Alex’s Notes: It seems we are seeing a total disconnect in reason when it comes to the markets right now. Numerous things are still not well in the economy, an article from Bloomberg today claims the IMF will cut its forecast for global growth because the US is facing the worst financial crisis since the Great Depression. Yet we see a 400 point gain in morning trading Tuesday? Or was it the April fools joke of one well known Bear analyst who suddenly claimed he was all into equities?

The fundamentals have not changed, and most have their heads in the sand in regards to how close we really came the nuclear domino effect that the failure of Bear Stearns would have set off in the Derivatives markets. But not you dear reader, because you are smart, and know how to see the truth through all the spin and garbage being fed to our citizens. What I wonder about, is when the next shoe drops, and it will, will the government just keep bailing them out? It seems likely given recent example. So maybe we will avert a deflationary event by the evaporation of hundreds of trillions in Derivative exposures, but that raises an equally ugly possibility of hyperinflation.

 

We are watching gold and silver correct, which is totally healthy in my opinion. Again, the fundamentals have not changed there either. Demand exceeds supply, as it always has, fiat money (the USD) continues to slide towards the abyss, and sooner or later the world is going to wake up to the fact that you cannot print your way to wealth. The Chinese, are some pretty smart cookies. Have you ever stopped to wonder why China is buying up mineral interests all over the world, in addition to becoming the largest producer of gold and near the top producer in silver? Have you ever stopped to wonder what would happen if the Chinese chose to tie their currency to a gold or silver standard? I am of the opinion that the Chinese Renminbi would become the worlds next reserve currency. The other effect that would have of course is to cause the price of gold and silver per ounce to go through the stratosphere, as it would no longer be a commodity, it would again be considered a monetary metal.

 

Finally, we have the proposals to give the Federal Reserve broad new powers of regulatory nature over the financial system. Does this make sense? Take a (somewhat) free market system and hand it over lock stock and barrel to a quasi-government entity controlled by private parties? Perhaps instead of doing what is hard and necessary (let the market correct itself and purge all the garbage we have built up over the last few decades), our politicians will take the easy and less painful path of allowing continual injections of liquidity into the markets, willing to run the risk of Zimbabwe style hyperinflation.

 

Solution? Got gold? Got silver? Do you still trust in your 401k? Make sure you are protected, because as the baby boomers start sucking their retirement money out of the markets within the next few years, they will come down like the Hindenberg.

 

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Hoarding by banks stokes fears on credit crisis
Chris Giles, James Politi, March 25 2008 15:10

 

Central banks’ efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis.

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Golden forays amid stock market uncertainty
www.chinaview.cn 2008-03-27

 

BEIJING, March 27 — A gold frenzy is spreading fast among Chinese investors, with the price of the precious metal hitting new highs even as the stock market stays stuck in the doldrums.

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Chinese exporters shun flagging dollar

 

Robin Kwong, Hong Kong
March 27 2008 22:02

 

Rising numbers of Chinese exporters are shunning the US dollar or devising ways to offset the impact of the falling currency as they confront rising labour and raw material costs at home.

 

According to Alibaba.com, the online company that matches Chinese suppliers with international buyers, the vast majority of their almost 700,000 Chinese suppliers no longer use dollars to settle non-US transactions to minimise foreign exchange risk.

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S Korea pension fund shuns US debt
Song Jung-a, Andrew Wood, Michael MacKenzie
March 26 2008 19:39

 

The world’s fifth-largest pension fund will no longer buy US Treasuries because yields are too low. The move signals what could be a big shift by financial institutions away from US government debt into higher-yielding assets.

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Fed’s rescue halted a derivatives Chernobyl
24/03/2008

 

When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake, writes Ambrose Evans-Pritchard

 

We may never know for sure whether the Federal Reserve’s rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.

 

“If the Fed had not stepped in, we would have had pandemonium,” said James Melcher, president of the New York hedge fund Balestra Capital.

 

“There was the risk of a total meltdown at the beginning of last week. I don’t think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system.”

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Former Fed chair Volcker: financial crisis not over
Wed Mar 19, 2008

 

NEW YORK (Reuters) – Paul Volcker, a former head of the U.S. Federal Reserve, said the financial crisis was not finished yet despite drastic actions from the central bank that are broadening its role in managing the economy.

 

In an interview with Charlie Rose on PBS television late Tuesday, Volcker said the country’s troubles are the inevitable consequence of a bubble in housing that was clearly unsustainable.

 

“I don’t think this crisis is over,” he said. “It’s quite a serious matter. We’ve seen the Federal Reserve take more extreme measures in some respects than any that have been taken in the past to deal with a financial crisis, which raises some real questions.”

