Of Human Bondage

March 6, 2008

Elaine Meinel Supkis

Not only has the lending stream from the Japanese carry trade seized up, the bond market's problems are growing, not alleviating. The hedge fund concept is in full collapse. Just last year, everyone running these systems boasted that risk had vanished and the interlocking systems they created were so complex and so strong, there would never be any downturns or collapses ever again. Usually, when people decide something it totally fool-proof it proves to be utterly foolish. The Titanic was unsinkable, of course.

Yen Carry Trade Hits a Critical Juncture

In the last few days much has been made about the Euro going through 1.50 against the US Dollar. I am more concerned about the systemic risks posed by the recent strength of the Japanese Yen as it may lead to a rush for the exits on the Yen carry trade.
*snip*
The index hit all-time highs in the July 2007, but has fallen about 14% since then and is reaching a critical technical support. Hedge funds and currency traders who put on such trades tend to be highly levered, and they are not well capitalized enough to withstand large losses.
*snip*
Should the Yen strengthen further against these high-yielding currencies and these stops are hit, it would be pandemonium, as everyone rushes for the exits, leading to a highly disorderly re-pricing of risk by the markets .

This article isn't from last July. It is from yesterday. We have been seeing six months of pure pandemonium already. Everyone is already rushing towards any possible exit. The disorderly re-pricing of risk has hammered the global banking system operated by the G7 nations. I have detailed this collapse for some time. The Japanese have been frantically bailing out the dollar as the dollar collapses. So why have they failed?

This is the key to the whole business we are watching today: the US trade deficit has finally caused such dislocations in the financial affairs of the US itself, it is collapsing from its own weight. Like a very fat lady trying to sing on a stage eaten by termites and carpenter ants, the whole rotted mess is collapsing. The Japanese would love to hoist Lady Liberty a bit higher so she can continue to sing but the Japanese and Germans are not strong enough to hoist $700 billion in US dollars flowing like crazy into world markets. They need the Dragon to help and China is not in a very helpful mood right now. For the G7 spend the last year attacking China and only China over the issue of currency values and trade surpluses.

So every time the other G7 nations try to get the old system going it fails miserably. Injections of money, dropping interest rates, giving sweetheart loans, saving offshore pirate accounts, increasing government spending, all these nostrums are failing. So now they return to the simplest one of all: re-start the Japanese carry trade.

And this dooms the US! We cannot let this happen. This is criminal. It is a direct attack on our nation's sovereignty. We cannot let the Bank of Japan continue to flood our banking system with cheap loans! And this is futile. I predict that 90% of these carry trade loans will flood into the oil and gold markets as they are already doing. Gold sellers, rejoice if this restarts!

Hedge fund fears push up Libor rates

nterbank rates were under fresh strain on Wednesday amid signs banks are hoarding cash because of fears of further hedge fund collapses.

Three-month sterling interbank rates were fixed at 5.77 per cent while three-month Libor for the euro stood at 4.40 per cent.

The spread between the Bank of Japan and the Federal Reserve's interest rates and real rates continues to widen. The Fed fantasy interest rate levels are shown to be a total fraud. As the value of gold and oil shoot upwards, the interest rate for lending shoots upwards, too. They can't go in opposite directions forever. We know from history that if interest rates fall in the face of equity devaluations coupled with raging inflation in commodities, we get more inflation in commodity markets. This is simple: money flows where it makes the biggest profits. And is commodities are inflating, any cheap loans will be used to drive up commodity prices even further! We also know the solution: painful rate hikes by the Fed. This kills the commodity markets.

But it won't happen until disaster forces it to happen. In our present case, the people losing money in previous markets like real estate are now pouring massive amounts of Japanese carry trade loans into commodities. They love the fact that commodities are kept carefully out of government inflation statistics. This means both Japan and the US can provide ever-cheaper loans based on the fake inflation rate and a collapse in the 'core inflation' item markets. As cars, houses and computers drop in price due to consumers unable to buy anything but food and fuel, the lending for speculation in food and fuel items can shoot upwards and be translated into profits in the commodity markets. This is the nastiest possible financial course a nation can follow!

Driving up survival costs and feeding speculators in this area with cheap money equals a fatal level of inflation that should lead to the collapse of the political system of ANY nation stupid enough to follow such a maniacal course.

The Yield Curve Shows Inflation Is Running Rampant

Here is my quote: "Inflation: It's a bond killer and a gold thriller".

