What i mean by crash is at least 40% drop from the markets peak.
A lot of data is showing the markets and economies will have a double dip by 2010.
However, Due to the US Governement and central banks intervations and false statements about the world economic. It is making very hard the economic and markets to heal itself.
Monday, June 28, 2010
Sunday, June 27, 2010
This will be a very important week with lot of bad data coming out.
A critical bill that was unable to pass this past week was the extension of unemployment benefits to millions of Americans currently collecting a $1,200 average monthly stipend from the US government for sitting on their couch and not paying their mortgage. As a result of this huge hit to endless governmental spending of future unearned money, the WSJ reports that "a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week."
The Germany electing a new president which may affect the Euro on 30 Jun3 2010.
The Military movements in the Middle east will be very clear by this week too.
The G20 meeting outcome which is not important will show the world how united we are.
The Germany electing a new president which may affect the Euro on 30 Jun3 2010.
The Military movements in the Middle east will be very clear by this week too.
The G20 meeting outcome which is not important will show the world how united we are.
Thursday, June 24, 2010
Fannie Mae and Freddie Mac could cost the banks 400 Billion
Bank executives were panicking last night over a proposed fix to Title II of financial reform literally penciled in at the last minute. The fear is that that the proposed change to the orderly liquidation authority could leave banks on the hook for a possible wind-down of Fannie Mae and Freddie Mac that could cost as much as $400 billion. In the House counter-offer below, Fannie and Freddie are penciled in as falling under the definition of 'financial company,' meaning they could be resolved by the orderly liquidation process.
If you haven't been paying attention, the thing to know here is that financial reform envisions a big winddown fund that's funded by the banks themselves -- prepaying their own funeral expenses, basically. Fannie and Freddie are technically still alive, and have never been wound down, continually slurping aid from the government.
This would obviously be a huge cost to the banks if they were saddled by this, and it seems unfair. That being said, the banks profit massively from Fannie and Freddie during the boom years. Some will say it's on them to pay back the piper.
If you haven't been paying attention, the thing to know here is that financial reform envisions a big winddown fund that's funded by the banks themselves -- prepaying their own funeral expenses, basically. Fannie and Freddie are technically still alive, and have never been wound down, continually slurping aid from the government.
This would obviously be a huge cost to the banks if they were saddled by this, and it seems unfair. That being said, the banks profit massively from Fannie and Freddie during the boom years. Some will say it's on them to pay back the piper.
July 1 is the day to Look Out
That’s the day the European Central Bank’s first and largest 12-month Long Term Refinancing Operation (LTRO) will run out. It’s also the day Barclays US money market analyst Joseph Abate expects three-month dollar Libor to start rising, to as much as 75 basis points.
The reasoning is that the start of the 12M LTRO, which added €442bn in market liquidity in June 2009, was the thing that kicked off the decline in dollar Libor, shifting it down by about 25bps between Spring and September 2009, when a second LTRO was launched.
The reasoning is that the start of the 12M LTRO, which added €442bn in market liquidity in June 2009, was the thing that kicked off the decline in dollar Libor, shifting it down by about 25bps between Spring and September 2009, when a second LTRO was launched.
Wednesday, June 23, 2010
Soros: Germany could destroy the Euro
"German policy is a danger for Europe, it could destroy the European project," said Soros, who earned $1 billion in 1992 by betting against the British pound.
He added in an interview with German weekly Die Zeit that he "could not rule out a collapse of the euro."
"Right now the Germans are dragging their neighbors into deflation, which threatens a long phase of stagnation. And that leads to nationalism, social unrest and xenophobia. Democracy itself could be at risk," he said
He added in an interview with German weekly Die Zeit that he "could not rule out a collapse of the euro."
"Right now the Germans are dragging their neighbors into deflation, which threatens a long phase of stagnation. And that leads to nationalism, social unrest and xenophobia. Democracy itself could be at risk," he said
Tuesday, June 22, 2010
Norway Foreign Minister Blasts G-20 (One of the smartest countries in Europe not to join EU)
Der Spiegel conducts a stunning interview with Norway's foreign minister Jonas Gahr Støre, in which the Scandinavian official rips the G-20 (which is meeting this weekend in Toronto), in a manner far more vicious than any of the tens of thousands of protesters could hope to ever do. Støre essentially compares the Group of Twenty to the most cataclysmic event in the history of mankind: calling it "the "greatest setback" for the international community since World War II." Any other day, this would result in a diplomatic gaffe, and the expulsions of various ambassadors. Today, with the entire world agreeing with the Norwegian, except those, of course, in attendance in Toronto, nobody bats an eyelid. One of the smartest countries in Europe (having refused to join the utter disaster that is the European Union... twice) once again proves its wit, when its minister "questions the legitimacy" of the G-20, stating "We no longer live in the 19th century, a time when the major powers met and redrew the map of the world. No one needs a new Congress of Vienna." Ah, but we do, as otherwise the spoils from the greatest generational wealth transfer would go equally and ratably to all, instead of being concentrated in the greedy hands of those who have already stolen so much, they have no place to put the loot. Which is why the G7, G8, G20, etc. will continue to exist as the world's most potent parasite until there is nothing left to steal anymore.
From Spiegel
'One of the Greatest Setbacks Since World War II'
Norway's foreign minister has described the group of the 20 most important industrialized and developing nations, which will meet this weekend in Toronto, as the "greatest setback" for the international community since World War II. In an interview with SPIEGEL ONLINE, Jonas Gahr Støre explains why the organization won't function in the long run.
SPIEGEL: Mr. Foreign Minister, this week the most important industrial and developing nations will meet at the G-20 summit in Toronto. You oppose the organization. Is that because Norway, which is one of Europe's richest countries, is not a part of it?
Jonas Gahr Støre: No. The G-20 had a meaning when the financial crisis broke out, the situation was serious and joint decisions had to be swiftly made in order to calm the markets. This importance remains. But the G-20 is a grouping without international legitimacy -- it has no mandate and it is unclear which functions it actually has.
SPIEGEL: The president of the European Central Bank, Jean-Claude Trichet, views the G-20 as being the main forum for steering the global economy.
Støre: It is for precisely that reason that one must be allowed to question its legitimacy. After World War II, we set up international organizations like the United Nations, the World Bank or the International Monetary Fund with clear responsibilities and clear mandates. We need to make them fit for the new realities in the world and for the new balance of power.
SPIEGEL: Isn't the G-20 an attempt to do precisely that?
Støre: The G-20 is a self-appointed group. Its composition is determined by the major countries and powers. It may be more representative than the G-7 or the G-8, in which only the richest countries are represented, but it is still arbitrary. We no longer live in the 19th century, a time when the major powers met and redrew the map of the world. No one needs a new Congress of Vienna.
SPIEGEL: Who do you feel is missing from the current grouping of major powers?
Støre: South Africa is part of it, but not as a representative of Africa. Saudi Arabia is part of it, but not as a representative of the Arab world. So why is the European Union represented in addition to having four individual EU member states and two others as observers? That is not acceptable. You don't have to change everything, but with a few small adjustments you could achieve a regional representation like that which we have achieved with the International Monetary Fund or the World Bank, among other organizations. We need the kind of strong, smaller alliances, or "voting groups," of the type that we see, for example, with the Nordic or the Baltic states, so that we can react quickly.
SPIEGEL: What can the Nordic countries do better than the G-20?
Støre: Taken together, the Nordic countries are the world's eighth- or ninth-largest economy. We are small in terms of our populations, but we are big in terms of our economic power. Norwegians are the biggest contributors to the international development programs of the United Nations and the World Bank. Norway's trade surplus is one-third of China's, and its current account surplus is one-third of that of Germany. Our pension and future fund (editor's note: the sovereign wealth fund that reinvests Norway's gas and oil riches for future generations) is the second largest in the world. So our experiences could be valuable in discussions about a reform of the global financial world.
SPIEGEL: Other countries could also use the same justification to demand admission to the Group of 20.
Støre: The 20 or effectively 22 are big, but there are also the countries that play a decisive role in a few areas. If the G-20 or another international body were to discuss, for example, energy security without Norway, which already provides one-third of Germany's natural gas, then that would be a real surprise for everyone. When climate change is discussed, one has to keep in mind the fact that Norway makes one of the largest contributions to saving rainforests and pays out billions of dollars, we should also have a voice, because we have something to say. Decisions on fighting poverty in the world without the participation of Norway, Denmark and Sweden, who make the greatest financial contributions, make no sense.
SPIEGEL: If Norway wants to strengthen its international influence, then why don't you just join the EU?
Støre: Because our people have rejected (membership) twice in referenda, the last time 16 years ago. In contrast to my own wishes, there is no majority support for membership today either. That is how democracy works.
SPIEGEL: Proponents of the G-20 want to reform the body and also to provide it with additional competencies -- in combating climate change, international development and in health care.
Støre: It would be a great paradox if the G-20 contributed to undermining the legitimacy of the UN and its institutions. It would mean a further creeping devaluation of the responsible world organizations, if decisions like those of the World Health Organization or the World Trade Organization were in the future effectively made in advance by the G-20.
SPIEGEL: The UN and its institutions haven't exactly proven themselves to be powerful instruments in the fight against global crises.
Støre: But that cannot lead us to give up reform of, for example, the UN Security Council and instead, out of convenience, create a new body with a new voice. That would be a kind of "key mandate" for a small, self-appointed group against the rest of the world -- the remaining 170 or 171 nations. From that perspective, the Group of 20, in terms of international cooperation, is one of the greatest setbacks since World War II.
SPIEGEL: Will the summit in Toronto this week make progress on introducing a global bank levy and bank participation in providing financial help to bankrupt countries like Greece?
Støre: That is a difficult task. The ability to find a compromise between the divergent national interests will show just how serious the desire for better international regulation of the financial markets really is. But it still doesn't answer the question of whether the world will accept the decisions made by the G-20.
Interview conducted by Manfred Ertel
From Spiegel
'One of the Greatest Setbacks Since World War II'
Norway's foreign minister has described the group of the 20 most important industrialized and developing nations, which will meet this weekend in Toronto, as the "greatest setback" for the international community since World War II. In an interview with SPIEGEL ONLINE, Jonas Gahr Støre explains why the organization won't function in the long run.
SPIEGEL: Mr. Foreign Minister, this week the most important industrial and developing nations will meet at the G-20 summit in Toronto. You oppose the organization. Is that because Norway, which is one of Europe's richest countries, is not a part of it?
Jonas Gahr Støre: No. The G-20 had a meaning when the financial crisis broke out, the situation was serious and joint decisions had to be swiftly made in order to calm the markets. This importance remains. But the G-20 is a grouping without international legitimacy -- it has no mandate and it is unclear which functions it actually has.
SPIEGEL: The president of the European Central Bank, Jean-Claude Trichet, views the G-20 as being the main forum for steering the global economy.
Støre: It is for precisely that reason that one must be allowed to question its legitimacy. After World War II, we set up international organizations like the United Nations, the World Bank or the International Monetary Fund with clear responsibilities and clear mandates. We need to make them fit for the new realities in the world and for the new balance of power.
SPIEGEL: Isn't the G-20 an attempt to do precisely that?
Støre: The G-20 is a self-appointed group. Its composition is determined by the major countries and powers. It may be more representative than the G-7 or the G-8, in which only the richest countries are represented, but it is still arbitrary. We no longer live in the 19th century, a time when the major powers met and redrew the map of the world. No one needs a new Congress of Vienna.
SPIEGEL: Who do you feel is missing from the current grouping of major powers?
Støre: South Africa is part of it, but not as a representative of Africa. Saudi Arabia is part of it, but not as a representative of the Arab world. So why is the European Union represented in addition to having four individual EU member states and two others as observers? That is not acceptable. You don't have to change everything, but with a few small adjustments you could achieve a regional representation like that which we have achieved with the International Monetary Fund or the World Bank, among other organizations. We need the kind of strong, smaller alliances, or "voting groups," of the type that we see, for example, with the Nordic or the Baltic states, so that we can react quickly.
SPIEGEL: What can the Nordic countries do better than the G-20?
Støre: Taken together, the Nordic countries are the world's eighth- or ninth-largest economy. We are small in terms of our populations, but we are big in terms of our economic power. Norwegians are the biggest contributors to the international development programs of the United Nations and the World Bank. Norway's trade surplus is one-third of China's, and its current account surplus is one-third of that of Germany. Our pension and future fund (editor's note: the sovereign wealth fund that reinvests Norway's gas and oil riches for future generations) is the second largest in the world. So our experiences could be valuable in discussions about a reform of the global financial world.
SPIEGEL: Other countries could also use the same justification to demand admission to the Group of 20.
Støre: The 20 or effectively 22 are big, but there are also the countries that play a decisive role in a few areas. If the G-20 or another international body were to discuss, for example, energy security without Norway, which already provides one-third of Germany's natural gas, then that would be a real surprise for everyone. When climate change is discussed, one has to keep in mind the fact that Norway makes one of the largest contributions to saving rainforests and pays out billions of dollars, we should also have a voice, because we have something to say. Decisions on fighting poverty in the world without the participation of Norway, Denmark and Sweden, who make the greatest financial contributions, make no sense.
SPIEGEL: If Norway wants to strengthen its international influence, then why don't you just join the EU?
Støre: Because our people have rejected (membership) twice in referenda, the last time 16 years ago. In contrast to my own wishes, there is no majority support for membership today either. That is how democracy works.
SPIEGEL: Proponents of the G-20 want to reform the body and also to provide it with additional competencies -- in combating climate change, international development and in health care.
Støre: It would be a great paradox if the G-20 contributed to undermining the legitimacy of the UN and its institutions. It would mean a further creeping devaluation of the responsible world organizations, if decisions like those of the World Health Organization or the World Trade Organization were in the future effectively made in advance by the G-20.
SPIEGEL: The UN and its institutions haven't exactly proven themselves to be powerful instruments in the fight against global crises.
Støre: But that cannot lead us to give up reform of, for example, the UN Security Council and instead, out of convenience, create a new body with a new voice. That would be a kind of "key mandate" for a small, self-appointed group against the rest of the world -- the remaining 170 or 171 nations. From that perspective, the Group of 20, in terms of international cooperation, is one of the greatest setbacks since World War II.
SPIEGEL: Will the summit in Toronto this week make progress on introducing a global bank levy and bank participation in providing financial help to bankrupt countries like Greece?
