Archive for June 2011
JUST TO SAY TO ALL YOU FAITHFUL SUBSCRIBERS, and the hangers-on, and all the others, that Quantum Pranx will be taking a well-earned rest for a couple of weeks, starting about now… So nothing new or topical will be coming onstream in that time, but please feel free to trawl the archives. You might find an interesting or challenging article to rearrange your critical faculties, or else get you reaching for the loaded emergency pistol that you keep close by in a handy drawer… Of course, we are all well aware of a somewhat critical time frame coming up (yes, of course, it came up a long while back): the Greek crisis, the Eurozone crisis, the U.S. deficit crisis, the dollar crisis, the end of the road crisis, the future of the world crisis, blah blah. Yeah, well, that’s why QP is taking some time off… Stay safe, stay sane. –Aurick
from Stock World Weekly
Posted June 26, 2011
ON THURSDAY, QU XING, DIRECTOR OF THE CHINA INSTITUTE OF INTERNATIONAL STUDIES, a Foreign Ministry think tank, told reporters that China doesn’t want to see debt restructuring in the Eurozone and is working with the IMF and countries involved with the debt crisis in an attempt to avoid it. Speaking at a press conference during a visit to Hungary, Premier Wen Jiabao said, “China is a long-term investor in Europe’s sovereign debt market. In recent years we have increased by a quite big margin holdings of Euro bonds. In the future, as we have done in the past, we will support Europe and the Euro.”. Sunday, on a tour of the Chinese-owned Longbridge MG Motor factory in Birmingham, Premier Wen told BBC it will lend to European countries, and also has plans to stimulate domestic demand and reduce its foreign trade surplus.
China’s stated position prompted Zero Hedge to ask, “Will the third time be the charm for the Chinese ‘white knight’ approach to Europe, where it has so far sunk about $50 billion in bad money after good?” Saturday, Zero Hedge reported that China’s European Bailout (And TBTF) Bid Hits Overdrive, As Wen Jiabao is Now in the Market for Hungarian Bonds. “It seems China has learned from the best, and either knows something others don’t (except for the SHIBOR market of course) or is actively preparing to become Too Biggest To Fail by making sure that if something bad happens to it, literally the entire world will follow it into the depths of hell. Sunday, ZH wrote, “As expected, China is the new IMF… All this means is that China will do everything in its power to prevent the ECB from launching an outright unsterilized monetization episode, which will double the amount of importable inflation (plunging EUR) to hit the Chinese domestic economy, and destabilize the already shaky stability, so critical for the Chinese communist party.” (China Says It Will Bail Out Insolvent European Countries.)
It’s good to know that China has its problem with inflation now solidly under control.
Greece has a population of just over 11 million people. Compare that to the New York City metropolitan area population estimated at 18.9 million. It may seem strange that Greece’s travails might greatly affect the global economy, but the potential repercussions from a Greek default become more significant when considering leverage and derivatives. Data from the International Monetary Fund (IMF) show that German banks are heavily leveraged, holding 32 Euros of loans for every Euro of capital they have on hand. Other banks are leveraged to the hilt as well. Belgian banks are leveraged 30-1, and French banks are leveraged 26-1. Lehman’s leverage at the time of its collapse was 31-1. U.S. Banks are paragons of sanity by comparison, with an average leverage of only 13-1. (Europe’s sickly banks) France and Germany are the countries most exposed to Greek debt through bank and private lending and government debt exposure (chart below).