The gold sellers celebrate, all right. Well, they get their comeuppance thanks to the foolish choices of our politicians. More about that in a later article about free trade!

Gulf investors may not save Citigroup, Dubai executive says

Sameer Al Ansari, Chief Executive of Dubai International Capital told delegates at a private equity conference that it will take more than the combined efforts of the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Saudi investor Prince Alwaleed bin Talal to save the bank.
*snip*
The intervention of sovereign funds such as ADIA, which pumped $7.6 billion into Citi, has failed to stem a decline in the bank's share price that was first triggered by the emergence last year of an $11 billion sub-prime write-down that led to the resignation of the then embattled chief executive Charles 'Chuck' Prince.
*snip*
The Qatari fund said last month that it had built a significant stake in Credit Suisse Group. The Swiss lender later said it had incurred a $2.85 billion hit from bad trading.

The Arabs have poured money down a rat hole and unlike the US investing community, they did this with REAL money and not loans! The freebooters in America and England happily bet money they don't own on whatever they want. If it vanishes, they can hang onto their ill-gotten loot which is parked offshore and run for cover. Like Mr. Prince just did. The Saudis haven't punished him unlike Putin who hunts down such people. The Arabs are naive. But they will eventually learn how not to be taken for chumps. The Chinese can be cheated, too. But like Putin, Hu has nuclear bombs, a considerable-sized secret police and a lot of patience for tracking down and eliminating people who try to cheat China. The happy-go-lucky attitude of American and British financiers are not mindful about the dangers in tweaking the Dragon's tail. Any more than ripping off an angry Russian Bear.

I think maybe the Saudis hope to own the Swiss as well as American and British financial houses. They are unaware of history, I think. Financial houses come and go. Even the most ancient can suddenly collapse over small things like their apprentices going crazy and causing trillions of dollars in wealth to vanish in a flash. They have a strong tendency in this regard. Modern systems, unlike the older ones, are more prone to sudden collapses. I marveled at all the talk about how smart apprentices using computers could prevent any crashes for the rest of history. This sort of arrogance is now in full collapse as it is now obvious that the people running the computers and doing the apprentice work were actively destroying the system even as they appeared to be building it. There are lessons to learn here. Heh. Very old lessons. The top wizards thought they could party, laugh, have sex with mistresses and travel all about the planet on magic carpets while their busy bee apprentices attended to the brooms moving water from the Bank of Japan to offshore bank accounts via various market bets.

Citic Securities, China's biggest brokerage, is pushing to renegotiate an agreement made in October to buy a stake in Bear Stearns after the Wall Street firm's shares plunged by more than a third.

Citic, which originally agreed to pay $1 billion for a 6 per cent stake in Bear Stearns, is now demanding about 8 per cent of the American bank on the basis that the payment represents a larger share of the group because of the stock's 35 per cent decline since the deal was announced.

Bear Stearns is trying to resist this. They think they can cheat the Dragon of China and not be eaten. Fools. My dad once spanked me for calling someone who was rich and powerful, 'a fool.' I remember this vividly for I was only about 7 years old. After I finished crying, I said, 'He still is a fool.' This is how I began my career as a black sheep to the ruling elites. Well, these people are FOOLS. And they misunderstand power even as we go about the planet, screaming we are #1. Yesterday, the Persian kitty of Iran suggested that the Security Council of the UN, nearly all nuclear powers, voluntarily disarm because they claim nuclear bombs are dangerous. HAHAHA. None responded to this challenge which didn't even make US news!

Well, Bear Stearns has a hostile nuclear power ordering them to give them their fair share which they fairly paid for. And Bear Stearns hopes to shove this off! Well, how are these FOOLS going to attract money to invest if they tell investors to go jump in a lake? They told investors who bought into their pirate offshore funds, 'F*ck you, s*ckers!' So they went to China as a last resort. Now they want the Chinese to pop off? HAHAHA. The Chinese want their share and they will either get it or I will have lots of fun making fun of Bear Stearns in a Bear market! They are dead. And I repeat this: DEAD AS A DOORKNOB.

Terrible returns equal tiny inflows for hedge funds

Investors punished hedge funds for their worst-ever returns in January by adding only a small amount of new money to these once red-hot portfolios, new data show.
*snip*
January's flows are only a little more than the $2.3 billion added in December and down from $21.8 billion put in during November.

In October investors added $16 billion after putting in $18.6 billion in September, the data show.

