ones (7). At this rate, the President and Congress of the United States (8) would have been wiser to call the three heroes of the film « Ghostbusters » to find a solution to the problem of ghost-assets than rely on the very questionable skills of the trio made up of the Fed’s Chairman Ben Bernanke, the new US Treasury Secretary Timothy Geithner and the White House head of economic advisers Lawrence Summers (9).
This process of the disappearance of the global financial base will result, at the end of 2009, in a speeding up of the process of power-, wealth-, influence- and living standard-reduction for a large number of major geopolitical players - but at varying speeds and in different proportions: the world is about to drastically shrink but not in the same way for everybody. This evolution will be a key component of the phase of global geopolitical dislocation, some sort of a sudden card reshuffling on a global scale. As we have highlighted many times, the big economic players, as much as many states or regions, will be concerned.
The table below clearly illustrates how large international banks shrank with the crisis to different extents. As we explained in a number of previous editions, the proportion of the financial sector in the economy of a country provides an indicator of how seriously this country will be affected by the crisis. The table below highlights some clear trends in this regard.
Dear reader, I like to add to this comment from GEAB, that the green dots have grown over the past months due to higher stock exchanges. My guess is that by the end of they year this green dots will be tiny little dots.
Compared market value of the world’s largest banks – In blue En bleu, as of Quarter 2007 / In green, as of 01/20/2009 - Source JPMorgan / Bloomberg (01/20/2009)
2. Fragmentation of the interests of the global system’s big players and blocks
The second destructuring process contributing to the global geopolitical dislocation consists of an increasing fragmentation of the interests of the global system’s big players and blocks. The current debate on the dangers of a return to protectionism is both an indicator and a component of this process. Indeed protectionism is back, because the globalisation of the last two decades has come to a grinding halt. Global leaders’ speeches on this subject are pathetic insomuch as they keep repeating their opposition to any such return and their will to revive the Doha round of free trade negotiations (10); but in fact, they are doing the exact opposite, witness Obama’s “Buy-American” campaign (11), Gordon Brown’s competitive devaluation of the Pound Sterling, Nicolas Sarkozy’s aid to the French motor industry, Angela Merkel’s carefully “Germany” targeted stimulus plan, or Hu Jintao’s project of Chinese domestic demand stimulation.
Global leaders are becoming schizophrenic: their actions and their lanuguage diverge more and more. And this is the reason why LEAP/E2020 estimates that the last “launch” window available to initiate a credible alternative to the global geopolitical dislocation process is located between the upcoming April 2009 G20 Summit and this summer. Thereafter, the world’s leaders will no longer even keep up the pretense of having commonly held views. Their own political survival, within their own countries, will force them to concentrate on emergency short and medium term solutions. Unemployment will drastically rise among the myriads of international experts who used to be the kingpins of global free trade in past decades. However, as often the case with experts (who are in the end normal human beings), they will probably switch to a new type of ideology and start advocating the merits of protectionism or the wonders of regional integration, with no shame whatsoever. In fact, this tendency is already visible in most main financial and political media.
This fragmentation will follow a relatively simple scheme:
. the big exporting powers (China, Japan and Germany, as well as the EU altogether) currently striving to preserve their access to the remaining solvent markets, will have to take stock of the situation in mid-2009. If their efforts appear to be in vain or uncertain because global trade is freefalling (12), they will have no other choice than turn to their domestic markets if they are solvent enough (13), or else they will soon turn to regional strategies at the expense of existing multilateral agreements and rules. Neither the WTO nor the UN and its agencies will be able to do much about it insofar as these organisations get their sole power from the fact that at least a large part of their members agree on respecting the rules of the game. If, on the contrary, their members prefer to disregard the rules, these institutions are doomed to become powerless (14).
. this fragmentation, which in fact is nothing less than subsidiarity for the sake of the common interest (in other words, a general stampede), could unwind in a fractal manner. This means that each State - and inside each State, each region, province, federal state (insofar as they exist politically), will in turn be tempted to make a quick assessment of their vital interests and of how much it will cost them to continue to observe the decades old rules. Crises of historic dimension such as this global systemic crisis have a tendency to undermine the most « obvious » facts in terms of territorial integrity or political loyalty. Every organised group, equipped with some assets, tends to wonder if he might not be better off alone than inside a larger entity. We shall examine later the impact of this tendency on the United States and the European Union.
