Srini's bubbles in Tokyo
October 8, 2008
Elaine Meinel Supkis
The entire G7 complex and all the tiny countries attached to the EU/UK/US system has collectively decided to drop interest rates lower in tandem. They hope this will trigger wild lending and wilder spending. Like the last two times this was done. The Bilderberger people have a very poor learning curve, it seems. The Derivatives Beast must either be resolved tomorrow or it will finally put all the gnome bankers out of their joint misery by eating all paper wealth on earth. In one gulp. But the true cause of all this is the Floating Currency. It is a total, roaring failure. There is only one solution: return to the gold standard.
Protect the Bubbles by Srini in Tokyo, Japan:
Fed, ECB, Central Banks Cut Rates in Coordinated Move
(Bloomberg) -- The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point.
Today's decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937; Japan's benchmark today had the worst drop in two decades. Policy makers are also aiming to unfreeze credit markets after the premium on the three-month London interbank offered rate over the Fed's main rate doubled in two weeks to a record.
``Central banks of the world have finally woken up to the gravity of the current situation,'' Charles Diebel, head of European rates strategy at Nomura International Plc in London, wrote in a note. ``It is not potentially not the last we will see of central bank activity particularly in Europe as the macro situation is still weakening dramatically.''
We are drowning in red ink. The central bankers want more red ink. We see the end of this clearly. There is no way, pouring on more red ink will fix what is wrong here! The world goes through this dual cycle all the time: easy credit cycles which are fun and hard savings cycles which are nasty. Instead of buying and buying, people are forced to save and save some more. It is always much more fun to buy than to save. And savings give rise to fear.
During all downturns, everyone talks about 'fear'. This is the agony of the savers as they struggle to protect their savings from being devoured by the borrowers declaring bankruptcy all over the place. Let me be very clear here: in the 'savings' cycle of world economics, this isn't a time when more and more people save money. These are times when the only people WITH money are the savers! And any system that kills savings to the point that it is less than 5% of financial markets is in trouble during these downturns.
The US has decided to be at a 0% savings rate, indeed, a NEGATIVE savings rate. So when the credit party ended, instead of having a bunch of savers now in charge of banking, there are not nearly enough of them to have any effect at all. So there is going to not be a 'saver's regime' in our future. Debtors overwhelm savers. And debtors want more debt. The only way this can be engineered is to have super-low interest rates.
Now, what do the beleaguered savers do when interest rates go super-low? They flee the banks! We see this very clearly today: the US mint has run out of silver and gold stocks with which they can mint real money coins. The face value of these coins has nothing to do with their price. Once upon a time, it was one and the same. Before the US ditched the gold standard under Nixon. Now, a $50 gold coin is worth hundreds of dollars more than the face value. This is an accurate reflection of the true buying power of the denominated currency values.
This month, gold ceased its fall to the cellar. As all the banks rush to make credit ridiculously cheap, the value of gold is climbing most ominously. In the case of the G7 doing this suicide plunge, it is now time to say for certain, any savings left MUST flow into gold because there is no way ANYONE can earn ANY interest on savings in BANKS in this climate.
This doesn't make gold a 'money.' It is still a 'commodity'. Only when some central bank which represents a great trading/industrial power declares its currency value to be guided by the value of gold, not relative value with other floating currencies, will gold cease being a commodity and become a currency. And with the total failure of the floating currency system created by the US and Europe when the US couldn't pay for the Vietnam War, we don't have to wait long for this new era to dawn. It is nearly upon us.
But ONLY after the dark night of depression destroys the current global fiat currency regime. Launching this too early will mean the new ruling currency [we all know which one that will be!] would be swamped by a flood of funny money seeking to be turned into gold. Only after all this red ink produced during the heyday of the floating currency is destroyed, can a new gold standard be launched!
About gold: the US mint can't get gold anymore nor can it raid Fort Knox for all that gold has been 'swapped' and this is a sign that the End is near as far as the fictions of the floating currency is concerned. Millions of people make easy money playing the odds games against the relative value of all currencies against each other. They will cease having this luxury in the future. All of them must be destroyed as currency markets collapse along with the banking crisis. Already, many of the hedge funds and investment banks are rapidly going under. We are halfway there. And when the Derivatives Beast's mess is put to the test tomorrow, I expect hysteria coupled with, at my end, happiness. For the utter destruction of the credit default swap markets will be a GOOD THING that will SAVE the SAVERS! In the end, it will kill the last illusions of cheap debts.
But first, all the central banks must exhaust themselves by trying to force the real interest rate to 0% a la Japan.
