Plate tectonics - a shift from paper assets to real assets

Renee Haugerud, founder and principal of commodities global macrofund Galtere recently was ranked number two HF manager in the world by Trader monthly magazine. She suggests a tectonic shift away from paper assets (equities) to real assets (commodities) is taking place and although the fund is mostly deleveraged she expects a second chance for commodity investments.

"The first sign that you get that deleveraging is over is when the US dollar decouples a bit from the equity market. We have seen some signs of this in the last couple of weeks."

"This is like plate tectonics. This is a shift from paper assets to real assets. This new cycle could last a couple of decades."

She admits that she never was "a big gold bug", but foresees good times for the metal in the future:
"For the first time in a long time I think that gold could be a repository of value going forward."
click for video










source: Hedge Clippings
CNBC, Renee Haugerud, Galtere Ltd. principal/founder
http://www.cnbc.com/id/15840232?video=940553955

Why isn't anyone in jail yet?

William Black, Associate Professor of Economics and Law at the University of Missouri — Kansas City and a former federal regulator.

Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis and blew the whistle on the "Keating Five" in 1989, says investigations have shown fraud incidence of 50% at (once) major subprime lenders like IndyMac and Countrywide.

El-Erian says fix everything and fix it now

El-Erian and Marc Faber, both astute investors, think the whole economic system is broken (at least in the US, possibly World). Only the government can fix it, and they have to act urgently now. If a recovery does not happen soon the economy will be worse than in the Great Depression.

El-Erian thinks this is a crisis "of the system" not "in the system":
"This is a crisis of the system, which means it morphs and is ahead of the policy makers still", he says.

A few more thoughts from his interview in CNBC:
"The bond market is telling you this is beyond a flight to quality, this is a flight to liquidity," El-Erian said. "There's damage to the system, and what you're seeing is a reaction to that and a reaction in the yield curve."

"TARP II would be done both with capital injection and asset purchases, dealing with impaired assets."

"There is a desire to say well lets choose between this (asset) and that (asset). This is not about local optimization, ...this is about attacking the problem holistically and urgently, otherwise you have to do the same thing again and it costs you a whole lot more."
click for video










Marc Faber, also called Dr. Doom, sees a strong rally happening very soon, because of all the money that governments are throwing at the broken system. He also thinks if the rally does not happen the economic downturn will be worse than the Great Depression.

Marc Faber said on CNBC Friday:
But "I assure you if you throw enough money at the system, eventually you can reflate, especially in the United States," Faber added.

Statistically a rebound should happen, but if it doesn't "the air is out" and the world faces an economy "worse than the depression of '29 to '32," he said.



source: El-Erian on the Markets
CNBC
http://www.cnbc.com/id/15840232?video=935557926

source: Strong Rebound Coming in Next 3 Months: Dr. Doom
CNBC
http://www.cnbc.com/id/27834889

Poole at The Cato Institute's Annual Monetary Conference

William Poole, Senior Fellow at the Cato Institute, and Former President Federal Reserve Bank of St. Louis, is speaking at a panel during the Cato Institute 26th Annual Monetary Conference on Lessons from the Subprime Crisis and The Way Forward. He identifies excessive leverage at the private sector as the main culprit for the financial crisis and warns of overreaction in the form of over-regulation which is undesirable in his view.

Poole is suggesting to tackle the tendency of excessive leverage by the private financial sector by changing the tax code (I kid U not) and give fiscal incentives to participants who lower their leverage ratios. What a crazy suggestion. There's no method in this madness since this libertarian think tank obviously resorts to tax cuts whenever there is trouble on the horizon and fails to recognize the obvious: changing the statutes of the Federal Reserve, who's misguided monetary policy is responsible for the current crisis, can help to solve it.



source: Cato Institute 26th Annual Monetary Conference, Lessons from the Subprime Crisis
Cato Institute
http://www.cato.org/events/monconf2008/index.html

The Big Three - another break in the bailouts

Volatility is returning into the EUR/USD exchange market as a bailout of the auto industry becomes increasingly elusive. Senate majority leader Harry Reid acknowledged that congressional efforts to rescue Detroit's Big Three might falter. The White House also quickly denied any desire to step in. In that case it would be up to the new administration to take action.