Støre: That is a difficult task. The ability to find a compromise between the divergent national interests will show just how serious the desire for better international regulation of the financial markets really is. But it still doesn't answer the question of whether the world will accept the decisions made by the G-20.
Interview conducted by Manfred Ertel
Monday, June 21, 2010
Andy Xie: Old Chinese manufacturing model will not work.
To put it bluntly, the key competence of a successful OEM in China is to squeeze labor to the maximum extent possible. That skill is developed within an organization. When a company employs hundreds of thousands from all over China, it needs a massive machine that involves recruiting, housing, training, and worker management on the factory floor.
For example, the factory I visited derives its economies of scale from 1) knowing where to find all the 18-year-old girls, 2) convincing them to stay in factory dormitories, 3) training them to put the parts together, and 4) ensuring that no one takes too many toilet breaks. This is all part of a huge system that can derive considerable economies of scale by processing hundreds of thousands of workers.
Yet today's generation of Chinese are much different that previous ones, says Mr. Xie. Young Chinese today grew up without the hardship of their parents, and thus are less willing to accept extreme hardship just for the sake of a marginal increase to their wealth. Unfortunately much of the Chinese leadership comes from a different time, which based on China's growth, might as well have been 'a different century'. This is why they have trouble understanding and solving labor discontent.
I'm afraid similar yet greater problems will eventually surface. Ultimately, market force will bring down the current system. Workers don't have to show up for factory jobs. They can join the urban service sector instead, where wages may be a bit lower but lifestyles are much better, and have a chance to integrate into urban life.
Thus the old Chinese manufacturing model, which many companies have built their core strengths around, is dying. Newer, more enlightened Chinese manufacturers will benefit, while the dinosaurs, especially around China's coastal regions, will go extinct if they don't change. Still in terms of labor costs, an awakening of Chinese aspirations only means higher wages and benefits, even if manufacturers successfully accommodate their young workers.
For example, the factory I visited derives its economies of scale from 1) knowing where to find all the 18-year-old girls, 2) convincing them to stay in factory dormitories, 3) training them to put the parts together, and 4) ensuring that no one takes too many toilet breaks. This is all part of a huge system that can derive considerable economies of scale by processing hundreds of thousands of workers.
Yet today's generation of Chinese are much different that previous ones, says Mr. Xie. Young Chinese today grew up without the hardship of their parents, and thus are less willing to accept extreme hardship just for the sake of a marginal increase to their wealth. Unfortunately much of the Chinese leadership comes from a different time, which based on China's growth, might as well have been 'a different century'. This is why they have trouble understanding and solving labor discontent.
I'm afraid similar yet greater problems will eventually surface. Ultimately, market force will bring down the current system. Workers don't have to show up for factory jobs. They can join the urban service sector instead, where wages may be a bit lower but lifestyles are much better, and have a chance to integrate into urban life.
Thus the old Chinese manufacturing model, which many companies have built their core strengths around, is dying. Newer, more enlightened Chinese manufacturers will benefit, while the dinosaurs, especially around China's coastal regions, will go extinct if they don't change. Still in terms of labor costs, an awakening of Chinese aspirations only means higher wages and benefits, even if manufacturers successfully accommodate their young workers.
Meredith Whitney: A double dip in housing is a certainty
State economies are plunging, and are $200 billion underwater, will lead to 2 million in state-level layoffs leading to a low-end impact; raising taxes at state level will impact the top-end
Retail sales have been stronger only due to consumers not paying mortgages, retail sales have already topped as is
Q2 bank results will finally catch up with accelerated mortgage foreclosures; charge-offs and delinquencies in credit cards are better due to mortgage non-payment cash flow going to other obligations, and this will soon top as well
Structural employment issues in the US won't get better any time soon
Retail sales have been stronger only due to consumers not paying mortgages, retail sales have already topped as is
Q2 bank results will finally catch up with accelerated mortgage foreclosures; charge-offs and delinquencies in credit cards are better due to mortgage non-payment cash flow going to other obligations, and this will soon top as well
Structural employment issues in the US won't get better any time soon
Sunday, June 20, 2010
Germany and France examine 'two-tier' euro
A European official has told The Daily Telegraph the dramatic option was being examined at cabinet level.
Senior politicians believe their economies need to be better protected as they could not cope with another crisis on a par the one in Greece.
The creation of a "super-euro" zone would initially include France, Germany, Holland, Austria, Denmark and Finland.
The likes of Greece, Spain, Italy, Portugal and even Ireland would be left in a larger rump mostly Mediterranean grouping.
The official said French and German officials had first spent months examining how to exclude poor-performing states from the euro but decided it was not feasible.
A two-tier monetary system in the 16-member euro zone is being examined as a "plan B".
"The philosophy is the stronger countries might need to move away from countries they can't afford to bail-out," said the official. "As a way of containing the damage, they may have to do something dramatic, though obviously in the short term implementation is difficult.
"It's an act of desperation. They are not talking about ideal solutions but the lesser of evils. Helping Greece could be done relatively cheaply but Spain they can't afford to let fail or bail-out.
"And putting more pressure on the people of France and Germany to save other countries is politically unfeasible."
One option, to protect the wealthier northern European countries and to help indebted southern Europeans, would be for Germany to lead a group of countries out of the existing euro into a new single currency alongside the old.
The old euro would decline sharply against the new German and French dominated currency but both north and southern Europeans would be protected.
Northern economies would be protected from debt contagion and southern countries would be spared the horrors of being thrown out and forced to go it alone.
Angela Merkel, the German Chancellor, has already paid a political price for forcing the rescue plan on a reluctant public, losing her majority in the upper house of parliament in a recent election.
The official pointed out that France held lent £500 billion to Spain and the Germans had lent £335 billion.
Nicolas Sarkozy, the French president, is understood to have been initially cool on the idea but has grown so frustrated with Greece and now Spain that he has allowed officials to explore proposals.
"He would prefer to keep the euro in place but if Spain, Italy and Greece are dragging him down he accepts he may have to cut them loose," said the official. "They are trying to contain the contagious effect but they don't have a solution yet."
The crunch time will come in September, when Spain has to refinance £67 billion of its foreign debt.
"If the markets don't buy that will trigger a response by Germany and France," said the official.
Expelling a country from the euro could push the whole region into a slump because European banks are so exposed to debt in southern Europe. The consequences for the exiting country would be even more catastrophic.
"The euro zone debt crisis has a long way to run," said one senior EU negotiator. "No one knows where it is going to end up. Only one thing is sure, the euro zone will change."
Senior politicians believe their economies need to be better protected as they could not cope with another crisis on a par the one in Greece.
The creation of a "super-euro" zone would initially include France, Germany, Holland, Austria, Denmark and Finland.
The likes of Greece, Spain, Italy, Portugal and even Ireland would be left in a larger rump mostly Mediterranean grouping.
The official said French and German officials had first spent months examining how to exclude poor-performing states from the euro but decided it was not feasible.
A two-tier monetary system in the 16-member euro zone is being examined as a "plan B".
"The philosophy is the stronger countries might need to move away from countries they can't afford to bail-out," said the official. "As a way of containing the damage, they may have to do something dramatic, though obviously in the short term implementation is difficult.
"It's an act of desperation. They are not talking about ideal solutions but the lesser of evils. Helping Greece could be done relatively cheaply but Spain they can't afford to let fail or bail-out.
"And putting more pressure on the people of France and Germany to save other countries is politically unfeasible."
One option, to protect the wealthier northern European countries and to help indebted southern Europeans, would be for Germany to lead a group of countries out of the existing euro into a new single currency alongside the old.
The old euro would decline sharply against the new German and French dominated currency but both north and southern Europeans would be protected.
Northern economies would be protected from debt contagion and southern countries would be spared the horrors of being thrown out and forced to go it alone.
Angela Merkel, the German Chancellor, has already paid a political price for forcing the rescue plan on a reluctant public, losing her majority in the upper house of parliament in a recent election.
The official pointed out that France held lent £500 billion to Spain and the Germans had lent £335 billion.
Nicolas Sarkozy, the French president, is understood to have been initially cool on the idea but has grown so frustrated with Greece and now Spain that he has allowed officials to explore proposals.
"He would prefer to keep the euro in place but if Spain, Italy and Greece are dragging him down he accepts he may have to cut them loose," said the official. "They are trying to contain the contagious effect but they don't have a solution yet."
The crunch time will come in September, when Spain has to refinance £67 billion of its foreign debt.
"If the markets don't buy that will trigger a response by Germany and France," said the official.
Expelling a country from the euro could push the whole region into a slump because European banks are so exposed to debt in southern Europe. The consequences for the exiting country would be even more catastrophic.
"The euro zone debt crisis has a long way to run," said one senior EU negotiator. "No one knows where it is going to end up. Only one thing is sure, the euro zone will change."
Slovakia rejected to sign Europe's 750 billion euro stability programme. (How about PIIGS can they afford?)
(Reuters) - Slovakia rejected on Friday calls to sign Europe's 750 billion euro stability programme, a necessary step for the financial safety net to go ahead, amid political wrangling.
All countries must sign off on the European Financial Stability Facility (EFSF) before it can go ahead and Slovakia's rejection could jeopardise European finance ministers' plan for the facility to be operational by the end of June.
Slovakia was asked during a European Council meeting in Brussels on Thursday to sign the deal.
Outgoing Prime Minister Robert Fico, however, said his government lacked a mandate to do so. He said it was ready to sign if given the nod by centre-right parties that are trying to form a government after winning elections last week.
"We are ready to sign if they say 'Yes, we respect that mechanism'," Fico told a news conference on Friday.
Pressure has been building on Slovakia from abroad to take at least the first step and sign off on the facility.
"We are confident that the prime minister and the new government know their European responsibility", a German government spokesman said on Friday.
Slovakia is due to contribute around 4.5 billion euros to the 750 billion euro financial safety net, which was established by euro zone governments this month for member countries if they run into financial difficulty.
OPPOSITION TO GREEK AID
The issue has become the centre of a domestic political struggle between Fico's leftist administration, which lost its majority in the election, and centre-right parties, who have opposed European aid to Greece.
The conservative Christian Democrat Union (SDKU), the Christian Democrat Movement (KDH), the liberal Freedom and Solidarity (SaS) and the mostly ethnic Hungarian party Most-Hid have been negotiating to form a cabinet but have not yet won an official mandate from President Ivan Gasparovic.
The SDKU's election leader and the likely next prime minister, Iveta Radicova, said Fico had full authority to sign off on the EFSF.
"Slovakia's prime minister and the government have a full (power) to decide (on the EFSF)," Radicova told reporters earlier on Friday.
She declined to ask Fico to sign the plan and refused to comment on how she would decide.
Finance Minister Jan Pociatek slammed the opposition stance.
"This is like playing with an atomic bomb. It is unpredictable what could happen if the mechanism will not be available on time," he said.
Slovakia needs to sign the agreement on the EFSF but can later decide not to participate in the aid mechanism without preventing other countries from going ahead.
Once 90 percent of all the mechanism's guarantees are confirmed by participating countries, the aid scheme can become operational.
Slovakia has a separate problem concerning the 110 billion euro EU/IMF bailout package for debt-laden Greece.
The country, which joined the euro zone in 2009 and is much poorer than Greece, is due to vote next month on its 800 million euro contribution to the package. But, before the election, the centre-right parties refused to say whether they would commit Slovakia's share to the bailout should they take power.
All countries must sign off on the European Financial Stability Facility (EFSF) before it can go ahead and Slovakia's rejection could jeopardise European finance ministers' plan for the facility to be operational by the end of June.
Slovakia was asked during a European Council meeting in Brussels on Thursday to sign the deal.
Outgoing Prime Minister Robert Fico, however, said his government lacked a mandate to do so. He said it was ready to sign if given the nod by centre-right parties that are trying to form a government after winning elections last week.
"We are ready to sign if they say 'Yes, we respect that mechanism'," Fico told a news conference on Friday.
Pressure has been building on Slovakia from abroad to take at least the first step and sign off on the facility.
"We are confident that the prime minister and the new government know their European responsibility", a German government spokesman said on Friday.
Slovakia is due to contribute around 4.5 billion euros to the 750 billion euro financial safety net, which was established by euro zone governments this month for member countries if they run into financial difficulty.
OPPOSITION TO GREEK AID
The issue has become the centre of a domestic political struggle between Fico's leftist administration, which lost its majority in the election, and centre-right parties, who have opposed European aid to Greece.
The conservative Christian Democrat Union (SDKU), the Christian Democrat Movement (KDH), the liberal Freedom and Solidarity (SaS) and the mostly ethnic Hungarian party Most-Hid have been negotiating to form a cabinet but have not yet won an official mandate from President Ivan Gasparovic.
The SDKU's election leader and the likely next prime minister, Iveta Radicova, said Fico had full authority to sign off on the EFSF.
"Slovakia's prime minister and the government have a full (power) to decide (on the EFSF)," Radicova told reporters earlier on Friday.
She declined to ask Fico to sign the plan and refused to comment on how she would decide.
Finance Minister Jan Pociatek slammed the opposition stance.
"This is like playing with an atomic bomb. It is unpredictable what could happen if the mechanism will not be available on time," he said.
Slovakia needs to sign the agreement on the EFSF but can later decide not to participate in the aid mechanism without preventing other countries from going ahead.
Once 90 percent of all the mechanism's guarantees are confirmed by participating countries, the aid scheme can become operational.
Slovakia has a separate problem concerning the 110 billion euro EU/IMF bailout package for debt-laden Greece.
The country, which joined the euro zone in 2009 and is much poorer than Greece, is due to vote next month on its 800 million euro contribution to the package. But, before the election, the centre-right parties refused to say whether they would commit Slovakia's share to the bailout should they take power.
Saturday, June 19, 2010
Huge numbers of Warships Cross Suez Canal On Way To Red Sea And Beyond
Shipping sources in the city of Suez on Friday have said that 12 U.S. warships, including a giant Israeli warship, have crossed the Suez Canal in the early hours of dawn on Friday, en route to the Red Sea coast, at the same time as the channel has seen large numbers of soldiers. According to sources and eyewitnesses 'The Suez Canal traffic was disrupted for hours in the morning during the crossing of U.S. Navy, which includes a giant aircraft carrier, soldiers, ships and infantry, armor and ammunition, coming from the Mediterranean Sea on its way to the Red Sea'. The sources revealed that many merchant ships were disrupted outside the channel until the completion of the Navy passage, which observers said was one of the longest since several years. The sources added that the movement of fishing boats in the Bitter Lakes and Lake Gator and navigation between the two shores of the Suez Canal over the Peace Bridge and ferries of individuals and vehicles may be stopped completely.