Culture of Life News, October 8, 2007: Treasury Sec Paulson Celebrates Weak Dollar
Treasury Secretary, Goldman Sachs Paulson, celebrates weakening the dollar so we can export to countries that have stronger currencies such as..ahem...Europe and Canada. The game of weakening a currency for trade and industrial advantage goes up yet another notch. The EU is celebrating greater wealth when they travel abroad but at home, costs are rising faster than incomes due to this very same thing and of course, there is the real estate bubble that always runs alongside rising currency values. Also, IBM claims their patent on outsourcing is an oversight which they wish to eliminate, hahaha. And Japan announces they will most certainly not change anything no matter what so they continue with .5% interest rates while making their FOREX reserves grow again.
*snip*
I read a lot of economic news and history. And there is this huge, gaping black hole in most economic narratives: they leave out the Nixon wage/price controls. I remember that period because my boss at that time filed for a pay raise for me but I couldn't get it because it was denied! Talk about pissing me off. The oil crisis ended when the Saudis began to sell oil again and OPEC began cheating each other on allotments and this drove the price of oil downwards. But due to the fact that the US was the final destination of most trade and finance, even a slight hike in energy costs affected inflation. So the US devalued the dollar right smack dab when the oil crisis, the oil boycott and the end of the Vietnam war and thus, the constriction of the military/industrial complex happening all at once.
This utterly derailed the US economy.
Just a reminder that unlike many other people, I actually sort of figured things out last year. People say that economic advisors who touted things like the 'miracle of Iceland' should be forgiven because they did it when everyone was doing it, this is wrong. A true economics advisor has to look beyond six weeks or six months. True, wealth is created fast, doing stupid things when everyone is doing the same. But in the LONG run and I hope everyone wants to live a long, long time, it is very foolish.
The short-term view of economics is exactly why we are falling off a cliff at every level. The refusal to look the long term while playing with long-term debts is foolish, for example. A 90 year old woman shouldn't get a 30 year mortgage, for example. Insuring houses in cities that get totally wiped out every dozen years is foolish, too. Running a global empire on the unsteady base of a floating currency is also very stupid. There is an old rule of thumb: if something is too good to believe, it is fake. If Iceland offers 8% interest on foreign money flowing in, we should expect default. Sometimes, indeed, nearly always, small profits mean long-term economic health.
The very stocks that shot up in each bubble stock market were the ones taking on the most debt. I know of solid, good stocks that didn't shoot up this last 4 years. But paid and still pay good dividends. Like Pfizer, for example. Hanging on to steady things is good in the long run.
Dow's Damage: 13% in Five Days
Including Monday's nearly 370-point drop and a 348-point slide last Thursday, the Dow has now shed nearly 13% in the past five trading days, the largest drop since September 2001. The 1403.55-point decline was the Dow's biggest five-day drop ever, and that doesn't include a 778-point drop on Sept. 29. The Dow is now down 33% from its record high reached almost exactly one year ago.The damage was even worse for the broad Standard & Poor's 500-stock index, which closed Tuesday below the psychologically important 1000 level for the first time since Sept. 30, 2003. The S&P fell 60.66 points Tuesday, or 5.7%, to 996.23. Its 14.6% five-day decline is the biggest since the five days that included the October 1987 stock-market crash and the index stands 21% lower than it was just one month ago.
Despite the declines, traders described the selloff as remarkably orderly and largely free of panicky jettisoning of big positions. Many say that in recent days, the market has been under pressure from small investors who are throwing in the towel after getting quarterly brokerage and mutual-fund statements showing big declines.
*snip*
The Fed added a potentially potent weapon to its arsenal against the credit crunch Tuesday morning. The central bank said it would for the first time purchase unsecured and asset-backed commercial paper from issuers in an effort to ease the logjam in that important market.The move was praised in the credit markets. "This was the medicine we needed," said T.J. Marta, fixed-income strategist at RBC Capital Markets in New York. "Short-term funding has been completely blocked. This is a direct and precise attempt and likely it will be successful in removing that block."
The hope is that stocks will soar today on the expectation that the G7 flood of easy credit based on diminishing savings will fix the economic black hole we are in. The harsh truth is, this won't happen. The fix is fatal. The energy of a system MUST be based on a POSITIVE flow, not negative flow. As I have said, in despair in the past, 'Why bother having any interest rates at all on anything?' when talking about the Japanese rates that are 2% below the government's estimation of inflation in Japan.
Faux interest rates only make things worse. Instead of protecting the most important element of the banking system, the SAVERS, the governments wish to protect the weakest part, the part that is negative, not positive: the borrowers! When Volcker made rates go up and up and up, he was doing this to save the savers. He correctly understood that industry, housing and banking would NEVER be fixed unless he first saved the savers! This ruthless plan finally got savers to stop buying gold and buying securities.
Since 2000, the main buyers of securities in the US has been our dire trade rivals: Japan, China and OPEC. All of whom took trade profits and temporarily parked them in US securities issued by our government which began an epic series of over-budget spending sprees that added over $4.5 trillion in debt to our nation's tax base. This is now being totally exceeded. Doubling, perhaps. And there isn't enough trade surplus to enable our rivals to suck down all this future debt. This is one huge black hole in the banking system.