It is hard to see how in this climate of multibillion dollar bailouts of Wall Street banks, a $25 billion cash infusion into the auto industry seems to be an overreach. After all Washington is populated with monetarists these days. After Lehman this could become the second assault on global financial markets (in particular financial markets in Europe) which inquisitive minds could view as Washington's financial equivalent of declaring war on the Euro currency. Maybe to trash a potential rival reserve currency is the only way out for a beleaguered US dollar!

click to enlarge













source: Democrats seek to lower expectations for bailout
AP, Wednesday November 19, 2:06 pm ET
http://biz.yahoo.com/ap/081119/congress_autos.html

Japan tackles hot topic - Tbonds denominated in foreign currencies

Yesterday, we got the Treasury International Capital (TIC) flow numbers which underscores an interesting development in recent weeks and months. In all this upheaval of the financial crisis all asset classes declined except the USD and US short and long dated government bonds, which actually increased in value. Brad Setser in his excellent blog for the Council on Foreign Relations (CFR) breaks down the numbers and concludes that "foreign demand for any US bond with a smidgen of credit risk has disappeared".

"Normally, this kind of fall-off in foreign demand would be associated not just with a credit crisis but also with a currency crisis. ....The US, though, isn’t a normal country. The fall in demand for risky US assets was offset by a rise in demand for Treasuries and the sale of foreign assets by Americans."

To illustrate the point click to enlarge the chart













Granted Treasuries are perceived as risk free, yet even Setser admits that "holders of long term Treasuries are clearly holding a lot of currency risk". In this context Yves Smith from the excellent blog "naked Capitalism" picks up an interesting piece of news coming form Japan.

Japanese economists are increasingly concerned with the ability of the United States to finance its enormous deficits. Credit default swaps on the benchmark 10-year contracts on Treasuries have risen to 42 basis points from below two basis points at the start of the credit crisis in July 2007. While Setser still calls this an Armageddon trade foreign officials are not taking it in stride.

Many believe that the dollar looked strong in recent weeks for technical reasons. Money that US financial firms had invested abroad are being repatriated which caused a demand for dollars. Once this subsides there could be a run on the currency. Even if this is exaggerating the situation and we only see a substantial devaluation of the USD, foreign officials will not like to see their Treasury holdings decline in value. This is why economists in Tokyo are now calling for the new administration "to issue US Treasuries denominated in yen and other currencies".

The inevitable consequence of a lack of trust in US financial assets could be that Japan, China and other emerging market central banks will eventually reduce their holdings of US Treasuries. The so called sovereign wealth funds (SWFs) contributing to global capital flows is also increasingly unlikely since those countries will have to fight their own demons on their own turf. The only way to reduce foreign currency risk for the financiers of the US current account imbalances seems to come from US Treasury bonds denominated in foreign currencies. This will not change until the US and global economy are on a clear trajectory to recovery which might not occur for another year or two...and even then it is far from certain that investors will again bestow their trust in US financial leadership.

Yves Smith also delves into the interesting issue of motivation for Japan to tackle this hot topic, after all the author writes, "if America's good buddy and military protectorate is making noises about foreign currency Treasuries, it is hard to dismiss the idea out of hand".



source: You know it is a crisis when the trade deficit could have been financed just by selling t-bills to China and European banks
CFR, by bsetser, posted on Tuesday, November 18th, 2008
http://blogs.cfr.org/setser/2008/11/18/you-know-it-is-a-crisis-when-the-trade-deficit-was-financed-by-selling-t-bills-to-china-and-european-banks/

source: Japanese Float Idea of the Treasury Selling Yen-Denominated Debt
naked capitalism, Wednesday, November 19, 2008
http://www.nakedcapitalism.com/2008/11/japanese-float-idea-of-treasury-selling.html

original news source: Japan economists call for 'Obama bonds'
By Kosuke Takahashi, Asia Times
http://www.atimes.com/atimes/Japan/JK19Dh01.html

How far will the S&P500 fall?

The first phase in the corrective trend in Elliott wave movements has bottomed. A second wave is about to start once the severity of the current recession will be realized.
click to enlarge

President-elect addresses the nation via YouTube

President-elect Barack Obama in his weekly address to the country has broken new ground again. 75 years after FDR used a new medium to reach out to his fellow citizens the new president has chosen a new messenger, more appropriate for the 21st century, the video sharing website YouTube.