Derivatives present another potential minefield. As Louise Story wrote in the NY Times,
“It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.? No one seems to be sure, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate… The looming uncertainties are whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default.” (Derivatives Cloud the Possible Fallout From a Greek Default)
Michael Hudson explored the differences between what happened to Iceland and its debt crisis, and what is currently happening in Greece:
“The fight for Europe’s future is being waged in Athens and other Greek cities to resist financial demands that are the 21st century’s version of an outright military attack. The threat of bank overlordship is not the kind of economy-killing policy that affords opportunities for heroism in armed battle, to be sure. Destructive financial policies are more like an exercise in the banality of evil – in this case, the pro-creditor assumptions of the European Central Bank (ECB), EU and IMF (egged on by the U.S. Treasury)…
“The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past. They are demanding privatization of public assets (on credit, with tax deductibility for interest so as to leave more cash flow to pay the bankers). This transfer of land, public utilities and interest as financial booty and tribute to creditor economies is what makes financial austerity like war in its effect…
“One would think that after fifty years of austerity programs and privatization selloffs to pay bad debts, the world had learned enough about causes and consequences. The banking profession chooses deliberately to be ignorant. ‘Good accepted practice’ is bolstered by Nobel Economics Prizes to provide a cloak of plausible deniability when markets “unexpectedly” are hollowed out and new investment slows as a result of financially bleeding economies, medieval-style, while wealth is siphoned up to the top of the economic pyramid.
“My friend David Kelley likes to cite Molly Ivins’ quip: ‘It’s hard to convince people that you are killing them for their own good.’ The EU’s attempt to do this didn’t succeed in Iceland. And like the Icelanders, the Greek protesters have had their fill of neoliberal learned ignorance that austerity, unemployment and shrinking markets are the path to prosperity, not deeper poverty. So we must ask what motivates central banks to promote tunnel-visioned managers who follow the orders and logic of a system that imposes needless suffering and waste – all to pursue the banal obsession that banks must not lose money?
“One must conclude that the EU’s new central planners (isn’t that what Hayek said was the Road to Serfdom?) are acting as class warriors by demanding that all losses are to be suffered by economies imposing debt deflation and permitting creditors to grab assets – as if this won’t make the problem worse. This ECB hard line is backed by U.S. Treasury Secretary Geithner, evidently so that U.S. institutions not lose their bets on derivative plays they have written up…” (Michael Hudson’s Whither Greece – Without a national referendum Iceland-style, EU dictates cannot be binding for more.)
by Rick Ackerman
Posted ‘Rick’s Picks’ June 23, 2011
HELICOPTER BEN WAS DEEP IN DENIAL YESTERDAY FOLLOWING A TWO-DAY FED meeting, telling reporters [see below,article from SeattlePI] he’s puzzled by recent signs of deterioration in the economy. “We don’t have a precise read on why this slower pace of growth is persisting.” Is this guy a hoot, or what?
Earth to Bernanke: The Great Recession never ended! In fact, the term “Great Recession” itself is popularly used by plain folks to assert that economic hard times are very much with us, notwithstanding brazen statistical claims to the contrary. As anyone can see, many trillions of stimulus dollars have yet to improve a dismal employment picture one iota — only kept it from getting worse; nor have those “dollars” boosted household incomes or real estate prices. What they have boosted are bank profits and the prices of stocks, commodities and basic goods
Surprising no one, Mr. Bernanke also failed to mention the still-deflating housing market as a possible reason for the punk economy. Who but a Fed chairman could fail to connect the dots? It seems not to have occurred to him that consumers are no longer binging because their homes have continued to plummet in value – another 4.2% in the last quarter alone.
In a policy statement issued after the meeting, the Fed muckety-mucks blamed the usual suspects for the weakening economy: higher energy prices and the disaster in Japan. Perhaps Bernanke had second thoughts about trotting out such a lame explanation, however, and that’s why he deflected the matter by feigning cluelessness. Whatever the case, although he further widened the cognitive gap between the government’s spinmeisters and the working stiff, the Fed chief may have bought time to feign yet more cluelessness when he admitted that the ”sluggish recovery” could linger into next year.
We wonder what he sees for 2012 that could change things for the better, since even realtors and developers who are usually giddy with optimism seem to have accepted that there isn’t yet any light at the end of the tunnel – at least, none that can be discerned by the uncompromised eye. Unfortunately for Mr. Bernanke, no matter how little he tries to say, he’ll have to give away his game when QE2 sunsets at the end of the month. You can bet that whatever form QE3 takes, it will be called something else. Bernanke and Obama can count on the mainstream media to go along with the ruse and to tell us as often as needed that the Emperor is wearing a fine suit of clothes, but we’ll look to Europe’s editorialists to call the next phase of Fed monetization by its proper name.
by Dave in Denver
Posted June 17, 2011
Question: If you were advising the Federal Reserve, what would you say are the unsolved economic problems of the day?