Egypt deployed thousands of soldiers on both sides of the Suez Canal for insurance; witnesses said 'The Israeli warships were seen among the U.S. warships but official sources have not confirmed the information'.
Maj. Gen. Amin Radi Secretary of the Committee on National Security in the People's Assembly made an exclusive statement to to Al Quds Al Arabi, that the "decision to declare war on Iran is not easy, but Israel was known for her Beslvha and Arabdtha may provide to the war in order to maintain its leadership in the region as nuclear weapons are the only deterrent."
Radhi said, 'should be the scourge of Israel tend to be left a free hand should be forced by the international community to disarm its nuclear weapons before calling for strike on Iran'. In a related development, the opposition warned from various that the Egyptian regime that allows a repeat of the historica mistake when opening the Suez Canal to cross the fleet-American attack on Iraq in this context, Abdullah said Alsnanwi editor of 'Arab Nazareth' for 'Al Quds Al Arabi' that 'the Egyptians will not stand idly by this time they see the system of government in a major scandal in coordination with Israel and America to open the Suez Canal to attack Iran and Islam." He expressed surprise at the crossing of a huge number of American battleships, along with an Israeli sub carrying nuclear warheads, and wondered, what is the secret channel those huge numbers of warships to the Gulf, and he believed the difficulty to enter the U.S. facing big problems in Afghanistan and Iraq to open a front with Iran.
For his part, the leader of the Brotherhood warned of the consequences of a strike on Iran, stressing that accept the Arab and Muslim world such a thing is unacceptable and should not be silent if the masses bowed to the will of the governments in Washington and Tel Aviv.
The international media has pointed to the direction of an Israeli nuclear submarine model 'Dolphin' carry nuclear warheads and warships to the Gulf region in light of tensions with Iran.
With Iran warned Friday that any act against the interests of the Iranian people, legal and legitimate will result in legal response and appropriate action by Iran, said U.S. Defense Secretary Robert Gates said Thursday that U.S. intelligence that indicates that it is likely to possess Tehran the ability to attack Europe ' tens or even hundreds of rockets' taken into account in the Government's decision to modify the Obama system for missile defenses. The United States has cited the growing threat of Iranian missiles when it announced in September (September) last plans to integrate missile defenses at sea and ashore in the member states of NATO in Europe and around the States in what was dubbed 'adaptive phased approach'. Gates said in a hearing on Congress 'among the elements of information that contributed to the decision to approach the interim adjustment to recognize that if Iran actually launched a rocket attack on Europe would not be just a missile or two or a few. He added, 'but is likely to be attacked with a barrage of missiles because of its potential to deal with tens or even hundreds of rockets'.
Egypt deployed thousands of soldiers on both sides of the Suez Canal for insurance; witnesses said 'The Israeli warships were seen among the U.S. warships but official sources have not confirmed the information'.
Maj. Gen. Amin Radi Secretary of the Committee on National Security in the People's Assembly made an exclusive statement to to Al Quds Al Arabi, that the "decision to declare war on Iran is not easy, but Israel was known for her Beslvha and Arabdtha may provide to the war in order to maintain its leadership in the region as nuclear weapons are the only deterrent."
Radhi said, 'should be the scourge of Israel tend to be left a free hand should be forced by the international community to disarm its nuclear weapons before calling for strike on Iran'. In a related development, the opposition warned from various that the Egyptian regime that allows a repeat of the historica mistake when opening the Suez Canal to cross the fleet-American attack on Iraq in this context, Abdullah said Alsnanwi editor of 'Arab Nazareth' for 'Al Quds Al Arabi' that 'the Egyptians will not stand idly by this time they see the system of government in a major scandal in coordination with Israel and America to open the Suez Canal to attack Iran and Islam." He expressed surprise at the crossing of a huge number of American battleships, along with an Israeli sub carrying nuclear warheads, and wondered, what is the secret channel those huge numbers of warships to the Gulf, and he believed the difficulty to enter the U.S. facing big problems in Afghanistan and Iraq to open a front with Iran.
For his part, the leader of the Brotherhood warned of the consequences of a strike on Iran, stressing that accept the Arab and Muslim world such a thing is unacceptable and should not be silent if the masses bowed to the will of the governments in Washington and Tel Aviv.
The international media has pointed to the direction of an Israeli nuclear submarine model 'Dolphin' carry nuclear warheads and warships to the Gulf region in light of tensions with Iran.
With Iran warned Friday that any act against the interests of the Iranian people, legal and legitimate will result in legal response and appropriate action by Iran, said U.S. Defense Secretary Robert Gates said Thursday that U.S. intelligence that indicates that it is likely to possess Tehran the ability to attack Europe ' tens or even hundreds of rockets' taken into account in the Government's decision to modify the Obama system for missile defenses. The United States has cited the growing threat of Iranian missiles when it announced in September (September) last plans to integrate missile defenses at sea and ashore in the member states of NATO in Europe and around the States in what was dubbed 'adaptive phased approach'. Gates said in a hearing on Congress 'among the elements of information that contributed to the decision to approach the interim adjustment to recognize that if Iran actually launched a rocket attack on Europe would not be just a missile or two or a few. He added, 'but is likely to be attacked with a barrage of missiles because of its potential to deal with tens or even hundreds of rockets'.
United States We are printing Money. Europe: We still remember inflation resulted world war 2.
BERLIN — German Chancellor Angela Merkel said on Saturday spending cutbacks are needed following the spate of throwing money at the global economic crisis, in a direct counter to US President Barack Obama.
Referring to the G20 summit in Canada next weekend, Merkel said in a videotaped message that "we are going to discuss when to quit the phase of short-term measures and go on to lasting budget consolidation."
Such a move was "urgently necessary, in the view of the Europeans and particularly of Germany," she said.
Obama urged the world's leading economies Friday to avoid scaling back government spending too quickly or risk derailing the global recovery.
"We worked exceptionally hard to restore growth; we cannot falter or lose strength now," Obama said in a letter to G20 leaders ahead of a June 26-27 summit in Toronto.
"Our highest priority in Toronto must be to safeguard and strengthen the recovery," Obama said in the letter dated June 16, but released Friday amid concerns about the pace of the global recovery.
The warning -- a clear shot at European governments reining in budget deficits -- comes after months of worry about the health of the eurozone, fueled by huge public debts in Greece and Spain.
Germany, Europe's biggest economy, is working on a multibillion-euro package of spending cuts designed to bolster government finances and recoup market confidence.
But those moves have led to US concerns that the global recovery -- from the worst slowdown in decades -- might be stopped in its tracks by withdrawing government stimulus.
Obama also expressed concern about "weak private sector demand and continued heavy reliance on exports" by some nations within the G20, in a clear reference to Germany.
Merkel retorted on Saturday, "We know of course that the European Union must make its contribution to ensure lasting world economic growth," but added, "We believe we have put the stresses on the right spot."
"Europe will make its point of view clear at the G20," she warned.
She also said that the European Union will "pledge at the G20 to develop a worldwide tax on financial transactions," even though there were doubts about its feasability.
"There will certainly be controversy," she added.
Referring to the G20 summit in Canada next weekend, Merkel said in a videotaped message that "we are going to discuss when to quit the phase of short-term measures and go on to lasting budget consolidation."
Such a move was "urgently necessary, in the view of the Europeans and particularly of Germany," she said.
Obama urged the world's leading economies Friday to avoid scaling back government spending too quickly or risk derailing the global recovery.
"We worked exceptionally hard to restore growth; we cannot falter or lose strength now," Obama said in a letter to G20 leaders ahead of a June 26-27 summit in Toronto.
"Our highest priority in Toronto must be to safeguard and strengthen the recovery," Obama said in the letter dated June 16, but released Friday amid concerns about the pace of the global recovery.
The warning -- a clear shot at European governments reining in budget deficits -- comes after months of worry about the health of the eurozone, fueled by huge public debts in Greece and Spain.
Germany, Europe's biggest economy, is working on a multibillion-euro package of spending cuts designed to bolster government finances and recoup market confidence.
But those moves have led to US concerns that the global recovery -- from the worst slowdown in decades -- might be stopped in its tracks by withdrawing government stimulus.
Obama also expressed concern about "weak private sector demand and continued heavy reliance on exports" by some nations within the G20, in a clear reference to Germany.
Merkel retorted on Saturday, "We know of course that the European Union must make its contribution to ensure lasting world economic growth," but added, "We believe we have put the stresses on the right spot."
"Europe will make its point of view clear at the G20," she warned.
She also said that the European Union will "pledge at the G20 to develop a worldwide tax on financial transactions," even though there were doubts about its feasability.
"There will certainly be controversy," she added.
The SNB can control the Global Forex markets and losses 8 Billion.
Reuters:
Swiss Central bank repeats will fight franc appreciation
Sun Jan 17, 2010 9:08am EST
* SNB will fight excessive franc appreciation resolutely
* Deflation continues to pose risk to Swiss recovery
Reuters:
SNB says FX intervention a success, sticking to policy
Tue Mar 23, 2010 8:15am EDT
* SNB chairman repeats cbank's intervention threat
* Says will not allow deflation risks from franc rise
This is from an important annual presentation. There is no equivocation here regarding the threat of deflation in Switzerland.
Speech by Mr Philipp M Hildebrand,
30 April 2010.
Any threat to this currency stability would, by definition, have a negative impact on Switzerland, above all if the Swiss franc were to appreciate sharply due to its role as a safe haven currency. The SNB will not, however, allow such a development to turn into a new deflation hazard for Switzerland. For this reason, it is acting decisively to prevent anexcessive appreciation of the Swiss franc.
HILDEBRAND, MAY 11
"We will not allow any excessive appreciation that might generate deflation risks".
Swiss Central bank repeats will fight franc appreciation
Sun Jan 17, 2010 9:08am EST
* SNB will fight excessive franc appreciation resolutely
* Deflation continues to pose risk to Swiss recovery
Reuters:
SNB says FX intervention a success, sticking to policy
Tue Mar 23, 2010 8:15am EDT
* SNB chairman repeats cbank's intervention threat
* Says will not allow deflation risks from franc rise
This is from an important annual presentation. There is no equivocation here regarding the threat of deflation in Switzerland.
Speech by Mr Philipp M Hildebrand,
30 April 2010.
Any threat to this currency stability would, by definition, have a negative impact on Switzerland, above all if the Swiss franc were to appreciate sharply due to its role as a safe haven currency. The SNB will not, however, allow such a development to turn into a new deflation hazard for Switzerland. For this reason, it is acting decisively to prevent anexcessive appreciation of the Swiss franc.
HILDEBRAND, MAY 11
"We will not allow any excessive appreciation that might generate deflation risks".
The Euro Family members are having a internal quarrel.( In the first place, Why Euro Zone has so many countries)
European diplomats say the background to the leaks and counter-leaks lies in pressure from Germany -- Europe's economic powerhouse and main paymaster -- for Spain to take tougher austerity measures to cut its huge budget deficit.
The Germans seem to have fired the first shot, telling journalists in Berlin on condition of anonymity on June 7 -- the day the German coalition agreed on its own austerity package -- that Spain was on the brink of seeking a European Union bailout.
Diplomats said Spanish Prime Minister Jose Luis Rodriguez Zapatero was furious and demanded to know in Berlin and Brussels where the reports were coming from.
The counter-attack began on Tuesday, when El Pais newspaper quoted Spanish government officials as saying Madrid wanted to publish the results of stress tests being conducted on its banks to reassure markets -- a move hitherto opposed by Germany.
"If the results of the tests were known there would be more than one surprise," one of the sources was quoted as saying, noting that Spanish banks had performed well.
The next day, the Bank of Spain said it would soon issue unilaterally the results of tests of capital adequacy and risk resilience being conducted on Spanish banks.
That forced the hand of EU leaders, meeting in Brussels on Thursday, who decided at Zapatero's initiative, with the support of the European Commission, to make bank-by-bank results public on the top 25 banks by the end of July.
If you are not afraied yet, you should be. Very.
EU officials, reluctant to speak on the record about the dispute, said the European Commission was flabbergasted by the leaks, which were damaging the euro zone.
"We simply cannot understand how this can be in Germany's interest, or anyone's interest in the euro area," an official involved in crisis management said.
The Germans seem to have fired the first shot, telling journalists in Berlin on condition of anonymity on June 7 -- the day the German coalition agreed on its own austerity package -- that Spain was on the brink of seeking a European Union bailout.
Diplomats said Spanish Prime Minister Jose Luis Rodriguez Zapatero was furious and demanded to know in Berlin and Brussels where the reports were coming from.
The counter-attack began on Tuesday, when El Pais newspaper quoted Spanish government officials as saying Madrid wanted to publish the results of stress tests being conducted on its banks to reassure markets -- a move hitherto opposed by Germany.
"If the results of the tests were known there would be more than one surprise," one of the sources was quoted as saying, noting that Spanish banks had performed well.
The next day, the Bank of Spain said it would soon issue unilaterally the results of tests of capital adequacy and risk resilience being conducted on Spanish banks.
That forced the hand of EU leaders, meeting in Brussels on Thursday, who decided at Zapatero's initiative, with the support of the European Commission, to make bank-by-bank results public on the top 25 banks by the end of July.
If you are not afraied yet, you should be. Very.
EU officials, reluctant to speak on the record about the dispute, said the European Commission was flabbergasted by the leaks, which were damaging the euro zone.
"We simply cannot understand how this can be in Germany's interest, or anyone's interest in the euro area," an official involved in crisis management said.
Friday, June 18, 2010
Giant sinkholes appear across China in vast area
Craters of different sizes have been seen in a vast area of land stretching across eastern and southern China's Jiangxi, Zhejiang, Sichuan, Hunan, Jiangsu and Guangxi province, state media reported.
In Ningxiang county in central Hunan Province, the toilet of a farmer's home collapsed, but nobody was injured, official Xinhua news agency reported.
Days earlier, a giant sinkhole swallowed up the entire playground of a primary school in the county.
Another hole with an 80m diameter opened up in the same county recently and families living nearby were soon evacuated from the dangerous areas.
Cheng Jie, a geological expert from the China University of Geoscience, said: "I think it is very unlikely that the sinkholes were caused by human activities. It is mainly a result of natural causes, like the sharp weather changes from extreme droughts to heavy rainstorms."