Today's address concerns the current economic crisis:

Merrill CEO Thain recalls 1929!

The man who won praise as Wall Street's Mr. Fix-It , Merrill CEO John Thain, says that the current economic environment more closely resembles 1929, the year of the start of the Great Depression. He become CEO of the battled Wall Street firm Merrill Lynch in September 07 and was one of the very few who early on recognized the severity of the downturn. Now he predicts a long and severe recession unlike anything we have seen in recent past.

"Although things are starting to improve, this is going to be a long process, and this is not going to get better quickly," he added. "It is not like '87, it is not like '98, it is not like 2001."


source: Merrill CEO says economic environment recalls 1929
Reuters, Tuesday November 11
http://biz.yahoo.com/rb/081111/business_us_merrill_thain.html

Will China's $586 billion dollar stimulus plan work?

China is jumping on to the stimulus train with a massive economic stimulus package. The government announced last Sunday that it would boost its economy with a RMB 4 trillion ($586 billion) capital injection. Stock markets around the globe cheered with the SSE Composite surging more than 7%. Though excitement was short lived and markets were again in the red the following day.

Some analysts see the impact of the stimulus plan between 1 and 2 percent of GDP in 2009 (see Pettis, Nov. 11) and others have criticized it outright as being not effective enough. Among those is Mr. Pettis, economics professor at Peking University's Guanghua School of Management. Prof. Pettis is an expert in Chinese financial markets and he protests the argument of the Chinese government that the fiscal stimulus plan is intended to offset flagging external demand similar to the successful 1998 fiscal expansion. In his opinion the Chinese economy has dramatically changed since 1998 rendering the current plan less effective.

Pettis, Nov 11:
But, as I argue in Sunday’s entry, conditions have changed dramatically. First, China’s GDP is about 2.5 times bigger today than it was back then, and exports have grown much faster than GDP, so China is far from being a “smallish” country. More importantly, the world is looking for more demand right now, not more supply. In a global system with so much excess capacity, and with a marked tendency to excess savings (Americans have to save more, Asians don’t want to consume more), I am a lot more pessimistic about the domestic impact of China’s fiscal expansion, especially if the goal is to increase investment. The world will not simply absorb a lot more Chinese capacity. This package is only useful to the extent that it boosts real demand, especially if it boosts household demand, but that doesn’t seem to be in the cards.

The rush of Chinese officials to implement the plan is also of concern for Mr. Pettis. He suspects it is partly intended as "a shock to confidence" because the economy might be actually in worse shape than the numbers seem to suggest. Another reason might be the upcoming G20 meeting where China faces additional challenges. For a pragmatist like me this is naturally on top of the list. In any case we have no crystal ball and we have to wait and see how it plays out. The odds are certainly not in favor of this massive stimulus package rescuing the Chinese and the global economic malaise.

Pettis, Nov 11:
Of course part of the rushed timing is probably to head off potential trouble at the upcoming G20 meeting. By announcing such a large headline package, China can argue that it is contributing both to the global monetary easing as well as to global fiscal expansion. This will take the pressure off other demands – for example one way China can contribute to global expansion is by a more radical reforming of the currency regime, and it clearly does not want to do that. October’s trade surplus – announced today – was 20% higher than September’s all-time record. This won’t make it easier to argue that they desperately need to keep the RMB from rising too much.



source: The RMB 4 trillion fiscal engine seems to be losing steam (My Blog)
By Michael Pettis, Nov 11
http://piaohaoreport.sampasite.com/china-financial-markets/blog/The-RMB-4-trillion-fiscal-packag.htm

ECB cut IR by 50 bp - is not precommitted

ECB cut IR by 50 bp and lowers outlook for growth and inflation. In the QaA Trichet continues to point the way for 21st century central banks with a pragmatic approach to the level of IRs to guarantee macroeconomic stability.

The Federal Reserve has to follow the ECB by approaching interest rate decisions with more pragmatism and less preemptive precommitment. It will become the new paradigm for all central banks!


Q, On the question if the governing council is now trying to get ahead of the curve by slashing interest rates:
We are pragmatic and we look at facts and figures. (Trichet was referencing to ULC and employee compensation costs which have much increased over the last years) We are doing what is good at any given time without being hampered by being precommitted.