HAHAHA. Hey, these goofy pirates can go to Beijing and make offers the Chinese will refuse! Or maybe visit the king of Saudi Arabia and prostrate themselves on his carpets and kiss his dainty feet. If they bring Prince's head, maybe he will reconsider their promises of eternal wealth from pirate cove investing! Frankly, I doubt any of this will happen. So the money that used to flow to them will flow to other places. Commodity markets, I would think. Or nuclear bombs. Unarmed, the Saudis can do what China can do: menace anyone who dares to cheat them. Of course, the King has said no to more oil pumping. Coupled with Iran kitty being put under more sanctions, this is killing the US domestic markets. Way to go! We see all three American candidates pushing for more wars with Iran so I suppose the US is addicted to crashing our head into the same brick wall, over and over again. To save face, of course.

Italy supports bond market as spreads soar

Service sector confidence in February was extremely weak in both Spain and Italy, high-lighting the growing economic rift between the North and South of the eurozone.

"These countries cannot devalue their way out of trouble as they used to do," said Simon Derrick, a currency strategist at the Bank of New York Mellon.

"The stress is surfacing in the bond markets instead as the default risk rises. Italy is now in the worst off all possible worlds because it needs lower rates to cushion the downturn. Instead it will have to pay higher rates on its debt. We are reaching the point where it could become a significant political issue," he said.

Germany is dragging along all of Europe in their attempt to keep the currency strong and banking above the waterline even as all ships are sinking. The huge inflation in all commodities are hammering Europe, not as bad as in the US but significantly. This, in turn, is killing the fun buying there as it is, here. So all systems set to the past money flows into real estate for retiring Northern European or American retirees is collapsing. A word of warning to any retirees thinking to flee their homes to cheaper countries: when economic systems fail, all nations have a history of cutting off financial outflows to foreign places. So if this money is flowing to say, Mexico, the US will cut this off if this is the only way to save us. Right now, this isn't going to happen. But in a total financial collapse like a depression, it has a very high chance of happening. It happened in the past. So it will happen in the future. History is absolutely certain about this dynamic.

Credit Swaps Thwart Fed's Ease as Debt Costs Surge

Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates.

General Electric Co. is one of five U.S. companies rated AAA by both Standard & Poor's and Moody's Investors Service, making its ability to repay debt unquestioned. Yet when the Fairfield, Connecticut-based company sold 2.25 billion euros ($3.35 billion) of five-year bonds last week, its annual interest payment was $17 million higher than on a sale nine months ago.

More proof we are in a collapsing banking system crisis. More and more commentators are realizing this is happening. But NOT the Fed. They still think monetarism works. They still imagine a tweak here or there will bring the Fat Lady who is now screaming rather than singing, back onstage. But the Fat Lady who is singing is actually not us, it is the Dragon of China. And it is singing about how the Japanese carry trade is over and the expansion of China is now switching direction from the US to the oil pumping nations and Russia. It is singing that the End is Here and Now. And if we refuse to change our tune, we will be in the orchestra pit.

Costs of getting loans must rise. This is due to INFLATION. The Fed hoped they could forget about inflation and fake it. But in the real world, inflation is a fire eating all savings, all investments. The only investments that are not being burned are ones in commodities which is the fuel for this inflationary fire. Duh. And cutting rates fuels the inflation fire like gasoline on a fire. And gasoline is on fire!

Alabama County Won't Pledge Money for Swaps, May Force Unwind

Compounding the problem, interest-rate swaps the county bought from JPMorgan, Bear Stearns Cos., Bank of America Corp. and Lehman Brothers Holdings Inc. to shield it against rising borrowing costs have backfired. The floating rates it pays on its bonds have climbed while the variable rate banks pay the county under the agreements have declined, pushing interest costs higher.

All the hedges protecting everyone are proving to be like wooden fences in a Santa Ana windstorm: they burn even faster than the houses and cause the fire to move faster! I have always hated the concept of hedging because they were all prone to a classic problem with all security systems: due to copy-cat actions, everyone ends up with the exact same hedge program and hedge system. So when something fails, they are all triggered simultaneously and thus cause the very collapse they were supposed to prevent. The only way to stop this is to have a system whereby parts make no profits at all but simply keep up with inflation while others are used to make profits above the rate of inflation. BUT, and this is the giant but, when inflation takes off, ALL HEDGES FAIL. For inflation can outstrip ANY AND ALL SYSTEMS in a flash if the inflationary fires are great enough. Hear me, Bernanke?