The first conflicts amongst « allies » are already shaping up under our noses. When French president Nicolas Sarkozy publicly denounces the inefficiency of the policy led by his British counterpart Gordon Brown (15) or when he casts doubt on the single European market’s ability to limit businesses’ relocation elsewhere, we are already at the stage described above. When Gordon Brown and a number of other British leaders call for job priority for British workers ahead of foreigners (including EU citizens), this is already a complete break from the agreed rules amongst EU partners (16). When the Chinese leaders vehemently criticize the current lack of alternatives for diversification out of US Dollars and T-Bonds, or when the Yuan (17) is the only currency to be criticised during the recent G7 Summit in Rome, these are again cases of fragmentation (18). When US President Obama’s administration prepares to launch a violent offensive against China in the field of human rights, energy and climate change, in a context of growing trade tensions, fragmentation of the global game is clearly speeding up (19). When Russian Prime Minister Vladimir Putin blames Washington and London for being at the heart of the current crisis (20), and when mute assent is the only reaction on the part of the majority of EU leaders (21), we get a hint of tomorrow’s fragmentation. When Temasek, Singapore’s Sovereign Fund, suddenly changes its leadership to redirect its investments away from British and US financial institutions, we understand that the fragmentation of the present system is gaining momentum (22).
A few more months at this pace and no one will care anymore about social conventions, and the process of global geopolitical dislocation will definitely be underway.
Is that the worst? Well as the wise man says maybe yes, maybe no
Bonds
The USTreasury auctions now have domestic hidden elements, and global hidden monetization elements. The USFed is purchasing through Permanent Open Market Operations the bonds grabbed by the primary dealers. Some of the auctions are actually underbid, and fortunately for the statistics, the bid/cover ratio includes obligated dealer bids. The USFed liberally uses its USDollar Swap Facility to enable strong bids by foreign central banks, except that they are highly likely coming from USFed accounts on foreign soil, or else from money lent by the USFed itself. Warning after warning have come not to monetize, not to debauch the USDollar currency, not to permit skyrocketing deficits. Yet they continue, and worse, little if any reform or actual stimulus has occurred. Mainly what we witness is more channeled funds to the big banks, more coverage of credit derivative fires, and more announcements of bond support.
Bonds, market manipulation via the use of POMO’s
The theory for which we have the greatest supporting evidence of manipulation surrounds the fact that the Federal
Reserve Bank of New York (FRNY) began conducting permanent open market operations (POMO) on March 25,
2009 and has conducted 42 to date. P
For a detailed analysis how the POMO Permanent Open Market Operations are used to manipulate the markets, please go to the
information on the following link
http://www.precisioncapmgt.com/wp-content/uploads/PCM-A_G.U.T._of_Market_Manipulation.pdf
Well dear reader as mentioned in a previous post, the primary dealers were the ones that did bid during the past treasury auctions. Within the official statistics the primary dealers bids were categorized like foreign central banks buying. This obviously is not correct. Seasoned observers found out that the FED bought these treasury bonds back from the primary dealers after a week. So with other words, the FED itself is buying the Treasury with money printed out of nothing (thin air). How long can they keep up with the scam? Well your guess is as good as mine, but I believe it will not take much time and the game will stop.
Why?
Because although the markets can be manipulated for some time, the manipulations will not achieve what is whished by the manipulators, which is to change the primary trend. The exercise costs a lot of money to make some people happy for a limited time.
The primary trend in bonds is down, meaning that bond prices will fall and yields will increase. Therefore holding long term bonds most probably will not be a good investment over the coming years.