Is there capital flight out of the Euro zone? (The Great Euro Bank Run in July)
The stunning revelation on June 8 that Swiss FX reserves jumped by almost CHF 80 bn in May – taking FX reserves from 28% to 43% of GDP in one month – raised fears of capital flight from the Euro zone. In the absence of hard data, it is impossible to say what drove this spike in reserve accumulation, but it seems likely that this data point is something of an outlier, driven by short term panic after Germany’s surprise announcement of a short sale ban on May 18.
At a purely conceptual level, the ongoing sovereign crisis on the Euro zone periphery does raise the possibility of capital flight, with Euro zone depositors potentially shifting their savings to safe havens like Switzerland and foreign investors pulling out of Euro zone assets. In today’s daily, we sift through the available data on capital flows out of the Euro zone, looking for signs of capital flight. Because Euro zone data are only available through March and thus pre-date the serious escalation of the Euro zone crisis, we focus on Japanese and US data which are available for April. We examine foreign investor behaviour in this already highly relevant month – European stocks and bonds were already starting to sell off quite hard from mid-April – but caution that they cannot tell us how Euro zone depositors are acting. Moreover, the crisis deepened in May and this may have changed the capital flow picture further.
Data on Japanese and US portfolio flows do not paint a picture of capital flight. This underscores our argument in the most recent FX monthly that the preponderance of evidence points to plain EUR selling – IMM positioning and risk reversals are stretched – while evidence of an underlying asset allocation shift out of EUR is weak. Of course, selling of liquid EUR can predate later asset allocation shifts in less liquid underlying assets, but we see the available data as underpinning our view that EUR/$ has only limited further downside, as embodied in our revised forecast.
2. Japanese investors are not yet penalizing the Euro zone, ...
Data on Japanese outward portfolio flows show that Japanese investors repatriated investments from the Euro zone in April, at roughly the same pace as in the previous 2 months. Overall, however, portfolio outflows from Japan fell back sharply, so this repatriation did not benefit any other country or region. To filter out noise in monthly portfolio flows, we construct 12 month rolling sums to assess the underlying trends. This shows that the 12 month outflow from Japan to the Euro zone has gone from JPY 4.8 tn in Aug-09 to JPY 0.6 tn in Apr-10, a drop of JPY 4.2 tn. Over the same period, the 12 month outflow to the US has fallen from JPY 9.1 tn to JPY 4.8 tn, a drop of JPY 4.4 tn. This does not paint a picture of capital flight from the Euro zone specifically, more of a general scaling back of risk in the face of growing uncertainty.
3. ..., but they are discriminating more among Euro zone assets
Of the JPY 4.2 tn drop in 12 month portfolio outflows to the Euro zone between Aug-09 and Apr-10, around 50% is explained by a reduction in outflows to France, 20% by a decline in flows to the Euro zone periphery (Greece, Ireland, Portugal and Spain), and 13% by a fall in flows to Germany. On a monthly basis, Japanese investors have continued to channel funds into German assets, while they have been selling French and periphery assets. There is thus clear evidence of greater differentiation among Euro zone countries, benefitting primarily Germany, though we should note that the sharp reduction in flows to France could be a reflection of liquidity, with Japanese investors better able to sell assets in the core than on the periphery. As always, bond related flows dominated Japanese portfolio data. Equity flows to the Euro zone have ground to a halt on a 12 month basis, a possible indication of a re-rating of the growth outlook in the Euro zone.
4. Meanwhile, US investors are still buying Euro zone assets
The April Treasury International Capital (TIC) report, which summarizes portfolio flows into and out of the US, paints a completely different picture. It suggests that net portfolio flows from the US into Euro zone stocks and bonds are still substantial, to the tune of $16 bn in April, which is roughly the same order of magnitude as prior to the global financial crisis in early 2007, so a very healthy pace of buying. Moreover, net flows into the Euro zone periphery were strong in April (around $5 bn), and they were positive for France ($2 bn), while flows to Germany were negative (-$2 bn). In essence, there is little evidence of a crisis of confidence among US investors in the Euro zone – at least in April.
5. No sign of portfolio allocation away from the Euro, yet
Overall, the picture is not one of foreign investors making a portfolio allocation away from Euro zone assets, and we re-emphasize that European stock and bond markets were already selling off quite hard from mid-April. This underscores our underlying view that investors will continue to hold their short Euro hedges for a while, but not re-allocate the actual assets much, which is implicitly what underpins our stronger EUR/$ forecast on a 12 month basis. That said, as May’s dramatic jump in Swiss FX reserves showed, the situation remains fluid and room for policy mistakes ample. We will continue to watch for changes in the data, most obviously in next week’s BoP release for the Euro zone.
At a purely conceptual level, the ongoing sovereign crisis on the Euro zone periphery does raise the possibility of capital flight, with Euro zone depositors potentially shifting their savings to safe havens like Switzerland and foreign investors pulling out of Euro zone assets. In today’s daily, we sift through the available data on capital flows out of the Euro zone, looking for signs of capital flight. Because Euro zone data are only available through March and thus pre-date the serious escalation of the Euro zone crisis, we focus on Japanese and US data which are available for April. We examine foreign investor behaviour in this already highly relevant month – European stocks and bonds were already starting to sell off quite hard from mid-April – but caution that they cannot tell us how Euro zone depositors are acting. Moreover, the crisis deepened in May and this may have changed the capital flow picture further.
Data on Japanese and US portfolio flows do not paint a picture of capital flight. This underscores our argument in the most recent FX monthly that the preponderance of evidence points to plain EUR selling – IMM positioning and risk reversals are stretched – while evidence of an underlying asset allocation shift out of EUR is weak. Of course, selling of liquid EUR can predate later asset allocation shifts in less liquid underlying assets, but we see the available data as underpinning our view that EUR/$ has only limited further downside, as embodied in our revised forecast.
2. Japanese investors are not yet penalizing the Euro zone, ...
Data on Japanese outward portfolio flows show that Japanese investors repatriated investments from the Euro zone in April, at roughly the same pace as in the previous 2 months. Overall, however, portfolio outflows from Japan fell back sharply, so this repatriation did not benefit any other country or region. To filter out noise in monthly portfolio flows, we construct 12 month rolling sums to assess the underlying trends. This shows that the 12 month outflow from Japan to the Euro zone has gone from JPY 4.8 tn in Aug-09 to JPY 0.6 tn in Apr-10, a drop of JPY 4.2 tn. Over the same period, the 12 month outflow to the US has fallen from JPY 9.1 tn to JPY 4.8 tn, a drop of JPY 4.4 tn. This does not paint a picture of capital flight from the Euro zone specifically, more of a general scaling back of risk in the face of growing uncertainty.
3. ..., but they are discriminating more among Euro zone assets
Of the JPY 4.2 tn drop in 12 month portfolio outflows to the Euro zone between Aug-09 and Apr-10, around 50% is explained by a reduction in outflows to France, 20% by a decline in flows to the Euro zone periphery (Greece, Ireland, Portugal and Spain), and 13% by a fall in flows to Germany. On a monthly basis, Japanese investors have continued to channel funds into German assets, while they have been selling French and periphery assets. There is thus clear evidence of greater differentiation among Euro zone countries, benefitting primarily Germany, though we should note that the sharp reduction in flows to France could be a reflection of liquidity, with Japanese investors better able to sell assets in the core than on the periphery. As always, bond related flows dominated Japanese portfolio data. Equity flows to the Euro zone have ground to a halt on a 12 month basis, a possible indication of a re-rating of the growth outlook in the Euro zone.
4. Meanwhile, US investors are still buying Euro zone assets
The April Treasury International Capital (TIC) report, which summarizes portfolio flows into and out of the US, paints a completely different picture. It suggests that net portfolio flows from the US into Euro zone stocks and bonds are still substantial, to the tune of $16 bn in April, which is roughly the same order of magnitude as prior to the global financial crisis in early 2007, so a very healthy pace of buying. Moreover, net flows into the Euro zone periphery were strong in April (around $5 bn), and they were positive for France ($2 bn), while flows to Germany were negative (-$2 bn). In essence, there is little evidence of a crisis of confidence among US investors in the Euro zone – at least in April.
5. No sign of portfolio allocation away from the Euro, yet
Overall, the picture is not one of foreign investors making a portfolio allocation away from Euro zone assets, and we re-emphasize that European stock and bond markets were already selling off quite hard from mid-April. This underscores our underlying view that investors will continue to hold their short Euro hedges for a while, but not re-allocate the actual assets much, which is implicitly what underpins our stronger EUR/$ forecast on a 12 month basis. That said, as May’s dramatic jump in Swiss FX reserves showed, the situation remains fluid and room for policy mistakes ample. We will continue to watch for changes in the data, most obviously in next week’s BoP release for the Euro zone.
2014 will determine course of century, says Cambridge professor
Prof Nicholas Boyle claims that events of the fateful year will decide whether the world enjoys peace and prosperity over the coming decades or suffers war and poverty.
He believes financial turmoil could be the trigger for the crisis, and that the reactions of American leaders will be crucial to its outcome. He also thinks new global organisations will be key to securing stability rather than nation-states.
Prof Boyle argues that 2014 will be important because previous five centuries have also hinged on events that took place in the middle of their second decade.
In 1517 Martin Luther nailed his theses to the door of Wittenburg church, sparking the Reformation and the rise of Protestantism.
A century later 1618 marked the start of the 30 Years War and decades of religious conflict in Western Europe, which ended with the establishment of the Hanoverians in 1715.
The enlightened Congress of Vienna took place in 1815 following the defeat of Napoleon, heralding a century of relative stability across Europe.
But in 1914 the First World War broke out, a catastrophic conflict that would claim millions of lives and set the tone for international discord throughout the 21st century.
Prof Boyle, whose book 2014 - How to survive the next world crisis is published on Thursday, said: “The character of a century becomes very apparent in that second decade, so why should ours be any different?
“Partly the timing has to do with the way we divide our understanding of human life and human history.
“If a century is going to have a character it is going to become apparent by the time it is approaching 20 years old, the same is true of human beings.
“Another factor is the sequence of generations. By about two decades in the generation that was really dominant in the last phase of the previous century has had its day.
“The future is beginning to be defined by their children who will only have lived in or have memories of the new century."
Professor Boyle predicted recent economic collapse could herald the start of a wider breakdown in international relations.
The USA will become the key player in a series of make-or-break decisions and either condemn us to a century of violence and poverty, or usher in a new age of global co-operation.
But he cautioned the peaceful alternative is only possible if the world realises the age of individual nation states is over and an effective system of global governance is introduced.
Flashpoints of world politics such as climate change and the rise of China and India, as well as the global credit crisis, will need international co-operation to be resolved.
Professor Boyle said: “2007 started off colossal economic change which has still got a long way to go.
“Big economic changes lead to big political changes and we have not seen them yet.
“My thesis is that we have got another crisis to come, and you can already see that in the questions being raised over the debts of nations rather than private credit debts.
“One thing that has not changed is the colossus that is the American military which means the USA has to be a key player in any major political shift.
“We are going to see disparity in America's perception of its declining economic significance and continuing military and political absolute power.
"Everything, in the end, may depend on whether America can react more imaginatively to that decline than Britain was able to do in the years before 1914.
"It is a profoundly hopeful sign that we begin the 21st century with very many more international and intergovernmental organisations than we had at the start of the 20th.
Professor Boyle stressed it is a global network of global organisations and the only partly-acknowledged "Empire" of America that will determine many aspects of our lives in the 21st century.
He added: "The only conceivably peaceful route to that goal is through a continuation of the pax Americana.
"But both the world's understanding of America, and America's understanding of itself, will have to change fundamentally for that goal to be achieved."
He believes financial turmoil could be the trigger for the crisis, and that the reactions of American leaders will be crucial to its outcome. He also thinks new global organisations will be key to securing stability rather than nation-states.
Prof Boyle argues that 2014 will be important because previous five centuries have also hinged on events that took place in the middle of their second decade.
In 1517 Martin Luther nailed his theses to the door of Wittenburg church, sparking the Reformation and the rise of Protestantism.
A century later 1618 marked the start of the 30 Years War and decades of religious conflict in Western Europe, which ended with the establishment of the Hanoverians in 1715.
The enlightened Congress of Vienna took place in 1815 following the defeat of Napoleon, heralding a century of relative stability across Europe.
But in 1914 the First World War broke out, a catastrophic conflict that would claim millions of lives and set the tone for international discord throughout the 21st century.
Prof Boyle, whose book 2014 - How to survive the next world crisis is published on Thursday, said: “The character of a century becomes very apparent in that second decade, so why should ours be any different?
“Partly the timing has to do with the way we divide our understanding of human life and human history.
“If a century is going to have a character it is going to become apparent by the time it is approaching 20 years old, the same is true of human beings.
“Another factor is the sequence of generations. By about two decades in the generation that was really dominant in the last phase of the previous century has had its day.
“The future is beginning to be defined by their children who will only have lived in or have memories of the new century."
Professor Boyle predicted recent economic collapse could herald the start of a wider breakdown in international relations.
The USA will become the key player in a series of make-or-break decisions and either condemn us to a century of violence and poverty, or usher in a new age of global co-operation.
But he cautioned the peaceful alternative is only possible if the world realises the age of individual nation states is over and an effective system of global governance is introduced.
Flashpoints of world politics such as climate change and the rise of China and India, as well as the global credit crisis, will need international co-operation to be resolved.
Professor Boyle said: “2007 started off colossal economic change which has still got a long way to go.
“Big economic changes lead to big political changes and we have not seen them yet.
“My thesis is that we have got another crisis to come, and you can already see that in the questions being raised over the debts of nations rather than private credit debts.
“One thing that has not changed is the colossus that is the American military which means the USA has to be a key player in any major political shift.
“We are going to see disparity in America's perception of its declining economic significance and continuing military and political absolute power.
"Everything, in the end, may depend on whether America can react more imaginatively to that decline than Britain was able to do in the years before 1914.
"It is a profoundly hopeful sign that we begin the 21st century with very many more international and intergovernmental organisations than we had at the start of the 20th.
Professor Boyle stressed it is a global network of global organisations and the only partly-acknowledged "Empire" of America that will determine many aspects of our lives in the 21st century.
He added: "The only conceivably peaceful route to that goal is through a continuation of the pax Americana.