As he feeds inflation, as the Bank of Japan feeds inflation, they refuse to understand they are the cause of this inflation. And the more they feed it via super-low interest rates, the worse it gets. Got that, Bernanke???

UBS may have dumped $24 billion Alt-A portfolio

"We see the speculated level of 70 cents on the dollar as realistic in a fire sale," he said in a note to clients on Thursday, adding the current market price is probably 84 cents on the dollar.

A 30% loss in a panic. The 84¢ on the dollar losses are obviously not priced for the real market. It is FAKE. And these false prices drive away even more investors so the 84¢ stuff, now that UBS has unloaded its dead dodoes, is probably worth only 60¢ on the dollar today. This is how collapses work: everyone is always behind the times. So we have raging inflation coupled with price collapses: the worst of all possible worlds.

Carlyle Fund Gets Default Notice After Margin Calls

Carlyle Capital Corp. missed four of seven margin calls yesterday totaling more than $37 million, the Guernsey, U.K.- based fund said today in a statement. The fund expects to get at least one more notice of default related to the margin calls.

Margin calls means Carlyle was playing with fire. Namely, loans from the Bank of Japan. And they can't repay anything at all. They have no savings. They never had savings. They hoped the Chinese, Arab and Russians would park their savings with them and have them 'grow'. Only the US and UK partners running this scam were using LOANS to play games. And thanks to that foolishness, are cranking down everyone's investments. Thanks a load, guys. I think the chumps who were taken for a ride by them will learn a lesson: making money is easy if you are cheating someone. And the only ones that a con artist can cheat are people with savings!

Highland threatened by tumbling debt prices

Highland Capital Management, a Texas fund manager that became one of the world's largest and most feared investors in corporate debt, is being forced to fight a multi-front battle to ensure that it does not become a victim of the sliding value of its holdings.

Highland, which manages $40bn, made its name by investing in the leveraged loans that private equity firms use for acquisitions - and then driving hard bargains with borrowers. Its tactics have included demanding big fees before agreeing to concessions for companies that had difficulty paying back debts.

And here we are: the guys playing with the values of these piratical private equity firms using Japanese carry trade loans to make profits are all going under and pulling down their investors who also took on many loans to buy the papers of the pirates doing the same thing....all are going under now. This is why debts used to buy debts that are debts purchased by deadbeats who don't have any idea how to repay any loans is fatal. And foolish. That Texas fund was FAKE. It was NOT SAVINGS. It was loans. Which are being called in today. All of this is very identical to the Great Crash and Great Depression which is why it was made illegal for quite a while. Until recently.

Welcome to the past. Hold onto your hats. And park your gold under the house where the rats can't get it.

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Comments

[RB]

E: "The happy-go-lucky attitude of American and British financiers are not mindful about the dangers in tweaking the Dragon's tail."

During the frantic drive to develop the atomic bomb in WW2, a number of American scientists were witnessing a demonstration put on by one of the scientists. It consisted of manually closing the gap between two chunks of fissible uranium with a prying screwdriver, when the experimenter slipped and the gap closed too far, resulting in the air around the metal turning blue. This ionized air indicated that the uranium chunks had reached near critical mass before the experimenter reacted to separate them again. Several observers and the experimenter died later from the radiation effects.

This story appeared many years ago in Readers Digest. It was titled 'Tickling the Dragon's Tail'.

[Chris]

I live in Finland. GE has started to hawk instant loans through TV ads, you can get a loan from € 2.000 to 50.000 euros instantly...

I suspect Carlyle has been looted of its funds. It used to be at the cutting edge of the dirty business. Now the Bushes, Majors et al have probably bailed a long time ago. Not too long ago they allowed the Arabs, I believe Dubai, to by a share for a few billions, just in time for the collapse.

I wonder if the Arabs truly are that naive. People like Prince Bendar certainly know how the game is played. If they think the US has begun to swindle them out of huge sums of money it will be interesting to see how they react. They can make life for the US in the ME region very very uncomfortable, that is for sure. Indirectly of course. Not to say if they squeeze oil production even further to get their money back leading to even higher oil prices...