 

The Fed has pumped over half a trillion dollars into the financial system, boosted its emergency lending facilities, and pledged to take on some of the mortgage debt ravaging banks’ balance sheets and causing billions in losses.

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PETER BRIMELOW
Indians buying up gold?
Commentary: Gold bugs think Fed, other central banks making it available

 

In the past few days a strange thing has happened. Australia’s Privateer says, “the shorter term (one and two-month) rates have actually gone into negative territory this week.”

 

In other words, gold is being supplied to the market by the central banks. Privateer goes on: “We do not recall a previous instance of this, and there certainly has not been one since the cold bull market began in 2001-02 …

 

“We have not — until now — seen a situation in which the central banks are actually paying the bullion banks, hedge funds, gold miners et al to borrow the stuff. And please don’t forget that, in this context, leasing gold is actually “shorting” gold. Gold is not “leased” to be hoarded, it is “leased” to be sold for something that pays a far higher rate of interest … the practice of ‘leasing gold — and silver’ by the central banks has been one of their best means of suppressing the prices of these precious metals for a long time.”

 

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Fed eyes Nordic-style nationalization of US banks
Ambrose Evans-Pritchard, International Business Editor
01/04/2008

 

The US Federal Reserve is examining the Nordic bank nationalizations of the 1990s as a possible interim solution to the US financial crisis.

 

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region’s economy to its knees.

 

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The Subprime Crisis Is Just Starting
by Daniel Amerman, March 20, 2008

 

The bigger issue is that all the big financial players are highly leveraged. Now, just for round numbers, let’s say that a big financial firm has $100 billion in assets, $94 billion in liabilities and $6 billion in capital. We will assume that it owns $6 billion in questionable mortgage securities directly, with another $6 billion in loans to highly leveraged hedge funds that have their own questionable mortgage security holdings. Something drops the value of questionable mortgage securities by 25%. So the big financial firm takes a $1.5 billion hit directly – and a 50% hit on the hedge fund loans when the hedge funds collapse and the creditors are left with illiquid and distressed collateral that they don’t dare sell. The big financial firm just lost $4.5 billion, and the key number isn’t that it lost 4.5% of the value of its assets – but that it lost 75% of the value of its $6 billion capital base. With the remaining 25% being considered highly questionable.

 

Meaning the financial firm now has to unload $75 billion in assets to maintain its 6% capital ratio (assuming it can survive at all), or else be recapitalized by a foreign investor, with the Fed possibly propping it up in the meantime, when no one else will lend to it. In a market where everyone else has their own problems, and don’t have the money to buy the assets. Which drops the prices of everything. Which multiplies the losses upwards. Which brings us to the real problem.

 

If real subprime losses climb by 6 times or 12 times – then system wide financial losses likely climb by 24 times, or 36 times, or more. Because everything is linked, and the math that links all the dominos is multiplication, not addition. If you want a mental picture of how banking dominos work, don’t think of one domino hitting another domino, hitting another domino in a long line. Rather, think of one domino hitting two dominos, hitting four dominos, and so forth. Understand this, and you will understand the desperation in the current moves by the Federal Reserve.

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Debt-Gorged British Start to Worry That the Party Is Ending

 

LONDON — At one point, Alexis Hall had more than 50 pairs of designer shoes and handbags. It never occurred to the 39-year-old media relations executive from Glasgow that her £31,500 in debt ($63,000) would be a problem.

 

Jason Butler of Bloomsbury Financial Planning says loans were too easy to take out.

 

“It was so easy to get the loans and the credit that you almost think the goods are a gift from the shop,” she said. “You don’t fully realize that it’s real money you are spending until you actually sit down and consolidate your bills and then it’s a shock.”

 

As the United States economy weakens, many Americans are being overwhelmed by personal debt, but Britons are even more profligate. For most of the last decade, consumers here went on a debt-financed spending spree that made them the most indebted rich nation in the world, racking up a record £1.4 trillion in debt ($2.8 trillion) — more than the country’s gross domestic product.

 

By comparison, personal debt in the United States is $13.8 trillion, including mortgage debt, slightly less than the country’s $14 trillion G.D.P.

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March 19 – AFP (Sandra Hernandez): “Sky-rocketing food prices in Egypt since the start of the year are being matched by a rumbling wave of popular discontent and unprecedented strikes and demonstrations. Textile workers, teachers, doctors and accountants have all threatened strikes under the united banner of ‘Stop The Expensive Life,’ while doctors went ahead last week with a one-hour work stoppage for better pay and conditions…”

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March 20 – Market News International: “Chinese foreign exchange reserves hit $1.6471 trillion at the end of February, rising $57.3 billion over the month… The increase compares with January’s record $61.6 billion addition to reserves and marks the second highest monthly increase on record.”