"But both the world's understanding of America, and America's understanding of itself, will have to change fundamentally for that goal to be achieved."
Thursday, June 17, 2010
Forced index fund sales of Greek debt likely
LONDON (Reuters) - Investors could be forced to sell billions of euros of Greek government bonds after Barclays Capital and Citigroup strip GGBs from indices following Moody's downgrade of the sovereign credit to junk status.
Moody's Investors Service cut Greece by four notches to junk status on Monday.
"Greece government debt will thus exit all Series-L investment-grade benchmarks (for example Global Aggregate, Global Treasury, Euro Aggregate, and Euro Treasury) on July 1, 2010," investment bank BarCap said in its statement on Monday.
It follows moves by Citigroup to drop GGBs from its World Government Bond Index (WGBI), another key sovereign credit benchmark series, after the Moody's downgrade.
But estimates vary wildly as to how much debt will be dumped by investors at the end of the month, and there is uncertainty as to the impact on Greek government debt prices.
"The four-notch ratings cut on Greece by Moody's takes GGBs out of most index-tracking funds. We estimate that total forced selling in GGBs could amount to some 30 billion euros," said Harvinder Sian, a bond analyst at RBS in London.
Huw Worthington, a bond strategist at BarCap in London, said a more conservative 2-4 billion euros may be involved as investors shun Greek paper no longer seen as investment grade.
Confusion reigns because of the many ways in which fund managers apply the indices to their portfolios. This in turn will make it harder to gauge how much or little the European Central Bank may need to buy in its efforts to maintain stable Greek bond yield spreads in the euro zone. The spread has meandered at around 500-600 basis points over Bunds since the ECB's operations began on May 10.
Around 200 billion euros worth of Greek government bonds are eligible for the BarCap and Citigroup indices, although not all of them are actually in indices.
"The exact amount is difficult to estimate. According to the Greek debt office, some 33 percent of GGBs have been allocated to fund managers and insurance and pension funds between 2005 and 2009," said Christoph Rieger, a bond strategist at Commerzbank in Frankfurt.
"Applied to the indices, this would add up to 66 billion euros. We believe the number that could actually be affected will be much smaller though as these accounts are likely to have reduced their holdings already significantly of late," he added.
ACTIVE MANAGERS ALSO USE INDICES
Not all fund managers have a licence to track the indices tick-for-tick.
"Many funds just benchmark to an index for the purposes of reporting to clients and are otherwise mostly or completely active fund managers who pick and drop bonds as and when they like. They are the ones who probably sold Greek bonds last autumn when the debt troubles first emerged," said one index specialist.
Another problem is that even pure "passive" fund managers, who track an index, are not obliged to hold every bond.
"There are instances where they can track the broad benchmark returns without actually holding some countries' debt throughout the investment period being measured," he added.
Citigroup said on Monday GGBs would be removed at the end of June after its index components are fixed on June 24 and said Greek bonds account for 1.34 percent of its flagship WGBI. The market value of Greek bonds is $213.6 billion.
JP Morgan Chase, which runs a rival bond index series, said in a note dated June 15 that GGBs were now eligible for its Emerging Markets Bond Index Plus.
Along with Citigroup and JP Morgan Chase, Barclays is one of the world's major index product providers. The indices are used by clients who want to maintain exposure to government debt without the need to actively manage their portfolio
Moody's Investors Service cut Greece by four notches to junk status on Monday.
"Greece government debt will thus exit all Series-L investment-grade benchmarks (for example Global Aggregate, Global Treasury, Euro Aggregate, and Euro Treasury) on July 1, 2010," investment bank BarCap said in its statement on Monday.
It follows moves by Citigroup to drop GGBs from its World Government Bond Index (WGBI), another key sovereign credit benchmark series, after the Moody's downgrade.
But estimates vary wildly as to how much debt will be dumped by investors at the end of the month, and there is uncertainty as to the impact on Greek government debt prices.
"The four-notch ratings cut on Greece by Moody's takes GGBs out of most index-tracking funds. We estimate that total forced selling in GGBs could amount to some 30 billion euros," said Harvinder Sian, a bond analyst at RBS in London.
Huw Worthington, a bond strategist at BarCap in London, said a more conservative 2-4 billion euros may be involved as investors shun Greek paper no longer seen as investment grade.
Confusion reigns because of the many ways in which fund managers apply the indices to their portfolios. This in turn will make it harder to gauge how much or little the European Central Bank may need to buy in its efforts to maintain stable Greek bond yield spreads in the euro zone. The spread has meandered at around 500-600 basis points over Bunds since the ECB's operations began on May 10.
Around 200 billion euros worth of Greek government bonds are eligible for the BarCap and Citigroup indices, although not all of them are actually in indices.
"The exact amount is difficult to estimate. According to the Greek debt office, some 33 percent of GGBs have been allocated to fund managers and insurance and pension funds between 2005 and 2009," said Christoph Rieger, a bond strategist at Commerzbank in Frankfurt.
"Applied to the indices, this would add up to 66 billion euros. We believe the number that could actually be affected will be much smaller though as these accounts are likely to have reduced their holdings already significantly of late," he added.
ACTIVE MANAGERS ALSO USE INDICES
Not all fund managers have a licence to track the indices tick-for-tick.
"Many funds just benchmark to an index for the purposes of reporting to clients and are otherwise mostly or completely active fund managers who pick and drop bonds as and when they like. They are the ones who probably sold Greek bonds last autumn when the debt troubles first emerged," said one index specialist.
Another problem is that even pure "passive" fund managers, who track an index, are not obliged to hold every bond.
"There are instances where they can track the broad benchmark returns without actually holding some countries' debt throughout the investment period being measured," he added.
Citigroup said on Monday GGBs would be removed at the end of June after its index components are fixed on June 24 and said Greek bonds account for 1.34 percent of its flagship WGBI. The market value of Greek bonds is $213.6 billion.
JP Morgan Chase, which runs a rival bond index series, said in a note dated June 15 that GGBs were now eligible for its Emerging Markets Bond Index Plus.
Along with Citigroup and JP Morgan Chase, Barclays is one of the world's major index product providers. The indices are used by clients who want to maintain exposure to government debt without the need to actively manage their portfolio
The Super Bears Meeting during the weekend (Nouriel Roubini,Marc Faber and David Rosenberg)
Gluskin Sheff man and über-bear David Rosenberg, for instance, outlined his concerns about unemployment and the prospects of a double-dip recession in a Tuesday note. He’s been at a weekend retreat with Nouriel Roubini and Marc Faber — which means he’s more bearish than ever:
The answer is that the U.S. economy is susceptible to a growth relapse, with all deference to the various purchasing managers’ reports, which for portfolio managers, should be treated as coincident indicators (equities historically have done far better the year after ISM comes off the 30 level than the years after the 60 milestone is reached, just as an example). A variety of recent consumer-related reports, including the May employment and retail sales releases, have been sub-par and are posing appropriate questions as to whether the recovery will be V-shaped. That mortgage applications for new home purchases have plunged 40% in the past five weeks to a 13-year low despite a 25bps decline in mortgage rates is, to be polite, disconcerting . . . Even if we don’t get a double-dip recession (I was the only one at the weekend retreat to see the odds as being more than remote) economic growth will probably be insufficient to absorb the still-large amount of excess capacity in the system. In turn, what that means is that the U.S. unemployment rate will stay near double-digit terrain for an extended period of time. It also means that inflation and interest rates will remain low for a sustained period of time. And, it means that a stock market priced for peak earnings in 2011 could be in for some disappointment.
The answer is that the U.S. economy is susceptible to a growth relapse, with all deference to the various purchasing managers’ reports, which for portfolio managers, should be treated as coincident indicators (equities historically have done far better the year after ISM comes off the 30 level than the years after the 60 milestone is reached, just as an example). A variety of recent consumer-related reports, including the May employment and retail sales releases, have been sub-par and are posing appropriate questions as to whether the recovery will be V-shaped. That mortgage applications for new home purchases have plunged 40% in the past five weeks to a 13-year low despite a 25bps decline in mortgage rates is, to be polite, disconcerting . . . Even if we don’t get a double-dip recession (I was the only one at the weekend retreat to see the odds as being more than remote) economic growth will probably be insufficient to absorb the still-large amount of excess capacity in the system. In turn, what that means is that the U.S. unemployment rate will stay near double-digit terrain for an extended period of time. It also means that inflation and interest rates will remain low for a sustained period of time. And, it means that a stock market priced for peak earnings in 2011 could be in for some disappointment.
Richard Russell meaning to markets "dead zone"
Richard Russell has been very vocally bearish of late. He’s not the only notable investor who has turned increasingly bearish in recent months. Currently, Russell believes we are in the “dead zone” – a sort of no man’s land for the market where we could potentially meander for a while, attempt to regain our footing and then get knocked flat on our backs:
“We’re in the area that I call the “dead zone.” I’ve been here before, and it’s not easy to write in the dead zone. The dead zone tends to appear after a period of dramatic and clearly-defined action. After such periods the market will often act like an exhausted prize fighter who has been knocked down to the canvas. He gets to his feet, but he is unsteady on his feet, and he’s playing for time — until his head clears. He’s fending off the other fighter as best he can, and he’s depending on his experience. Will he make it to the end of the round? But what kind of shape is he in for the next round?
To be more specific, the last significant low for the Dow was recorded on June 7 at 9816, Transports 4038. I want to watch these two points for indications of further strength or weakness.
The Lowry’s figures are important at this juncture. Their Selling Pressure Index at 707 is 462 points above their Buying Power Index which stands at 245. Thus Selling Pressure is in the dominant position, which suggests that the market should work sharply lower at the drop of a dime.”
“We’re in the area that I call the “dead zone.” I’ve been here before, and it’s not easy to write in the dead zone. The dead zone tends to appear after a period of dramatic and clearly-defined action. After such periods the market will often act like an exhausted prize fighter who has been knocked down to the canvas. He gets to his feet, but he is unsteady on his feet, and he’s playing for time — until his head clears. He’s fending off the other fighter as best he can, and he’s depending on his experience. Will he make it to the end of the round? But what kind of shape is he in for the next round?
To be more specific, the last significant low for the Dow was recorded on June 7 at 9816, Transports 4038. I want to watch these two points for indications of further strength or weakness.
The Lowry’s figures are important at this juncture. Their Selling Pressure Index at 707 is 462 points above their Buying Power Index which stands at 245. Thus Selling Pressure is in the dominant position, which suggests that the market should work sharply lower at the drop of a dime.”
Hussman: Four Factors Pushing Us Toward a Double-Dip
In his latest weekly market commentary, top fund manager John Hussman says four factors are indicating that the U.S. is on the verge of a double-dip recession.
“In every instance we’ve observed these conditions, the U.S. economy has either already been in a recession, or has been within a few weeks of what turned out in hindsight to be the official beginning of a recession,” Hussman writes. “There have been no false signals.”
The four factors:
1: Widening credit spreads: Hussman says this is already occurring.
2: Moderate or flat yield curve: “Virtually any decline” in the 10-year Treasury yield will make this occur, Hussman says.
3: Falling stock prices: This, of course, has occurred in recent weeks.
4: Moderating ISM and employment growth: The measures Hussman uses for employment growth are moderating; the ISM growth is not.
“For all intents and purposes, unless the credit spreads, the S&P 500 (SPY), or the yield curve reverse, a further decline in the Purchasing Managers Index to 54 or below would be sufficient to confirm a ‘double-dip recession’,” writes Hussman. “Note that by itself, such a level might not be particularly troublesome. But in concert with the other evidence we observe, it would be sufficient to complete the syndrome of risk factors.”
“In every instance we’ve observed these conditions, the U.S. economy has either already been in a recession, or has been within a few weeks of what turned out in hindsight to be the official beginning of a recession,” Hussman writes. “There have been no false signals.”
The four factors:
1: Widening credit spreads: Hussman says this is already occurring.
2: Moderate or flat yield curve: “Virtually any decline” in the 10-year Treasury yield will make this occur, Hussman says.
3: Falling stock prices: This, of course, has occurred in recent weeks.
4: Moderating ISM and employment growth: The measures Hussman uses for employment growth are moderating; the ISM growth is not.
“For all intents and purposes, unless the credit spreads, the S&P 500 (SPY), or the yield curve reverse, a further decline in the Purchasing Managers Index to 54 or below would be sufficient to confirm a ‘double-dip recession’,” writes Hussman. “Note that by itself, such a level might not be particularly troublesome. But in concert with the other evidence we observe, it would be sufficient to complete the syndrome of risk factors.”
83 Billion losses for BP. This is enough to save Greece.
According to the NYT...
Even misdemeanor convictions under environmental laws could produce stunningly large fines under general federal criminal statutes, Mr. Uhlmann added. That is because the Alternative Fines Act allows the federal government to request twice the gain or loss associated with an offense if the Justice Department shows that a crime was committed.
Predictions by analysts of the overall cost of the spill to BP, when criminal penalties are included, have been rising. On Wednesday, Pavel Molchanov, an analyst at Raymond James, estimated the total legal cost, including criminal fines, at $62.9 billion, which would dwarf the $20 billion escrow account to be used to pay claims of economic loss.
So we're talking $83 billion is possible. Suddenly the $90 or so billion having been clipped from BP's market cap is making a lot of sense.
Even misdemeanor convictions under environmental laws could produce stunningly large fines under general federal criminal statutes, Mr. Uhlmann added. That is because the Alternative Fines Act allows the federal government to request twice the gain or loss associated with an offense if the Justice Department shows that a crime was committed.
Predictions by analysts of the overall cost of the spill to BP, when criminal penalties are included, have been rising. On Wednesday, Pavel Molchanov, an analyst at Raymond James, estimated the total legal cost, including criminal fines, at $62.9 billion, which would dwarf the $20 billion escrow account to be used to pay claims of economic loss.
So we're talking $83 billion is possible. Suddenly the $90 or so billion having been clipped from BP's market cap is making a lot of sense.
Wednesday, June 16, 2010
Spain:Cuando el rio suena, lleva agua (If the river is noisy it’s because it has water)
A liquidity plan, confirmed by sources close to the issuing entity, and also corroborated by senior business leaders, will incorporate financial aid in the form of a credit line amounting to between 200,000 and 250,000 million euros, compared with 110 000 million that went to Greece.
Apparently, the decision could have been made in a special, secret meeting of the Board of Directors of the IMF, which was convened solely to discuss the Spanish economic situation.