August 20 – Bloomberg (Caroline Hyde and Paul Armstrong): “Corporate defaults worldwide rose in 2009, surpassing the number for the whole of 2008, Standard & Poor’s said… A total of 201 issuers defaulted through Aug. 12, affecting $453.1 billion of debt, S&P said. That’s up from 126 defaults totaling $433 billion for all of last year…”
http://www.chinadaily.com.cn/china/2009-08/18/content_8582318.htm
http://news.bbc.co.uk/2/hi/business/8207174.stm
Gold
We are just entering the strongest seasonal period for gold.
Before giving some information about Gold, I'd like to mention a comment from the book "The Collapse of the Dollar" from James Turk and John Rubino. They state:
Generally, when gold is mentioned in the financial media, people refer to its "price". This is incorrect, because gold is not a commodity like oil or eggs. Gold is money. An old Chinese proverb says wisdom begins by calling things by their right name. And since we don't talk about the "price" of euros or yen, but instead discuss their exchange rate, one should treat gold the same way. Therefore dear reader from now on I will use exchange rate and not price.
Well dear reader in the past years holding gold and silver in the months of April to August has not been awarded. In these months the gold and silver exchange rate normally fell down considerably versus other currencies. This year was somehow different. We had some minor fluctuations but both, gold and silver, held up surprisingly (or maybe not so much) well. Well anyway we are entering again the period of the year that in the past years was very positive for gold and silver investors and holders. As it took months to build up the healthy price basis we have know and as it took for the manipulators a lot of efforts, combined with a high cost for doing so, to keep the exchange rate below USD 960 in gold, I do believe that the coming move up will be very strong. Once we will have passed the 1,000 mark we should move up to the 1,300 to 1,400 level.
Indicators suggest gold poised for big breakout by end Q3
The slow trading months of summer are usually a time when gold exchange rate decline, but economic analysts at Blanchard and Company, America's largest precious metals investment firm, say that indicators this year have them believing the metal is poised for a big breakout by the end of the third quarter.
http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=87109&sn=Detail
Well dear reader on the following link you find arguments about what I have been saying now for some time. We are in my opinion at the point where gold exchange rate will shoot up versus all paper currencies
Pessimistic Sentiment Gives a Buy Signal for Gold
We determined that Gold was approaching an "Extreme Pessimism" sentiment buy earlier this month when it hit 39.6 on the Ned Davis Research Gold Bullion Sentiment Poll. Now that it has hit 18.7 on the poll (see chart below), the lowest reading since the sentiment low in 2002, we believe the buy signal has been given.
http://seekingalpha.com/article/157409-pessimistic-sentiment-gives-a-buy-signal-for-gold?source=yahoo
Commercial real estate
Collapse: U.S. commercial real estate activity in the second quarter slowed to its lowest level in 15 years as demand for office and retail space collapsed amid the severe recession, a real estate trade group said Wednesday
http://www.cnbc.com/id/32475782
Doug Noland from www.prudentbear.com
The Depressed U.S. Consumer And Global Reflation:
The global reflation thesis has been somewhat under fire of late. Chinese stocks dropped about 25% from trading highs set earlier this month. An abrupt slowdown in bank lending – and even discussion of more stringent bank capital requirements - has many now questioning the underpinnings of Chinese recovery. Here at home, a bevy of data on household spending, confidence, and job losses point to stubborn consumer frugality. Can global reflation make headway without a recovery in U.S. consumption? As the year has progressed, optimistic adherents to the global reflation/recovery thesis have multiplied. Of late, however, the reflation protagonists have been roused. Many hold the view that the Chinese situation is much more tenuous than advertised. Moreover, this camp views global recovery as impossible in the era of the stingy American consumer. Talk of deflation risk has turned more boisterous. My view differs from both the bullish consensus reflation viewpoint and that of the protagonists/ “deflationists.” And, to cut to the chase, I do believe a period of global reflation can evolve in the face of weak U.S. consumption. And while a troubled bond market would likely halt reflation in it tracks, a downtrodden American consumer is an impediment to be hurdled with a powerful boost from ultra-easy global “money.” Indeed, deep underlying U.S. fragility – and resulting market assurance that the Fed is indefinitely wedded to ultra-loose policy – is a critical facet of my global reflation thesis. Fundamentally, it is my view that