[Cato]

Building an economy on high finance was intended to be complex, incomprehensible to many insiders and designed to stay that way - Of Human Bondage. But that was relevant only on the road to the mess we're now in. One only needs to know how a confidence game works going forward. The NY Observer wrote an article about Elaine's former hood called "The Creative Crescent in a Drought". They lament the exodus of artists and writers because both the boom and prices are unrelentingly up (i.e., get in and buy while you still can). Yet, the news is pouring out about growing foreclosures in Brooklyn and home owners in the Hamptons that haven't made mortgage payments for a year. My all time favorite is actually a local furniture operation where I live that runs TV ads incessantly hawking "make no payments until 2010" and "pay no interest until 2014" - while never showing a stick of furniture. Hell, they aren't in the furniture business stupid! They're in the "terms" business!

I sense the game shifts to who is to blame for the debacle. Exactly who: spilled the beans, pulled a rabbit out of the hat, let the cookie crumble, walked whistling past the graveyard, showed their cards, spit into the wind, opened Pandora's Box, put the cart before the horse, let the cat out of the bag, yanked on the Wizard's curtain, let the shit hit the fan and walked on their grandmother's grave. Some troll on another site called bloggers and honest analysts cheap shots to our time honored system who are below the belt, sucker punching us. He wisely counsels that fallacious beliefs and misplaced priorities are our collective bread and butter without breaking into a sweat. Now, everything from fast food to weight loss centers has to worry about rising food costs affecting peoples' ability to afford to stay fat. The service economy of the unneeded and unwanted is a frightening thing. A great many people have hitched their career wagons to non-essential consumption and lifestyles.

[Elaine Meinel Supkis]

I had to swim in the shark infested waters of the big stagflation years of the 1970s. My major was, believe it or not, German Languages! Medieval German. Talk about useless.

I still read it for fun. But I had a child and then my husband found he had a fatal form of cancer all in the same year. I went from just fine to total poverty in that year! I moved to NYC and when winter came, had no shoes, just sandals. A lady gave me a pair of boots, another gave me gloves after watching me shiver at a bus stop!

I had to work like hell to pull us through this horror. I went into the slums and decided to pull everyone together and upwards and this was DAMN DANGEROUS. I must be the only white woman ever allowed to address the Black Muslims on their home base in Newark, talking about street patrols and how to pull minority kids out of the downward cycle they were trapped in.

The fact is, these forces are hard to fix and I did quite well. Made money, I also learned I could walk on metaphoric broken glass barefooted. A useful thing to know.

There will always be work. Our comfort level rises or falls. We lived without airconditioning before 1960. We can do it again. I lived without it in DEATH VALLEY in the early 1950's. We dug this deep pit and piled boards and then dirt on top. It was cool inside this cave of ours. This is where we kids played or slept during the hottest hours of summer.

And so on! Humans are not nearly as weak as we think. I remember when nearly no one had air conditioners in NYC. My husband's parents and friends all slept outside on the fire escapes, balconies and roof tops. I did this too! In the 1970's. It actually made the streets SAFER. TV and modern climate controls are huge factors in the rise of street crime. People used to be outside in the evenings back when I was a child.

[CK]

And when you say Carlyle you are saying the Bush and Bin Laden families. Paraguay and aquifers come to mind. We can do without a lot but water is fundamental.

[Elaine Meinel Supkis]

Yes, the bin Ladens were with Bush Sr. at a Carlyle business meeting on 9/11.

[Kah]

Ha... we didn't have a/c until 1972 and that was a window unit...(our house sat in the mouth of a holler and it cooled off at night and the a/c was turned off) that was after we got telephone service in 1969... the phone co would not run the lines across the river, but we finally got our mailbox one mile from the house (guess it was a good thing we lived 2 miles off the highway). In fact it was 20 years later that I learned why my mom put down the carpet samples from the store for our liv rm carpet ( I thought it was because she wanted it colorful, I didn't know it was because we were poor!)
The young people have no clue what is coming up upon us..... but hopefully it will draw families and communities closer together.
It does aggravate me that while the Federal reserve is lowing interest rates for the ARMS that are due to reset this year, the elderly/fixed income people are truly suffering because of food, energy (utility bills) and medical are soaring... someone in Congress needs to wake up and put price controls on these 3 items if they're gonna trash the economy.

[Gary W]

Nice picture from the "Hell" panel, looks like we are headed there. Could you write another of your fine articles about the vast commitment to fantasy that is derivatives? When that begins to unravel, the collapse is near.

[Elaine Meinel Supkis]

Poverty is all in the mind. The people who lived in stone huts with straw roofs in Ireland, for example, had very rich social and musical lives. The poor of Wales had the best bards and poets.

Much of great art swelled up out of the loins of poverty.