Hmm. ‘Apparently’. The IMF chief Dominique Strauss-Kahn is due to arrive in Spain for talks on Friday, but the government has denied that a bailout is on the agenda.
Apparently, the decision could have been made in a special, secret meeting of the Board of Directors of the IMF, which was convened solely to discuss the Spanish economic situation.
Hmm. ‘Apparently’. The IMF chief Dominique Strauss-Kahn is due to arrive in Spain for talks on Friday, but the government has denied that a bailout is on the agenda.
Monday, June 14, 2010
EURO will End.
Some late night words of caution from one of the UK's best journalists. In a report obtained by Ambrose Evans-Pritchard, French financial firm AXA is quoted as essentially saying that the chance of the Eurozone's survival is nil. Why a European bank would issue it own suicide note is unclear, although the firm's logic is sound: "The markets are very nervous because they can see that there is a fatal flaw in the system and no clear way out. We are in a very major crisis that has even broader implications than the credit crisis two years ago. The politicians have not yet twigged to this." Ms Zemek said the rescue had bought a "maximum" of 18 months respite before deeper structural damage hits home, with a "probable" default by Greece setting off a chain reaction across Southern Europe. "It would be the end of the euro as we know it. The long-term implications are at best a split in the eurozone, at worst the destruction of the euro. It is not going to end happily however you slice it."
And some more doom and gloom:
Axa said there was "no chance" that the EU's €750bn "shock and awe" shield will succeed since it treats Club Med's debt trap as a short-term liquidity crisis.
In the case of Greece the joint IMF-EU policy will increase Greek public debt from 120pc to 150pc of GDP by 2014, arguably making matters worse.
A number of ex-IMF officials have said the policy is doomed to failure since there is no devaluation or debt relief to offset the ferocious fiscal squeeze, and may endanger the credibility of the Fund itself. The IMF had floated the idea of a debt restructuring but this was blocked by the Brussels.
Contagion from a Greek default would be harder to control than fallout from the Lehman collapse. "This has huge implications for banks. These bonds didn't just disappear; they went somewhere, allegedly into French money markets and insurance companies, or on to French balance sheets," she said.
The ECB has lent Greek banks €85bn, mostly in exchange for collateral in the form of Greek government bonds.
This has kept Greek lenders alive as they suffer a slow bank run, losing 7pc of their deposit base since last June as wealthy Greeks shift their funds abroad. The ECB support is equal to 20pc of their non-equity funding, according to Lombard Street Research.
All this is occurring as Merkel and Sarkozy's denial that all is good is getting progressively more transparent for the mere propaganda, and total lack of long-term planning that it is. With a near record number of EURUSD short contracts outstanding, traders should be wary of massive short covering episodes, although the fate of the EUR, just like that of the US market at this point, are both guaranteed. We will present tomorrow's ECB deposit facility usage as it becomes available. Following today's all time record of €384 billion, at this point the death of European interbank liquidity is a certainty, and unlike the US, as Bank of America points out (and as we will touch upon tomorrow), there is no simple, and US-comparable "print money" solution. Europe is on now its own.
And some more doom and gloom:
Axa said there was "no chance" that the EU's €750bn "shock and awe" shield will succeed since it treats Club Med's debt trap as a short-term liquidity crisis.
In the case of Greece the joint IMF-EU policy will increase Greek public debt from 120pc to 150pc of GDP by 2014, arguably making matters worse.
A number of ex-IMF officials have said the policy is doomed to failure since there is no devaluation or debt relief to offset the ferocious fiscal squeeze, and may endanger the credibility of the Fund itself. The IMF had floated the idea of a debt restructuring but this was blocked by the Brussels.
Contagion from a Greek default would be harder to control than fallout from the Lehman collapse. "This has huge implications for banks. These bonds didn't just disappear; they went somewhere, allegedly into French money markets and insurance companies, or on to French balance sheets," she said.
The ECB has lent Greek banks €85bn, mostly in exchange for collateral in the form of Greek government bonds.
This has kept Greek lenders alive as they suffer a slow bank run, losing 7pc of their deposit base since last June as wealthy Greeks shift their funds abroad. The ECB support is equal to 20pc of their non-equity funding, according to Lombard Street Research.
All this is occurring as Merkel and Sarkozy's denial that all is good is getting progressively more transparent for the mere propaganda, and total lack of long-term planning that it is. With a near record number of EURUSD short contracts outstanding, traders should be wary of massive short covering episodes, although the fate of the EUR, just like that of the US market at this point, are both guaranteed. We will present tomorrow's ECB deposit facility usage as it becomes available. Following today's all time record of €384 billion, at this point the death of European interbank liquidity is a certainty, and unlike the US, as Bank of America points out (and as we will touch upon tomorrow), there is no simple, and US-comparable "print money" solution. Europe is on now its own.
Jailed for debts (USA style)
It’s not a crime to owe money, and debtors’ prisons were abolished in the United States in the 19th century. But people are routinely being thrown in jail for failing to pay debts. In Minnesota, which has some of the most creditor-friendly laws in the country, the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009, a Star Tribune analysis of state court data has found.
Not every warrant results in an arrest, but in Minnesota many debtors spend up to 48 hours in cells with criminals. Consumer attorneys say such arrests are increasing in many states, including Arkansas, Arizona and Washington, driven by a bad economy, high consumer debt and a growing industry that buys bad debts and employs every means available to collect.
Whether a debtor is locked up depends largely on where the person lives, because enforcement is inconsistent from state to state, and even county to county.
In Illinois and southwest Indiana, some judges jail debtors for missing court-ordered debt payments. In extreme cases, people stay in jail until they raise a minimum payment. In January, a judge sentenced a Kenney, Ill., man “to indefinite incarceration” until he came up with $300 toward a lumber yard debt.
“The law enforcement system has unwittingly become a tool of the debt collectors,” said Michael Kinkley, an attorney in Spokane, Wash., who has represented arrested debtors. “The debt collectors are abusing the system and intimidating people, and law enforcement is going along with it.”
How often are debtors arrested across the country? No one can say. No national statistics are kept, and the practice is largely unnoticed outside legal circles. “My suspicion is the debt collection industry does not want the world to know these arrests are happening, because the practice would be widely condemned,” said Robert Hobbs, deputy director of the National Consumer Law Center in Boston.
Debt collectors defend the practice, saying phone calls, letters and legal actions aren’t always enough to get people to pay…..
Taxpayers foot the bill for arresting and jailing debtors. In many cases, Minnesota judges set bail at the amount owed.
In Minnesota, judges have issued arrest warrants for people who owe as little as $85 — less than half the cost of housing an inmate overnight. Debtors targeted for arrest owed a median of $3,512 in 2009, up from $2,201 five years ago.
Those jailed for debts may be the least able to pay….
The laws allowing for the arrest of someone for an unpaid debt are not new.
What is new is the rise of well-funded, aggressive and centralized collection firms, in many cases run by attorneys, that buy up unpaid debt and use the courts to collect.
Three debt buyers — Unifund CCR Partners, Portfolio Recovery Associates Inc. and Debt Equities LLC — accounted for 15 percent of all debt-related arrest warrants issued in Minnesota since 2005, court data show. The debt buyers also file tens of thousands of other collection actions in the state, seeking court orders to make people pay.
The debts — often five or six years old — are purchased from companies like cellphone providers and credit card issuers, and cost a few cents on the dollar. Using automated dialing equipment and teams of lawyers, the debt-buyer firms try to collect the debt, plus interest and fees. A firm aims to collect at least twice what it paid for the debt to cover costs. Anything beyond that is profit….
Todd Lansky, chief operating officer at Resurgence Financial LLC, a Northbrook, Ill.-based debt buyer, said firms like his operate within the law, which says people who ignore court orders can be arrested for contempt…
Few debtors realize they can land in jail simply for ignoring debt-collection legal matters. Debtors also may not recognize the names of companies seeking to collect old debts. Some people are contacted by three or four firms as delinquent debts are bought and sold multiple times after the original creditor writes off the account….
A year ago, Legal Aid attorneys proposed a change in state law that would have required law enforcement officials to let debtors fill out financial disclosure forms when they are apprehended rather than book them into jail. No legislator introduced the measure…
One afternoon last spring, Deborah Poplawski, 38, of Minneapolis was digging in her purse for coins to feed a downtown parking meter when she saw the flashing lights of a Minneapolis police squad car behind her. Poplawski, a restaurant cook, assumed she had parked illegally. Instead, she was headed to jail over a $250 credit card debt.
Less than a month earlier, she learned by chance from an employment counselor that she had an outstanding warrant. Debt Equities, a Golden Valley debt buyer, had sued her, but she says nobody served her with court documents. Thanks to interest and fees, Poplawski was now on the hook for $1,138….
She spent nearly 25 hours at the Hennepin County jail….
The next day, Poplawski appeared before a Hennepin County district judge. He told her to fill out the form listing her assets and bank account, and released her. Several weeks later, Debt Equities used this information to seize funds from her bank account. The firm didn’t return repeated calls seeking a comment.
“We hear every day about how there’s no money for public services,” Poplawski said. “But it seems like the collectors have found a way to get the police to do their work.”
Not every warrant results in an arrest, but in Minnesota many debtors spend up to 48 hours in cells with criminals. Consumer attorneys say such arrests are increasing in many states, including Arkansas, Arizona and Washington, driven by a bad economy, high consumer debt and a growing industry that buys bad debts and employs every means available to collect.
Whether a debtor is locked up depends largely on where the person lives, because enforcement is inconsistent from state to state, and even county to county.
In Illinois and southwest Indiana, some judges jail debtors for missing court-ordered debt payments. In extreme cases, people stay in jail until they raise a minimum payment. In January, a judge sentenced a Kenney, Ill., man “to indefinite incarceration” until he came up with $300 toward a lumber yard debt.
“The law enforcement system has unwittingly become a tool of the debt collectors,” said Michael Kinkley, an attorney in Spokane, Wash., who has represented arrested debtors. “The debt collectors are abusing the system and intimidating people, and law enforcement is going along with it.”
How often are debtors arrested across the country? No one can say. No national statistics are kept, and the practice is largely unnoticed outside legal circles. “My suspicion is the debt collection industry does not want the world to know these arrests are happening, because the practice would be widely condemned,” said Robert Hobbs, deputy director of the National Consumer Law Center in Boston.
Debt collectors defend the practice, saying phone calls, letters and legal actions aren’t always enough to get people to pay…..
Taxpayers foot the bill for arresting and jailing debtors. In many cases, Minnesota judges set bail at the amount owed.
In Minnesota, judges have issued arrest warrants for people who owe as little as $85 — less than half the cost of housing an inmate overnight. Debtors targeted for arrest owed a median of $3,512 in 2009, up from $2,201 five years ago.
Those jailed for debts may be the least able to pay….
The laws allowing for the arrest of someone for an unpaid debt are not new.
What is new is the rise of well-funded, aggressive and centralized collection firms, in many cases run by attorneys, that buy up unpaid debt and use the courts to collect.
Three debt buyers — Unifund CCR Partners, Portfolio Recovery Associates Inc. and Debt Equities LLC — accounted for 15 percent of all debt-related arrest warrants issued in Minnesota since 2005, court data show. The debt buyers also file tens of thousands of other collection actions in the state, seeking court orders to make people pay.
The debts — often five or six years old — are purchased from companies like cellphone providers and credit card issuers, and cost a few cents on the dollar. Using automated dialing equipment and teams of lawyers, the debt-buyer firms try to collect the debt, plus interest and fees. A firm aims to collect at least twice what it paid for the debt to cover costs. Anything beyond that is profit….
Todd Lansky, chief operating officer at Resurgence Financial LLC, a Northbrook, Ill.-based debt buyer, said firms like his operate within the law, which says people who ignore court orders can be arrested for contempt…
Few debtors realize they can land in jail simply for ignoring debt-collection legal matters. Debtors also may not recognize the names of companies seeking to collect old debts. Some people are contacted by three or four firms as delinquent debts are bought and sold multiple times after the original creditor writes off the account….
A year ago, Legal Aid attorneys proposed a change in state law that would have required law enforcement officials to let debtors fill out financial disclosure forms when they are apprehended rather than book them into jail. No legislator introduced the measure…
One afternoon last spring, Deborah Poplawski, 38, of Minneapolis was digging in her purse for coins to feed a downtown parking meter when she saw the flashing lights of a Minneapolis police squad car behind her. Poplawski, a restaurant cook, assumed she had parked illegally. Instead, she was headed to jail over a $250 credit card debt.
Less than a month earlier, she learned by chance from an employment counselor that she had an outstanding warrant. Debt Equities, a Golden Valley debt buyer, had sued her, but she says nobody served her with court documents. Thanks to interest and fees, Poplawski was now on the hook for $1,138….
She spent nearly 25 hours at the Hennepin County jail….
The next day, Poplawski appeared before a Hennepin County district judge. He told her to fill out the form listing her assets and bank account, and released her. Several weeks later, Debt Equities used this information to seize funds from her bank account. The firm didn’t return repeated calls seeking a comment.
“We hear every day about how there’s no money for public services,” Poplawski said. “But it seems like the collectors have found a way to get the police to do their work.”
Soros Warns about double dip
In the week following the bankruptcy of Lehman Brothers on Sept. 15, 2008 — global financial markets actually broke down, and by the end of the week, they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions, which ceased to be acceptable to counterparties.
As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit to make up for the credit that disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and re-establish macroeconomic balance.
This required a delicate two-phase maneuver just as when a car is skidding. First you have to turn the car into the direction of the skid and only when you have regained control can you correct course.
The first phase of the maneuver has been successfully accomplished — a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.
Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt. Greece and the euro have taken center stage, but the effects are liable to be felt worldwide. Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude. We find ourselves in a situation eerily reminiscent of the 1930s. Keynes has taught us that budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip.
It is important to realize that the crisis in which we find ourselves is not just a market failure but also a regulatory failure, and even more importantly, a failure of the prevailing dogma about financial markets. I have in mind the Efficient Market Hypothesis and Rational Expectation Theory. These economic theories guided, or more exactly misguided, both the regulators and the financial engineers who designed the derivatives and other synthetic financial instruments and quantitative risk management systems which have played such an important part in the collapse. To gain a proper understanding of the current situation and how we got to where we are, we need to go back to basics and re-examine the foundation of economic theory.