 

March 20 – Bloomberg (Nipa Piboontanasawat and Theresa Tang): “Hong Kong’s inflation accelerated to the fastest pace in more than a decade as snowstorms in China pushed up the cost of food imported from the mainland. Consumer prices rose 6.3% in February from a year earlier…”

 

March 18 – Financial Times (Richard McGregor): “China is ‘deeply worried’ about the state of the US and global economies and about the impact from the continuing weakness of the dollar against other currencies, Wen Jiabao, the country’s premier, said… Chinese policymakers are grappling with conflicting pressures, trying to control inflation, which has hit 12-year highs, without slowing the economy too much when they need to create millions of new jobs a year.”

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March 21 – Washington Post (Neil Irwin and Alejandro Lazo): “Inflation is walloping Americans with low and moderate incomes as the prices of staples have soared far faster than those of luxuries. The goods and services Americans consumed in February were 4% more expensive than they were a year earlier. But there is a big divide in how much prices are climbing between the basic items people need to live and get to work… An analysis of government data by The Washington Post found that prices have risen 9.2% since 2006 for the groceries, gasoline, health care and other basics that a middle-income American family has little choice but to consume. That would cost such a family, which made $45,000 on average in 2006, an extra $972 per year…”

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FOX: Putting Out the Fire With Gasoline
by Michael Fox, March 20, 2008 – 11:58am

 

Two hundred billion – here, two hundred billion – there: before you know it we’re talking about a lot of money! When I introduced you to the Weimar dollar, the government’s proactive devaluation of the currency had just begun. On February 5, Congress and Bush approved a plan to “stimulate the economy” by distributing tax rebates of just $600 to millions of middle-income taxpayers. To each taxpayer, of course, it’s a drop in the bucket that will neither change their lives nor stimulate the larger economy, as the effect of merely printing all that money will be to devalue the currency, thus creating inflation in the most basic imported commodity (oil), and in the end, that money will, therefore, end up in the hands of the oil companies only. Meanwhile, the damage to the currency will have begun.

 

Then the Federal Reserve announced a $200 billion swap of government treasury bonds for the (valueless) bundled security funds being held and traded by large financial institutions. More dollars created from thin air, and once again, reducing the value of the currency. Nevertheless, Wall Street investors reacted jubilantly. For one day. Reality then set in, and investors immediately started dumping stocks; trying to take profits off the one-day spike.

 

This weekend, the Bear Stearns debacle: Once again, the Fed creates $30 billion for JPMorgan Chase to take over the insolvent entity, the only real asset being the Bear Stearns Corporate Headquarters on Madison Avenue. Twelve months ago, the stock value alone of Bear Stearns was in excess of $22 billion. JPMorgan is purchasing it for roughly $300 million, and a billion more if they want the office tower, though, frankly, why bother, since after they lay off the 14,000 employees of BS (how deeply ironic, that), who’ll staff the building, anyway?

 

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Goldman, Lehman Rating Outlook Cut to Negative by S&P, Zhao Yidi

 

March 21 (Bloomberg) — Goldman Sachs Group Inc., the biggest U.S. securities firm, and smaller rival Lehman Brothers Holdings Inc. had their credit-rating outlook cut to negative by Standard & Poor’s, which said Wall Street banks’ profits may fall as much as 30 percent in the coming year.

 

“Our current expectation is that net revenue could decline” at least 20 percent for independent securities firms, S&P said in a statement today. S&P affirmed its long-term credit rating of AA- for Goldman and A+ for Lehman. Both companies are based in New York.

 

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Debt: Our 9 Trillion Pound Gorilla, By Susan J. Douglas

 

The human and financial costs of the Iraq War, the economy and Bush’s debt ought to be the mantra for Democrats running for Congress.

 

Who would have thought that we might ever miss Ross Perot?

 

Squawking at us with his graphs and pie charts about the dangers of deficit spending and the mounting national debt, Perot was especially outraged that the debt had gone from $1 trillion in 1980 to $4 trillion by 1992.

 

He got people’s attention about mortgaging our children’s futures and won 19 percent of the vote in the 1992 presidential race, the most for a third party candidate since Teddy Roosevelt in 1912. (This despite being featured on the cover of Weekly World News with space aliens.)

 

As we brace for the Swiftboating to come this summer, I find myself nostalgic for a Perot infomercial where he would make clear that my daughter, or my friend’s infant—all of us, as of now—each carries nearly $31,000 of this debt. And we don’t owe it only to each other.

 

We are in major hock to China, Japan and other foreign countries. Given the subprime disaster, rising unemployment, a reeling stock market, a teetering construction industry and considerable under-reported inflation—you know, all the markings of the “r” word—it is striking that the debt is not a major campaign issue for the Democrats.