Which is why it continues to collapse!
Venture Funding May Fall This Year for First Time Since 2003
(Bloomberg) -- Venture capital investments will probably fall this year for the first time since 2003 as the financial crisis cripples the markets for acquisitions and initial public offerings.U.S. startup funding may drop in the third quarter, said Tracy Lefteroff, a managing partner at PricewaterhouseCoopers LLP, which does consulting work for venture capital firms. In July, Lefteroff said investments in 2008 would be ``on par'' with the $30.7 billion invested last year.
Iceland's Krona Quoted Almost 50 Percent Below Peg
(Bloomberg) -- Iceland's krona was priced at almost 50 percent below the peg against the euro set by the central bank yesterday to stabilize the currency as regulators said they took control of Glitnir Bank hf, the country's No. 3 lender.Nordea Bank AB, the biggest Scandinavian lender, said the price suggested by bid/ask spreads in pre-market trading was 255 per euro, compared with the 131 per euro level established by the central bank yesterday. There had been no buying of the krona to support the peg by the central bank, Nordea said.
These ventures were mostly engineered on the basis of getting cheap Japanese carry trade loans, passing them through New Zealand or Iceland or other proto-pirate islands as well as outright pirate coves like the Cayman Islands. This brought in a flood of red ink that was used to dump into various businesses. This, in turn, wrecked the ability of any business to survive any economic downturn, no matter how slight. Seeing this flood back in 2002, central banks should have shut it down by ATTACKING THE BANK OF JAPAN. Instead, to my great fury, we did the exact opposite.
We encouraged the Bank of Japan to play this game. This is why there was a flood of propaganda about how Japan was in a depression and had dropping prices when inflation was taking off in Japan. So Japan was allowed to flood the world with credit. This meant the US could have tons of easy credit debts and 'grow' while claiming, 'The money supply isn't growing so fast.' But the INTERNATIONAL money supply shot up! And since we are the world's biggest consumer of nearly everything, this meant our own system was flooded with easy money that I called 'funny money'.
Shipping Lines Sail Uncertain Seas
Global Weakness Sends Rates Tumbling With New Vessels On the Way; Some May Become Cruise Ships Last year, the basic price of shipping a large container of goods from Asia to Europe, the world's busiest route, was $2,800. This week, with demand plunging amid a worsening economy, that price was an unprofitable $700.
Talk about a plunge in value! All things plunge in value as contractions set in. The flood of funny money vanishes into thin air. The US destroyed its own merchant marine over the course of the entire length of the fiat currency regime. My ex-husband was in shipping. He had a front seat to this total collapse of our systems. When pirate coves discovered they could make money off of fees from shipping, few G7 shipping companies flew their national flags and instead, flew small island or African micro-nation flags. Bit by bit, the concept of a national shipping industry collapsed. Today, the US has virtually NO merchant marine at all. And all ships that carry cars from Japan to the US are owned by Asians. Not one is American. When we ship our own exports overseas, Asian and European ships carry this, not US ships.
No nation that claims global power can run without their own merchant marine. Not since the earliest days of shipping with the Phoenicians 8,000 years ago, has this been possible. The loss of our own merchant marine was a warning sign that our empire was in deep trouble.
Denninger, one of the very, very best analysts around these dark days:
Academia, including most particularly Bernanke, posits that one must "increase liquidity" into a seizure in the markets such as we have now, lest we have a Depression.The failure of this so-called economic "theory" is that it fails to recognize the root cause of the problem and therefore misses the forest for the trees. It is akin to trying to put out a forest fire by peeing on it and has precisely the same end result.
In point of fact we are now running out of names for Bernanke's "liquidity facilities"; TAF/PDCF/TSLF/TARP/ABCPMMMF and now this new SPV (does it have a name yet?)
The truth is that this crisis occurred under Greenspan and Bernanke's watch precisely because these two "gentlemen", along with our Treasury Secretary Paulson and other government officials, presided over the granting of credit to people who could not pay it back.
The false premise these folks all proceed from is that credit is equivalent to money.
*snip*
Borrowing short-term (to lower the coupon required) for long-term requirements is fundamentally unsound. When you do so you place the very life of the entity that does so at risk.
Nothing to add here but to say, read Denninger. He should be in charge of the Federal Reserve. Add that to my list of wishes. At the very least, someone should put him in charge of something in the Treasury. Secretary of Treasury, for example. Keep those horrible gnomes out of the Treasury!