I have developed an alternative theory about financial markets which asserts that financial markets do not necessarily tend toward equilibrium; they can just as easily produce asset bubbles. Nor are markets capable of correcting their own excesses. Keeping asset bubbles within bounds have to be an objective of public policy. I propounded this theory in my first book, “The Alchemy of Finance,” in 1987. It was generally dismissed at the time, but the current financial crisis has proven, not necessarily its validity, but certainly its superiority to the prevailing dogma.
Let me briefly recapitulate my theory for those who are not familiar with it. It can be summed up in two propositions. First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced. When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
Second, financial markets do not play a purely passive role; they can also affect the so-called fundamentals they are supposed to reflect. These two functions that financial markets perform work in opposite directions. In the passive or cognitive function, the fundamentals are supposed to determine market prices. In the active or manipulative function market, prices find ways of influencing the fundamentals. When both functions operate at the same time, they interfere with each other. The supposedly independent variable of one function is the dependent variable of the other, so that neither function has a truly independent variable. As a result, neither market prices nor the underlying reality is fully determined. Both suffer from an element of uncertainty that cannot be quantified. I call the interaction between the two functions reflexivity. Frank Knight recognized and explicated this element of unquantifiable uncertainty in a book published in 1921, but the Efficient Market Hypothesis and Rational Expectation Theory have deliberately ignored it. That is what made them so misleading.
Reflexivity sets up a feedback loop between market valuations and the so-called fundamentals which are being valued. The feedback can be either positive or negative. Negative feedback brings market prices and the underlying reality closer together. In other words, negative feedback is self-correcting. It can go on forever, and if the underlying reality remains unchanged, it may eventually lead to an equilibrium in which market prices accurately reflect the fundamentals. By contrast, a positive feedback is self-reinforcing. It cannot go on forever because eventually, market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction. That is how financial markets produce boom-bust phenomena or bubbles. Bubbles are not the only manifestations of reflexivity, but they are the most spectacular.
In my interpretation equilibrium, which is the central case in economic theory, turns out to be a limiting case where negative feedback is carried to its ultimate limit. Positive feedback has been largely assumed away by the prevailing dogma, and it deserves a lot more attention.
I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow and more and more people lose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup, said, “As long as the music is playing, you’ve got to get up and dance. We are still dancing.” Eventually a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.
Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions. Disillusionment turns into panic, reaching its climax in a financial crisis.
The simplest case of a purely financial bubble can be found in real estate. The trend that precipitates it is the availability of credit; the misconception that continues to recur in various forms is that the value of the collateral is independent of the availability of credit. As a matter of fact, the relationship is reflexive. When credit becomes cheaper, activity picks up and real estate values rise. There are fewer defaults, credit performance improves, and lending standards are relaxed. So at the height of the boom, the amount of credit outstanding is at its peak, and a reversal precipitates false liquidation, depressing real estate values.
The bubble that led to the current financial crisis is much more complicated. The collapse of the subprime bubble in 2007 set off a chain reaction, much as an ordinary bomb sets off a nuclear explosion. I call it a superbubble. It has developed over a longer period of time, and it is composed of a number of simpler bubbles. What makes the superbubble so interesting is the role that the smaller bubbles have played in its development.
The prevailing trend in the superbubble was the ever-increasing use of credit and leverage. The prevailing misconception was the belief that financial markets are self-correcting and should be left to their own devices. President Reagan called it the “magic of the marketplace,” and I call it market fundamentalism. It became the dominant creed in the 1980s. Since market fundamentalism was based on false premises, its adoption led to a series of financial crises. Each time, the authorities intervened, merged away, or otherwise took care of the failing financial institutions, and applied monetary and fiscal stimuli to protect the economy. These measures reinforced the prevailing trend of ever-increasing credit and leverage, and as long as they worked, they also reinforced the prevailing misconception that markets can be safely left to their own devices. The intervention of the authorities is generally recognized as creating amoral hazard; more accurately it served as a successful test of a false belief, thereby inflating the superbubble even further.
It should be emphasized that my theories of bubbles cannot predict whether a test will be successful or not. This holds for ordinary bubbles as well as the superbubble. For instance, I thought the emerging market crisis of 1997-98 would constitute the tipping point for the superbubble, but I was wrong. The authorities managed to save the system and the superbubble continued growing. That made the bust that eventually came in 2007-8 all the more devastating.
What are the implications of my theory for the regulation of the financial system?
First and foremost, since markets are bubble-prone, the financial authorities have to accept responsibility for preventing bubbles from growing too big. Alan Greenspan and other regulators have expressly refused to accept that responsibility. If markets can’t recognize bubbles, Greenspan argued, neither can regulators — and he was right. Nevertheless, the financial authorities have to accept the assignment, knowing full well that they will not be able to meet it without making mistakes. They will, however, have the benefit of receiving feedback from the markets, which will tell them whether they have done too much or too little. They can then correct their mistakes.
Second, in order to control asset bubbles it is not enough to control the money supply; you must also control the availability of credit. This cannot be done by using only monetary tools; you must also use credit controls. The best-known tools are margin requirements and minimum capital requirements. Currently, they are fixed irrespective of the market’s mood, because markets are not supposed to have moods. Yet they do, and the financial authorities need to vary margin and minimum capital requirements in order to control asset bubbles.
Regulators may also have to invent new tools or revive others that have fallen into disuse. For instance, in my early days in finance, many years ago, central banks used to instruct commercial banks to limit their lending to a particular sector of the economy, such as real estate or consumer loans, because they felt that the sector was overheating. Market fundamentalists consider that kind of intervention unacceptable, but they are wrong. When our central banks used to do it, we had no financial crises to speak of. The Chinese authorities do it today, and they have much better control over their banking system. The deposits that Chinese commercial banks have to maintain at the People’s Bank of China were increased 17 times during the boom, and when the authorities reversed course, the banks obeyed them with alacrity.
Third, since markets are potentially unstable, there are systemic risks in addition to the risks affecting individual market participants. Participants may ignore these systemic risks in the belief that they can always dispose of their positions, but regulators cannot ignore them because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or a collapse. They have to monitor the positions of participants in order to detect potential imbalances. That means that the positions of all major market participants, including hedge funds and sovereign wealth funds, need to be monitored. The drafters of the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans: they ignored the systemic risks attached to concentrated positions in securities. This was an important factor aggravating the crisis. It has to be corrected by raising the risk ratings of securities held by banks. That will probably discourage loans, which is not such a bad thing.
Fourth, derivatives and synthetic financial instruments perform many useful functions, but they also carry hidden dangers. For instance, the securitization of mortgages was supposed to reduce risk through geographical diversification. In fact, it introduced a new risk by separating the interest of the agents from the interest of the owners. Regulators need to fully understand how these instruments work before they allow them to be used, and they ought to impose restrictions guard against those hidden dangers. For instance, agents packaging mortgages into securities ought to be obliged to retain sufficient ownership to guard against the agency problem.
Credit-default swaps (C.D.S.) are particularly dangerous. They allow people to buy insurance on the survival of a company or a country while handing them a license to kill. C.D.S. ought to be available to buyers only to the extent that they have a legitimate insurable interest. Generally speaking, derivatives ought to be registered with a regulatory agency just as regular securities have to be registered with the S.E.C. or its equivalent. Derivatives traded on exchanges would be registered as a class; those traded over-the-counter would have to be registered individually. This would provide a powerful inducement to use exchange traded derivatives whenever possible.
Finally, we must recognize that financial markets evolve in a one-directional, nonreversible manner. The financial authorities, in carrying out their duty of preventing the system from collapsing, have extended an implicit guarantee to all institutions that are “too big to fail.” Now they cannot credibly withdraw that guarantee. Therefore, they must impose regulations that will ensure that the guarantee will not be invoked. Too-big-to-fail banks must use less leverage and accept various restrictions on how they invest the depositors’ money. Deposits should not be used to finance proprietary trading. But regulators have to go even further. They must regulate the compensation packages of proprietary traders to ensure that risks and rewards are properly aligned. This may push proprietary traders out of banks, into hedge funds where they properly belong. Just as oil tankers are compartmentalized in order to keep them stable, there ought to be firewalls between different markets. It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall Act of 1933 did. But there have to be internal compartments keeping proprietary trading in various markets separate from each other. Some banks that have come to occupy quasi-monopolistic positions may have to be broken up.
While I have a high degree of conviction on these five points, there are many questions to which my theory does not provide an unequivocal answer. For instance, is a high degree of liquidity always desirable? To what extent should securities be marked to market? Many answers that followed automatically from the Efficient Market Hypothesis need to be re-examined.
It is clear that the reforms currently under consideration do not fully satisfy the five points I have made, but I want to emphasize that these five points apply only in the long run. As Mervyn King explained, the authorities had to do in the short run the exact opposite of what was required in the long run. And as I said earlier, the financial crisis is far from over. We have just ended Act II. The euro has taken center stage, and Germany has become the lead actor. The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation. But I prefer to discuss this subject in Germany, which is the lead actor, and I plan to do so at the Humboldt University in Berlin on June 23. I hope you will forgive me if I avoid the subject until then.
As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit to make up for the credit that disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and re-establish macroeconomic balance.
This required a delicate two-phase maneuver just as when a car is skidding. First you have to turn the car into the direction of the skid and only when you have regained control can you correct course.
The first phase of the maneuver has been successfully accomplished — a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.
Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt. Greece and the euro have taken center stage, but the effects are liable to be felt worldwide. Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude. We find ourselves in a situation eerily reminiscent of the 1930s. Keynes has taught us that budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip.
It is important to realize that the crisis in which we find ourselves is not just a market failure but also a regulatory failure, and even more importantly, a failure of the prevailing dogma about financial markets. I have in mind the Efficient Market Hypothesis and Rational Expectation Theory. These economic theories guided, or more exactly misguided, both the regulators and the financial engineers who designed the derivatives and other synthetic financial instruments and quantitative risk management systems which have played such an important part in the collapse. To gain a proper understanding of the current situation and how we got to where we are, we need to go back to basics and re-examine the foundation of economic theory.
I have developed an alternative theory about financial markets which asserts that financial markets do not necessarily tend toward equilibrium; they can just as easily produce asset bubbles. Nor are markets capable of correcting their own excesses. Keeping asset bubbles within bounds have to be an objective of public policy. I propounded this theory in my first book, “The Alchemy of Finance,” in 1987. It was generally dismissed at the time, but the current financial crisis has proven, not necessarily its validity, but certainly its superiority to the prevailing dogma.
Let me briefly recapitulate my theory for those who are not familiar with it. It can be summed up in two propositions. First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced. When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
Second, financial markets do not play a purely passive role; they can also affect the so-called fundamentals they are supposed to reflect. These two functions that financial markets perform work in opposite directions. In the passive or cognitive function, the fundamentals are supposed to determine market prices. In the active or manipulative function market, prices find ways of influencing the fundamentals. When both functions operate at the same time, they interfere with each other. The supposedly independent variable of one function is the dependent variable of the other, so that neither function has a truly independent variable. As a result, neither market prices nor the underlying reality is fully determined. Both suffer from an element of uncertainty that cannot be quantified. I call the interaction between the two functions reflexivity. Frank Knight recognized and explicated this element of unquantifiable uncertainty in a book published in 1921, but the Efficient Market Hypothesis and Rational Expectation Theory have deliberately ignored it. That is what made them so misleading.
Reflexivity sets up a feedback loop between market valuations and the so-called fundamentals which are being valued. The feedback can be either positive or negative. Negative feedback brings market prices and the underlying reality closer together. In other words, negative feedback is self-correcting. It can go on forever, and if the underlying reality remains unchanged, it may eventually lead to an equilibrium in which market prices accurately reflect the fundamentals. By contrast, a positive feedback is self-reinforcing. It cannot go on forever because eventually, market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction. That is how financial markets produce boom-bust phenomena or bubbles. Bubbles are not the only manifestations of reflexivity, but they are the most spectacular.
In my interpretation equilibrium, which is the central case in economic theory, turns out to be a limiting case where negative feedback is carried to its ultimate limit. Positive feedback has been largely assumed away by the prevailing dogma, and it deserves a lot more attention.
I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow and more and more people lose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup, said, “As long as the music is playing, you’ve got to get up and dance. We are still dancing.” Eventually a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.
Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions. Disillusionment turns into panic, reaching its climax in a financial crisis.
The simplest case of a purely financial bubble can be found in real estate. The trend that precipitates it is the availability of credit; the misconception that continues to recur in various forms is that the value of the collateral is independent of the availability of credit. As a matter of fact, the relationship is reflexive. When credit becomes cheaper, activity picks up and real estate values rise. There are fewer defaults, credit performance improves, and lending standards are relaxed. So at the height of the boom, the amount of credit outstanding is at its peak, and a reversal precipitates false liquidation, depressing real estate values.
The bubble that led to the current financial crisis is much more complicated. The collapse of the subprime bubble in 2007 set off a chain reaction, much as an ordinary bomb sets off a nuclear explosion. I call it a superbubble. It has developed over a longer period of time, and it is composed of a number of simpler bubbles. What makes the superbubble so interesting is the role that the smaller bubbles have played in its development.
The prevailing trend in the superbubble was the ever-increasing use of credit and leverage. The prevailing misconception was the belief that financial markets are self-correcting and should be left to their own devices. President Reagan called it the “magic of the marketplace,” and I call it market fundamentalism. It became the dominant creed in the 1980s. Since market fundamentalism was based on false premises, its adoption led to a series of financial crises. Each time, the authorities intervened, merged away, or otherwise took care of the failing financial institutions, and applied monetary and fiscal stimuli to protect the economy. These measures reinforced the prevailing trend of ever-increasing credit and leverage, and as long as they worked, they also reinforced the prevailing misconception that markets can be safely left to their own devices. The intervention of the authorities is generally recognized as creating amoral hazard; more accurately it served as a successful test of a false belief, thereby inflating the superbubble even further.
It should be emphasized that my theories of bubbles cannot predict whether a test will be successful or not. This holds for ordinary bubbles as well as the superbubble. For instance, I thought the emerging market crisis of 1997-98 would constitute the tipping point for the superbubble, but I was wrong. The authorities managed to save the system and the superbubble continued growing. That made the bust that eventually came in 2007-8 all the more devastating.
What are the implications of my theory for the regulation of the financial system?