Milton Friedman: One unsolved economic problem of the day is how to get rid of the Federal Reserve. –January 1996 interview on NPR
RON PAUL HAS BEEN AGGRESSIVELY SEEKING AN OFFICIAL, INDEPENDENT audit of the gold that is supposedly being held at Ft. Knox on behalf of all U.S. citizens. Such an audit has not taken place since Eisenhower was the President? What gives there? In the face of mounting criticism and citizen requests for this audit, why does the Treasury ignore this issue? What does it have to hide?
At this point, anyone who looks at the Treasury financial statements is placing their “full faith” in the belief that the Government is honestly reporting its numbers. Does anyone really believe that the economic numbers the Government publishes on a weekly basis? Everyone believe that the Government is telling truth about why we’re spending trillions on wars in Iraq, Afghanistan and now Libya?
The Fed has been spending millions to fight all of the recent Freedom Of Information Act requests, which have been filed so that we can see what the Fed is doing secretly with our money – especially now that most of what Fed does has a guarantee on it by the Treasury. Most notably for me is the GATA request that we get to see what kinds of transactions the Fed has been in engaging in with OUR gold. It is highly likely that the 8100 tonne book entry on the Treasury balance sheet is just another electronic entry on a piece of paper. How about we get to take a look at the actual physical gold that is supposedly represented by that electronic entry? How about we get to see if that gold has any legal encrumbrances attached to it like Federal Reserve gold swaps and leasing transactions?
An audit needs to be done and it needs to be done under the full, transparent scrutiny of all U.S. citizens who would like to watch it happen. And of even more immediate concern, at least to me, is the drain on physical gold and silver occurring at the Comex. It’s kind of spooky the way unencumbered physical silver is being, and has been, “sucked” out of the system (Comex, SLV) over the past couple months. As much as I want to see Ron Paul force an open audit of Ft. Knox, I’d love to see an open audit of the Comex. I believe the Comex problem is the Achilles Heel of this whole mess.
It wouldn’t take much to stage a run on the Comex. And when that occurs, if it turns out that the Comex is unable to make deliveries of actual physical metal and instead changes its rules and defers to cash settlement of contracts, that’s when all hell will break loose. I would then expect that GLD and SLV will head south quickly in price while the global spot price of gold and silver head for the moon. The slight inversion in silver futures will go nearly verticle and the dollar index will go into a serious tail-spin. But how about we just start with a simple audit of Ft. Knox?
Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it becomes, marked: ‘Account overdrawn.’ (famous speech by Francisco D’Anconia in “Atlas Shrugged”)
by Doug Noland
Posted June 17, 2011
ISN’T IT INCREDIBLE THAT THE FAILURE OF ONE FIRM, Lehman Brothers, almost brought down the global financial system? It is equally incredible that, less than three years later, a small country of 11 million has the world teetering on the edge of another systemic crisis. Today’s circumstance is a sad testament both to the instability of the international Credit “system” and to the lessons left unlearned from the previous crisis.
For about 15 months now my analysis has attempted to draw parallels between the initial subprime eruption and last year’s Greek debt crisis. Both were the initial cracks in major Bubbles (“Mortgage/Wall Street Finance” and “Global Government Finance”). These two weakest links – due to their role as the marginal borrower exploiting a period of system market excess – were extremely poor Credits. On the one hand, the systemic vulnerabilities associated with a potential bursting of major Bubbles elicited aggressive policy responses to the initial subprime and Greek tumults. On the other hand, policy had no constructive impact on the underlying quality of the debt – while significantly inciting market excesses (market price distortions, Credit and speculative excess, etc.) that exacerbated systemic fragilities.