A very, very good summary of the Derivatives Beast. I suggest everyone read this one in full:
CNN: The $55 trillion question
AT FIRST GLANCE, credit default swaps don't look all that scary. A CDS is just a contract: The "buyer" plunks down something that resembles a premium, and the "seller" agrees to make a specific payment if a particular event, such as a bond default, occurs. Used soberly, CDS offer concrete benefits: If you're holding bonds and you're worried that the issuer won't be able to pay, buying CDS should cover your loss. "CDS serve a very useful function of allowing financial markets to efficiently transfer credit risk," argues Sunil Hirani, the CEO of Creditex, one of a handful of marketplaces that trade the contracts.Because they're contracts rather than securities or insurance, CDS are easy to create: Often deals are done in a one-minute phone conversation or an instant message. Many technical aspects of CDS, such as the typical five-year term, have been standardized by the International Swaps and Derivatives Association (ISDA). That only accelerates the process. You strike your deal, fill out some forms, and you've got yourself a $5 million - or a $100 million - contract.
And as long as someone is willing to take the other side of the proposition, a CDS can cover just about anything, making it the Wall Street equivalent of those notorious Lloyds of London policies covering Liberace's hands and other esoterica. It has even become possible to purchase a CDS that would pay out if the U.S. government defaults. (Trust us when we say that if the government goes under, trying to collect will be the least of your worries.)
You can guess how Wall Street cowboys responded to the opportunity to make deals that (1) can be struck in a minute, (2) require little or no cash upfront, and (3) can cover anything. Yee-haw! You can almost picture Slim Pickens in Dr. Strangelove climbing onto the H-bomb before it's released from the B-52. And indeed, the volume of CDS has exploded with nuclear force, nearly doubling every year since 2001 to reach a recent peak of $62 trillion at the end of 2007, before receding to $54.6 trillion as of June 30, according to ISDA.
I know for a fact that the BIS, the Federal Reserve and everyone in the Bilderberger group and so on...they ALL knew that the Derivatives Beast was growing far too fast. They ALL knew that it exceeded the value of all the globe's GDP last year. They did absolutely nothing except one thing: they decided to put a 'true value' on all the aspects of this CDS monster. They launched MarkIt, a place where these credit defaults could be swapped out in the open and thus, be able to have a real value.
And quickly discovered, this value was really $0. This meant the bottom lines of all those investment banks and hedge funds were not $66 trillion but $0. This faux money was the basis for these guys to borrow and lend. Now, they have nothing and are totally relying on governments to be the banks. And to lend money on faux interest rates which all the central bankers are now setting at 0%. And this is the dreadful 0%-0%-0% system I keep complaining about.
This kills savers. Totally and completely. Savers will flock to gold as a last lifeline. But the cruel truth is, the governments control gold markets. Including simply not releasing gold. All the central bankers who lied and said gold was no longer needed in currency markets have all ceased selling gold in the open markets!
Gold has basically ceased to circulate! They are all hoarding gold now! And this should make the price of gold climb a lot faster than it has. But it is still below the $1,200 peak it reached last November when everyone suddenly figured that the banking system was collapsing.
Today, it is over $919 and climbing. It has risen today, in just a few hours, by almost $40. I suspect the last savers on earth are all bailing out of the banks. There are no more banks offering interest rates higher than the rate of inflation. And the attempt at evading the goddess of Depression means the G7 will embrace the goddess of Inflation! And she is faster than thought and loves infinity and in particular, the number ZERO. She adds these zeros until money buys NOTHING.
Bankers Might Need 50 Years to Regain Credibility: Joe Mysak
The last few weeks have gone by in a blur. And yet it was just the sitzkrieg, the phony war. The real bloodshed will occur in the weeks and months ahead. Nobody knows what the real outcome of this disaster will be, although it's very likely that the financial industry will be crushed.Now the scene shifts to Washington.
This isn't a temporary shift, either, as the U.S. Treasury attempts to pick up the pieces of the financial system. No, I have a feeling that no matter who wins the presidency, we are going to see newly empowered regulators go on the rampage. The taxpayers will demand nothing less.
*snip*
Swaptions! Interest-rate swaps and derivatives! From coast to coast, these things are eating issuers alive. I'm not sure I'm angrier at the bankers who so aggressively pitched the things, the politicians who bought into them because they could get campaign contributions from the brokers who set them up, or the bond-rating companies that rarely delved into the risky nature of these products in their regular analyses.The full effect of the financial crisis is still murky. We do know that state and local tax revenue is declining, and that the business environment is turning sour. A bumper crop of municipal-bond defaults seems likely.
Another decent story about the Derivatives Beast. Finally, 10 years too late, a few people have figured out what was obvious from day one. The trick is to figure this all out BEFORE it reaches gargantuan sizes.
Silver is a good alternative to gold. Silver prices have been down and as gold prices climb back up, silver very well could follow.
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Funding Available, No Banks, No Loans, No Bailouts, No Bull
Posted by: Iago | October 10, 2008 at 06:09 PM