First and foremost, since markets are bubble-prone, the financial authorities have to accept responsibility for preventing bubbles from growing too big. Alan Greenspan and other regulators have expressly refused to accept that responsibility. If markets can’t recognize bubbles, Greenspan argued, neither can regulators — and he was right. Nevertheless, the financial authorities have to accept the assignment, knowing full well that they will not be able to meet it without making mistakes. They will, however, have the benefit of receiving feedback from the markets, which will tell them whether they have done too much or too little. They can then correct their mistakes.
Second, in order to control asset bubbles it is not enough to control the money supply; you must also control the availability of credit. This cannot be done by using only monetary tools; you must also use credit controls. The best-known tools are margin requirements and minimum capital requirements. Currently, they are fixed irrespective of the market’s mood, because markets are not supposed to have moods. Yet they do, and the financial authorities need to vary margin and minimum capital requirements in order to control asset bubbles.
Regulators may also have to invent new tools or revive others that have fallen into disuse. For instance, in my early days in finance, many years ago, central banks used to instruct commercial banks to limit their lending to a particular sector of the economy, such as real estate or consumer loans, because they felt that the sector was overheating. Market fundamentalists consider that kind of intervention unacceptable, but they are wrong. When our central banks used to do it, we had no financial crises to speak of. The Chinese authorities do it today, and they have much better control over their banking system. The deposits that Chinese commercial banks have to maintain at the People’s Bank of China were increased 17 times during the boom, and when the authorities reversed course, the banks obeyed them with alacrity.
Third, since markets are potentially unstable, there are systemic risks in addition to the risks affecting individual market participants. Participants may ignore these systemic risks in the belief that they can always dispose of their positions, but regulators cannot ignore them because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or a collapse. They have to monitor the positions of participants in order to detect potential imbalances. That means that the positions of all major market participants, including hedge funds and sovereign wealth funds, need to be monitored. The drafters of the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans: they ignored the systemic risks attached to concentrated positions in securities. This was an important factor aggravating the crisis. It has to be corrected by raising the risk ratings of securities held by banks. That will probably discourage loans, which is not such a bad thing.
Fourth, derivatives and synthetic financial instruments perform many useful functions, but they also carry hidden dangers. For instance, the securitization of mortgages was supposed to reduce risk through geographical diversification. In fact, it introduced a new risk by separating the interest of the agents from the interest of the owners. Regulators need to fully understand how these instruments work before they allow them to be used, and they ought to impose restrictions guard against those hidden dangers. For instance, agents packaging mortgages into securities ought to be obliged to retain sufficient ownership to guard against the agency problem.
Credit-default swaps (C.D.S.) are particularly dangerous. They allow people to buy insurance on the survival of a company or a country while handing them a license to kill. C.D.S. ought to be available to buyers only to the extent that they have a legitimate insurable interest. Generally speaking, derivatives ought to be registered with a regulatory agency just as regular securities have to be registered with the S.E.C. or its equivalent. Derivatives traded on exchanges would be registered as a class; those traded over-the-counter would have to be registered individually. This would provide a powerful inducement to use exchange traded derivatives whenever possible.
Finally, we must recognize that financial markets evolve in a one-directional, nonreversible manner. The financial authorities, in carrying out their duty of preventing the system from collapsing, have extended an implicit guarantee to all institutions that are “too big to fail.” Now they cannot credibly withdraw that guarantee. Therefore, they must impose regulations that will ensure that the guarantee will not be invoked. Too-big-to-fail banks must use less leverage and accept various restrictions on how they invest the depositors’ money. Deposits should not be used to finance proprietary trading. But regulators have to go even further. They must regulate the compensation packages of proprietary traders to ensure that risks and rewards are properly aligned. This may push proprietary traders out of banks, into hedge funds where they properly belong. Just as oil tankers are compartmentalized in order to keep them stable, there ought to be firewalls between different markets. It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall Act of 1933 did. But there have to be internal compartments keeping proprietary trading in various markets separate from each other. Some banks that have come to occupy quasi-monopolistic positions may have to be broken up.
While I have a high degree of conviction on these five points, there are many questions to which my theory does not provide an unequivocal answer. For instance, is a high degree of liquidity always desirable? To what extent should securities be marked to market? Many answers that followed automatically from the Efficient Market Hypothesis need to be re-examined.
It is clear that the reforms currently under consideration do not fully satisfy the five points I have made, but I want to emphasize that these five points apply only in the long run. As Mervyn King explained, the authorities had to do in the short run the exact opposite of what was required in the long run. And as I said earlier, the financial crisis is far from over. We have just ended Act II. The euro has taken center stage, and Germany has become the lead actor. The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation. But I prefer to discuss this subject in Germany, which is the lead actor, and I plan to do so at the Humboldt University in Berlin on June 23. I hope you will forgive me if I avoid the subject until then.
Saturday, June 12, 2010
Japanese ads say women want men with government bonds
http://media.cnbc.com/j/CNBC/Sections/News_And_Analysis/__Story_Inserts/graphics/__MEDIA/ADVERTISEMENTS/Japan_govtbond_ad_300.standard.jpg
Why the push to sell these bonds? According to our sources, Japan is out of money, currently spending twice what it makes.
File this under the what-will-they-think-of-next category: a new Japanese advertising campaign has women proclaiming their love of men who are fiscally responsible enough to buy government bonds.
The ads, commissioned by the ministry of finance, are pushing a new fixed-rate, three-year note the government started selling last week, as reported by Bloomberg.
“I want my future husband to be diligent about money,” a 27-year-old female says in one of the ads. “Playboys are no good … Men who hold JGBs are popular with women!!”
The bonds sell at local banks for 10,000 yen (US$109), but eligible bachelors will need to buy a lot of them if they want to even put a dent in the country’s crushing national debt of 882.9-trillion yen (almost US$10-trillion) as of the end of March.
“It strikes of desperation,” Christian Carrillo, a senior interest-rate strategist in Tokyo at Societe Generale SA told Bloomberg. “I doubt this will be a successful strategy to attract retail investors.”
Godzilla is not amused.
World Bank sees 'double-dip' recession for parts of Europe
Government finances in high-income countries in Europe, France, the US and the UK are currently on an “unsustainable path,” said Andrew Burns, the World Bank’s manager of global macroeconomics.
“We’re expecting that growth in the second quarter is also likely to be disappointing, quite possibly seeing negative growth in several European countries and a double dip in some of these economies,” he added.
The European Union and International Monetary Fund has set set up a €750bn bail-out fund for countries in danger of financial instability, in an attempt to halt the spread of the region's sovereign debt crisis.
Herman Van Rompuy, the EU president, said this week that the EU would be prepared to extend that rescue package if it proved insufficient.
“Currently there isn’t even the hint of a request to put this rescue plan into practice,” Van Rompuy told Belgium’s Trends magazine. “And if the plan were to prove insufficient, my answer is simple: in this case, we’ll do more.”
The EU hopes to prevent countries such as Spain and Portugal from succumbing to debt woes after a separate €110bn lifeline for Greece failed to contain the fiscal crisis.
A second downturn in Europe could lead to global fall-out, the World Bank said in its 2010 Global Economic Prospects report.
Failure to resolve the debt crisis in Europe could hurt global growth and have “serious” effects on East Asia, where exports and investment are large shares of economies, it said.
“We’re expecting that growth in the second quarter is also likely to be disappointing, quite possibly seeing negative growth in several European countries and a double dip in some of these economies,” he added.
The European Union and International Monetary Fund has set set up a €750bn bail-out fund for countries in danger of financial instability, in an attempt to halt the spread of the region's sovereign debt crisis.
Herman Van Rompuy, the EU president, said this week that the EU would be prepared to extend that rescue package if it proved insufficient.
“Currently there isn’t even the hint of a request to put this rescue plan into practice,” Van Rompuy told Belgium’s Trends magazine. “And if the plan were to prove insufficient, my answer is simple: in this case, we’ll do more.”
The EU hopes to prevent countries such as Spain and Portugal from succumbing to debt woes after a separate €110bn lifeline for Greece failed to contain the fiscal crisis.
A second downturn in Europe could lead to global fall-out, the World Bank said in its 2010 Global Economic Prospects report.
Failure to resolve the debt crisis in Europe could hurt global growth and have “serious” effects on East Asia, where exports and investment are large shares of economies, it said.
Friday, June 11, 2010
Three Leading Indicators to proof the makets are going to collapse.
The Inventory Adjustment That Boosted GDP Is Now Over
The Manufacturing and Trade Inventories and Sales report from the Census Bureau today showed that the inventory adjustment is over:
Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,354.3 billion, up 0.4 percent (±0.1%) from March 2010, but down 2.8 percent (±0.3%) from April 2009.
Inventories/Sales Ratio. The total business inventories/sales ratio based on seasonally adjusted data at the end of April was 1.23. The April 2009 ratio was 1.43.
More On The Huge Slowdown Predicted By The ECRI Leading Indicators
David Rosenberg's favorite leading indicator, the Economic Cycle Research Institute (ECRI) Leading Index, fell to 123.2 in the week ended June 4, down from 124 the week before, a -3.5% annualized contraction: the first time this has gone negative in over a year. This is the lowest level since July 31, 2009, when it was at 122.4.
Consensus has expected slower GDP growth in the second half of the year, so the question is whether this index dive simply represents that or something more ominous.
The Consumer Metrics Institute has developed (and is continuing to develop) techniques for monitoring ‘up-stream’ economic activities on a daily basis.
“On May 27th the BEA released its first revision to its 1st Quarter 2010 GDP growth rate measurement, lowering the number from a 3.2% annualized growth rate to 3.0% annualized growth. One day later the Consumer Metrics Institute’s ‘Daily Growth Index’ was signaling what we should expect the BEA’s measurement of the 3rd Quarter 2010 GDP growth rate to be contracting at about a 2.0% rate.
“The prior BEA estimate of 1st Quarter 2010 GDP growth trailed our ‘Daily Growth Index’ by 127 days, and because of the rapid rate that the economy was cooling when the measurements were being made the newly adjusted estimate is now trailing our ‘Daily Growth Index’ by 125 days. Since the 3rd Quarter of 2010 ends 125 days after May 28th (when our ‘Daily Growth Index’ was recording a ‘growth’ rate of -1.99%), if the BEA estimates continue to trail our ‘Daily Growth Index’ in a consistent manner we should expect that the 3rd Quarter’s GDP ‘growth’ rate will be in the -2.0% neighborhood.”
Even BDI,Copper,US railway cargo all leading indicators all pointing towards markets collapse. Who trust the US gov data and survey these days? CNBC?
The Manufacturing and Trade Inventories and Sales report from the Census Bureau today showed that the inventory adjustment is over:
Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,354.3 billion, up 0.4 percent (±0.1%) from March 2010, but down 2.8 percent (±0.3%) from April 2009.
Inventories/Sales Ratio. The total business inventories/sales ratio based on seasonally adjusted data at the end of April was 1.23. The April 2009 ratio was 1.43.
More On The Huge Slowdown Predicted By The ECRI Leading Indicators
David Rosenberg's favorite leading indicator, the Economic Cycle Research Institute (ECRI) Leading Index, fell to 123.2 in the week ended June 4, down from 124 the week before, a -3.5% annualized contraction: the first time this has gone negative in over a year. This is the lowest level since July 31, 2009, when it was at 122.4.
Consensus has expected slower GDP growth in the second half of the year, so the question is whether this index dive simply represents that or something more ominous.
The Consumer Metrics Institute has developed (and is continuing to develop) techniques for monitoring ‘up-stream’ economic activities on a daily basis.
“On May 27th the BEA released its first revision to its 1st Quarter 2010 GDP growth rate measurement, lowering the number from a 3.2% annualized growth rate to 3.0% annualized growth. One day later the Consumer Metrics Institute’s ‘Daily Growth Index’ was signaling what we should expect the BEA’s measurement of the 3rd Quarter 2010 GDP growth rate to be contracting at about a 2.0% rate.
“The prior BEA estimate of 1st Quarter 2010 GDP growth trailed our ‘Daily Growth Index’ by 127 days, and because of the rapid rate that the economy was cooling when the measurements were being made the newly adjusted estimate is now trailing our ‘Daily Growth Index’ by 125 days. Since the 3rd Quarter of 2010 ends 125 days after May 28th (when our ‘Daily Growth Index’ was recording a ‘growth’ rate of -1.99%), if the BEA estimates continue to trail our ‘Daily Growth Index’ in a consistent manner we should expect that the 3rd Quarter’s GDP ‘growth’ rate will be in the -2.0% neighborhood.”
Even BDI,Copper,US railway cargo all leading indicators all pointing towards markets collapse. Who trust the US gov data and survey these days? CNBC?
Thursday, June 10, 2010
Video of Border Shooting of 15 Year Old Disproves “Self Defense”
This video from a Mexican news broadcast is nominally off topic for this blog, but I thought I’d include it precisely because it illustrates one of the mechanisms of propaganda: how the non or under reporting of key facts is used to manage popular perceptions. This video appears getting play only on CNN and some local newstations in the US (and I see the YouTube has only a bit over 1000 viewings thus far).
The newswoman says the teenagers were throwing rocks, but as you can see from the video, unless they were using slingshots (and there is no evidence of that) they were so far away as to pose no threat to the border cop.
Gonzalo reports: “It’s getting a lot of play not only in Mexico, but in the rest of Latin America. The emerging consensus in Latin America is, the US is a country of trigger-happy crazy-people.”
As sad as this case is, in the overall scheme of things this is a minor incident, but it serves to illustrate how news reporting is tailored to fit conventional (and authority-flattering) narratives.
Update: A Google search does show The Daily News with a writeup of the video. It also points out the body of the slain Mexican teenager was found on Mexican soil. Since he appears to have fallen in place, this raises further problems for the “official” version of the story.
The newswoman says the teenagers were throwing rocks, but as you can see from the video, unless they were using slingshots (and there is no evidence of that) they were so far away as to pose no threat to the border cop.
Gonzalo reports: “It’s getting a lot of play not only in Mexico, but in the rest of Latin America. The emerging consensus in Latin America is, the US is a country of trigger-happy crazy-people.”
As sad as this case is, in the overall scheme of things this is a minor incident, but it serves to illustrate how news reporting is tailored to fit conventional (and authority-flattering) narratives.
Update: A Google search does show The Daily News with a writeup of the video. It also points out the body of the slain Mexican teenager was found on Mexican soil. Since he appears to have fallen in place, this raises further problems for the “official” version of the story.
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