the nexus of global reflation emanates from irreparable structural impairment to the international dollar reserve system. The global dollar monetary “regime” some time back stopped functioning as a disciplining or restraining force for Credit systems around the world. Today, even in this nervous post-crisis landscape, the prospect of an unending expansion of dollar reserves works to foment synchronized Credit and speculative excesses. And the deeply maladjusted U.S. “Bubble” economy ensures heavy ongoing non-productive U.S. debt issuance that manifests as enormous trade and speculative dollar financial flows - to further inundate the saturated world. The unfolding breakdown in this dollar “system” is the genesis of global inflationary forces. I’ve read and listened to the view that an imminent dollar rally will rejuvenate global deflation. And while the dollar and currency markets will surely fluctuate, I view nothing on the horizon that will alter the fundamental issue of massive outgoing dollar flows. Policymaking is now trapped in a scheme of promoting excess in the name of system stabilization. The Fed is poised to again retain a loose policy stance for a far too extended period, and there will be no let up in the massive issuance of federal (Treasury, agency, and GSE MBS) debt. A central aspect of my global reflation thesis holds that China, Asia and the “emerging” economies are this cycle’s “asset class” with the strongest inflationary biases – hence the areas most prone to immediate and spectacular inflationary manifestations. These “hot money” magnets then work to rejuvenate animal spirits throughout the global leveraged speculating community, with rapidly recovering Credit systems and economies spurring a more general rebound in global activity. The more commodity-oriented and manufacturing-driven economies are the first to benefit. The “services” and housing-centric U.S. economy badly lags in this reflationary scenario. Many analysts that do recognize U.S. vulnerability also see troubling aspects to the Chinese economy and financial system. I see them also; they just don’t alter my fear that China has likely entered a precarious period where Credit, speculation, and spending excesses tend to really run amuck. Expect increasing concern from China’s policymakers – and lots of tinkering (bank capital requirements, lending restraint pronouncements, warnings against speculation, interest-rate adjustments, etc.). And expect markets in China and around the world to grapple mightily with the course of Chinese policy responses. Keep in mind that the “terminal phase” of Credit Bubble excess is notorious for outflanking fainthearted policymaking. And it is indeed acute financial, economic and social vulnerabilities that I suspect will restrain Chinese policymakers from applying the type of tough measures necessary to rein in (traditionally unwieldy) late-cycle excesses. It is the combination of deep structural issues/vulnerabilities in the U.S. and China that have the reflation antagonists and deflationists energized. They see confirmation in their view from recent U.S. economic data and Chinese developments. Yet it remains a preeminent challenge of Credit Bubble analysis to recognize that fundamental issues can inhibit, repress and check excess – but there are circumstances when system maladjustment and fragility instead tend to cultivate a backdrop of policymaking and market tolerance. As I’ve written over the years, major Credit Bubbles invariably evolve from some underlying source of Monetary Disorder. Stable and sound Credit systems are simply not breeding grounds for Bubbles. And the greatest Bubbles are fashioned when profound money and Credit distortions meld with policymaker confusion and acquiescence. As we’ve witnessed – at home, in China and around the world – acute financial and economic fragility has engendered a backdrop of unprecedented global policymaking accommodation. And predictably accommodating policymakers have cultivated an environment of synchronized global marketplace reflation accommodation. It is with this analysis in mind that I am analytically forced to give global reflation the strong benefit of the doubt. I will be dismissive of deflation chatter as long as the markets readily accommodate Trillions of U.S. debt issuance here at home and tolerate excesses within domestic Credit systems across the globe. Today, the dollar index traded below 78 and crude traded above $74. The bond market is understandably unsettled. Ten-year yields traded at 3.72% on July 27, dropped to 3.48% on July 31, jumped to 3.85% on August 7, sank to 3.43% yesterday and closed today at 3.57%. I’ll posit that artificially low interest rates everywhere are global reflation’s greatest champion. It is the nature of Bubbles that the longer markets misprice risk the greater the pain when the Bubble eventually bursts. Credit and market analysis could not be more challenging or fascinating.
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