There was heightened fear this week that the “Greek” crisis was evolving into Europe’s “Lehman Moment.” Recalling back to 2008, the Lehman collapse was the catalyst for a crisis of confidence throughout the expansive universe of “Wall Street” risk intermediation. Importantly, market confidence in the willingness and capacity for policymakers to backstop this multifarious system held steady virtually until the moment the Lehman bankruptcy was announced. The marketplace had appreciated the enormous risks associated with a potential crisis of confidence throughout the securitization and derivative marketplaces, yet assumed that policymakers would simply not tolerate a failure by one of the major players in this financial daisy chain. The global financial system almost imploded when this precarious “too big to fail” assumption was debunked.
I have posited that the global policy response to the 2008 crisis only expanded and solidified the market’s notion of “too big to fail.” Most in the marketplace believe that policymakers now recognize that allowing Lehman’s failure was a major policy blunder. The expectation today is that the EU, ECB, IMF, Germany, China and the Fed will not tolerate a Greek debt default. This faith had better not be misplaced.
While the Lehman failure proved the catalyst for the 2008 crisis, it was definitely not the root cause. The problem was instead the Trillions of unsound debt underpinning Trillions of leverage, Credit insurance, and sophisticated risk intermediation that, through “Wall Street alchemy”, had transformed really bad loans into seemingly appealing (“money-like”) debt instruments. As soon as the market began to back away from these structures (commencing with subprime concerns), the downside of a (Hyman Minsky) “Ponzi Finance” scheme was set in motion. And as the Bubble began to falter, the market increasingly valued huge amounts of debt based on the perception of a system backstop rather than on the fundamentals of the underlying debt instruments (largely, increasingly vulnerable mortgages).
If authorities had moved to save Lehman back in September of 2008, it would have bought some extra time – and would have changed little. Trillions of unsound debt, distorted asset and securities markets, and a severely maladjusted economic structure ensured a major crisis. It was only a matter of the timing and circumstances as to how the widening gulf between distorted market prices and the true underlying value of the debt was resolved. As we are witnessing with Greek, Portuguese and Irish debt (and CDS) prices, market troubles often manifest when unanticipated policy uncertainties force the marketplace to take a clearer look at the fundamentals underpinning a debt structure – only to grimace.
The problem today is not really Greece. A dysfunctional global Credit “system” has created tens of Trillions of unsound debt – and rapidly counting. Aggressive “activist” policymaking has been at the heart of this unprecedented Credit inflation, and the markets today fully expect policymakers to ensure this Bubble’s perpetuation. And, importantly, for better than two years now global fiscal and monetary policies have incited another huge round of global speculation and leveraging. This latest Bubble gained considerable momentum with last year’s European Greek bailout and implementation of the Fed’s QE2 program.
Policymaking gave a new – and egregiously profitable – lease on life to the “global leveraged speculating community.” Given up for dead in late-2008, hedge funds, proprietary trading desks and others have been able to exploit government-induced market distortions like never before. With confidence that massive fiscal and monetary stimulus would ensure economic expansion, abundant marketplace liquidity, and strong inflationary biases for global securities and commodities markets, the global “risk on” trade proliferated near and far. Re-risking and re-leveraging – through the creation of new market-based debt and attendant liquidity – fueled a self-reinforcing speculative boom. QE2 (and other central bank liquidity operations) coupled with re-leveraging dynamics bolstered the perception that the markets had commenced a cycle that would prosper in liquidity abundance for an extended period. Fragile underpinnings, especially in the U.S., seemed to ensure years of policy largess.
There is a big problem any time the leveraged speculating community begins to question core assumptions – certainly including the capacities of policymakers to sustain Credit booms, ensure liquid and continuous markets, and to contain Credit stress. Think of it this way: Enterprising market operators are incentivized into leveraged (“risk-on”) trades when they discern that policymaking is providing both a trading edge (generally an inflationary bias or predictable spread) in the marketplace and a favorable liquidity backstop availing an easy exit when necessary. I would argue that huge speculative positions have accumulated over the past two years on assumptions that are increasingly in doubt. This has quickly become a major market issue, and largely explains recent market action.