Q, on the role of central banks in general:
We are all doing what is expected under this exceptionally difficult circumstances

Q, Is there more discipline in macropolicy necessary?
We have to take into account to introduce a new framework that would permit to avoid the persistence of very big imbalances both domestic and external. An appropriate level of surveillance and discipline is lacking and has to be reintroduced.
click for QaA










From the introductory statement:
Looking forward, recent sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009. Depending, in particular, on the future path of oil and other commodity prices, some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year, particularly due to base effects. These movements would be short-lived and therefore not relevant from a monetary policy perspective. Looking through such volatility, however, upside risks to price stability at the policy-relevant horizon are alleviating.

There is also some evidence in the September data that the recent intensification of the financial tensions has triggered a slower provision of bank credit to euro area residents, mostly taking the form of smaller holdings of securities. At the same time, for the euro area as a whole, up to September there were no indications of a drying-up in the availability of bank loans to households and non-financial corporations. In particular, the maturity composition of loans suggests that non-financial corporations continued to obtain funding, also at relatively long maturities. However, more data and further analysis are necessary to form a robust judgment.

To sum up, the intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time. In such an environment, taking into account the strong fall in commodity prices over recent months, price, cost and wage pressures in the euro area should also moderate. At the same time, a cross-check of the outcome of the economic analysis with that of the monetary analysis confirms that the underlying pace of monetary expansion has remained strong but has continued to show further signs of deceleration. Hence, when taking all information and analysis into account, there is a further alleviation of upside risks to price stability at the policy-relevant medium-term horizon, even though they have not disappeared completely. At this juncture, it is therefore crucial that all parties, including public authorities, price-setters and social partners, fully live up to their responsibilities. The level of uncertainty stemming from financial market developments remains extraordinarily high and exceptional challenges lie ahead. We expect the banking sector to make its contribution to restore confidence. The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective. In so doing, it supports sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.



source: Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 6 November 2008
http://www.ecb.int/press/pressconf/2008/html/is081106.en.html

http://www.thomson-webcast.net/de/dispatching/?ecb_081106_stream_video

The Speech - Change has come

favorite quote:
"And to all those who have wondered if America's beacon still burns as bright tonight we proved once more that the true strength of our nation comes not from our the might of our arms or the scale of our wealth, but from the enduring power of our ideals: democracy, liberty, opportunity, and unyielding hope."
read the full transcript here



source: FULL TRANSCRIPT: Sen. Barack Obama's Victory Speech
Sen. Barack Obama Delivers Victory Speech from Grant Park in Chicago
Nov. 4, 2008
http://abcnews.go.com/print?id=6181477

Obama's historic victory!

Taxpayers to the rescue for local communities - No thanks

Americas state and local governments and municipalities are asking voters to approve record borrowing to fund schools, sewers and other public projects. The approval of $66 billion of public money is needed but most of it might get rejected. Taxpayers are not as receptive this year with a slumping economy and weakening job market. During the general election of 1990, a time when the economy was also slumping, only 41 percent of the taxpayer funded proposals were approved. We wrote about a similar situation in Denmark where community life is deeply impacted by a lack of funding due to the financial crisis. On both sides of the pond taxpayers will have to cover funding shortfalls and they won't like it a bit.

from Bloomberg:
California leads U.S. state and local governments asking voters to approve $66.4 billion in borrowing for schools, sewers and other public works today as a contracting economy and higher costs damp taxpayers' appetite for new debt.

Voters in 41 states from Rhode Island to Alaska are weighing the second-biggest slate of bond measures after November 2006's $78.6 billion, according to Ipreo, a New York-based financial data provider. California has the largest referendum, $9.95 billion in funding for a high-speed rail network, with proposals around the state totaling almost $42 billion.

Taxpayers, who approved an average 82 percent of bonds on local ballots the past decade, may not be as receptive this year. Wall Street upheaval drove interest rates on tax-exempt debt to record highs, hurt consumer spending, increased unemployment and prompted emergency federal government action to shore up the financial system.

``With voters tightening their own belts right now, I would think they would want government to do the same thing and not take on the new debt,'' said John Matsusaka, president of the University of Southern California's Initiative and Referendum Institute in Los Angeles.
continue reading



source: California, Schools Seek Approval for $66 Billion of Muni Bonds
Bloomberg
http://www.bloomberg.com/apps/news?pid=20602007&sid=aYHheYymc6Hc&refer=govt_bonds

source: A crisis' real world example in Denmark's small communities
Monday, November 3, 2008
http://manonthestreet64.blogspot.com/2008/11/crisis-real-world-example-in-denmarks.html

Let the sun shine on credit derivatives

Starting today the Depository Trust & Clearing Corp. (DTCC) will publish data on CDS contracts which are still traded over the counter. This will bring much needed transparency to a huge market that has cast its shadow over the financial system in the last 12 month. The market is so opaque that nobody knows the actual size of it. The notional value of outstanding contracts varies from $35 trillion to $62 trillion. Some representatives of the industry claim misinformation for discrediting the credit derivative market, but policy makers are wary of such claims after the financial system had to be bailed out with public money to avoid a financial meltdown similar to the Great Depression.

from Bloomberg:
The Depository Trust & Clearing Corp. will publish details of the top 1,000 credit-default swaps today, bowing to regulatory pressure for more transparency in the $47 trillion market.

The data from the DTCC, which operates a central registry, will for the first time offer a clearer picture of the amount wagered on the creditworthiness of the world's companies and governments.

The industry has stepped up efforts to counter critics among U.S. lawmakers and regulators who say the lack of transparency in the market exacerbated the financial turmoil. The collapse of Lehman Brothers Holdings Inc. contributed to a decline in financial markets last month because no one knew how many contracts were outstanding on the securities firm, or who had held them. Estimates ranged as high as $400 billion, though the actual amount turned out to be $72 billion, the DTCC said.

The industry should ``get the word out about the small size of these risks compared to the notional amounts on which the contracts are based,'' said Mark Brickell, chief executive officer of Blackbird Holdings Inc., which provides an electronic trading system for derivatives, and former chairman of the International Swaps and Derivatives Association.

After subtracting redundant trades, only $5.2 billion had to actually change hands, DTCC said last month in what was its first release of data from the warehouse.
continue reading


source: Depository Trust to Provide Credit-Default Swaps Data
Bloomberg
http://www.bloomberg.com/apps/news?pid=20602007&sid=a3sNLNa70g.4&refer=govt_bonds

A crisis' real world example in Denmark's small communities

This Bloomberg article addresses the impact the credit crisis has on community life in Denmark, where local banks traditionally provided funds to sponsor sports and cultural centers. The country has more banks than any other country in the EU. On average 33 lenders serve 1 million residents. This is changing rapidly in the current crisis and smaller banks get swallowed up. Funds for sports and cultural centers, swimming clubs, local fishing clubs, sailing and soccer clubs are now drying up.

from Bloomberg:
When Danish bank Ebh Bank A/S succumbed to the financial crisis six weeks ago, the fallout didn't just affect customers and clerks. Artists, musicians and swimmers also suffered.

On the day Denmark's central bank was forced to bail out the 110-year-old lender, Ebh Bank yanked sponsorship of a proposed sports and cultural centre in its home town of Fjerritslev, a few miles inland from the North Sea.

``We put the project on hold immediately,'' said Egon Korsbaek, chairman of Ebh, based 150 miles northwest of Copenhagen. ``We've supported large and small projects. We don't think we'll be able to continue with the bigger ones.''

Danes have three times more banks than the average European and the institutions are the biggest backers of sports arenas, fishing clubs and museums in small towns. Sponsorship is now under threat as Denmark becomes the first European economy to enter a recession. Eight banks have collapsed or were rescued or bought since the seizure in credit markets started last year.

Roskilde Bank A/S, rescued by the central bank in August in Denmark's first such bailout in more than a decade, will allow 25 ``major'' sponsorships to run out, spokesman Stig Bo Jensen said.
continue reading




source: Ebh Bank, Sydbank Desert Denmark's Athletes Amid Credit Crisis
Bloomberg
http://www.bloomberg.com/apps/news?pid=20601109&sid=a8SbB1dEzIsQ&refer=news

In Iceland a call for revival of the class struggle

The people of Reykjavik had enough, now they are marching. In Iceland a call for revival of the class struggle has become louder. The means of the class struggle, the unions, the political parties have been practical inactive for the last 15 to 20 years says one demonstrator.
click for video