 

Today the national debt is $9.2 trillion. And hardly anyone is talking about this. We’ve had rabbinical debates about healthcare and moronic charges and counter-charges about who’s ready “on day one” to be president. But the poor bastard who walks into the Oval Office next January will confront the $9 trillion-plus pound gorilla sitting in the room.

 

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Wall Street May Face $460 Bln in Losses, Goldman Says
Zhao Yidi

 

March 25 (Bloomberg) — Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said.

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Citigroup Estimates Cut by Oppenheimer’s Whitney
Adam Haigh, Poppy Trowbridge, March 26 Bloomberg

 

Citigroup Inc., the biggest U.S. bank by assets, will post a quarterly loss four times as large as Oppenheimer & Co. analyst Meredith Whitney previously estimated, she said in a revised forecast.

 

Citigroup fell 5.9 percent in New York trading to $22.05 at 4:20 p.m. after Whitney predicted the bank will lose $1.15 a share in the first quarter. That compares with her earlier loss estimate of 28 cents, Whitney wrote in an investor note yesterday.

 

“This will not be our last reduction in 2008,” Whitney wrote in the note. “We anticipate further downside to both estimates and stock prices” because banks will be under pressure to mark down assets to reflect falling market indexes.

 

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Floridians Forgo Beer, Take $200 Vacations as Home Prices Fall
Vivien Lou Chen March 26,2008 Bloomberg

 

Miami-area homeowner Richard Welch is spending $70 less on groceries a week after his house lost $145,000 in value. Rita Roland cut off 11 inches of hair to save on salon trips, and Victor Parris stopped drinking his favorite brands of dark ale.

 

Is this the model lifestyle that will be catching on across the country ?

 

“Absolutely, I feel less wealthy than I did in 2006,’ said Welch, 48, a corporate tax auditor. He said he and his wife, Barbara, are slashing spending by 30 percent, including canceling their cable television.

 

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Information = currency. USA 1 Others 100
digitalrights – Thursday March 27, 2008

 

U.S. Digital Deficiency Jeopardizes ‘Super Power’ Status

 

Children born in America this year will be the first true Digital Natives of the Information Age. They will grow up in a time when all of their telecommunications tools: video, voice and data are based completely upon digital technology. It is an interesting historical footnote, to be sure. But it made me wonder: What will their rights be as Digital Citizens of the United States? Does our public policy contemplate a future constrained by the agendas of big business or will it position America to truly prosper in the global information economy?

 

An average broadband connection in the United States is 1.5 Mbps down and 768 Kbps up — about enough speed to watch a fairly low resolution streaming video or do some casual web surfing. Cable modems are faster and you can certainly purchase more connectivity, if you can afford it. But, on average, consumers are offered asymmetrical (faster download/slower upload) broadband connections and no one seems that unhappy about it. They should be.

 

A child born in Korea or Singapore this year will be a digital native of their respective countries. They will grow up in a time when all of their telecommunications tools: video, voice and data are based completely upon digital technology. And they are very likely to start their journey through the Internet with 100 Mpbs symmetrical broadband connection.

 

Let’s see. American Digital Natives 1.5 Mpbs, other competing countries 100 Mpbs. You don’t need to be a technologist or a mathematician to do this calculation. They have 100 of something we have 1.5 of. They can move information much faster than we can.

 

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Follow the money…out of America
Friday March 28, Paul R. La Monica, CNNMoney.com

 

Where are investors putting their money in these uncertain times? Apparently, more and more are seeking safer havens in Europe, India, China and Latin America.

 

With recession fears dogging the U.S. markets, stocks had a dismal first quarter. But according to recent figures from two key research firms that track the mutual fund industry, investors are flocking to overseas markets.

 

Fund tracker TrimTabs Investment Research reported in its latest weekly report about market liquidity that total inflows into equity mutual funds during the week ended March 26 was $7.43 billion.

 

But of that total, $4.4 billion, or nearly 60%, was invested in funds that mainly invest in non-U.S. stocks.

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Overhaul of Financial Regulations Sought
Monday March 31 Martin Crutsinger, AP Economics Writer

 

Treasury Secretary Henry Paulson Proposes Sweeping Overhaul of Financial Regulations

 

WASHINGTON (AP) — The Bush administration is proposing the biggest overhaul of financial regulation since the Great Depression. The sweeping plan is already drawing intense criticism — a debate unlikely to be settled until a new president takes office.

 

The 200-page document, which was to be released Monday by Treasury Secretary Henry Paulson, proposes giving broad new powers to the Federal Reserve to combat the type of severe credit crisis currently gripping financial markets.

 

It would designate the Fed as a “market stability regulator” and give it the power to examine the books of any financial institution, not just banks, that might pose a threat to the stability of the financial system.

 

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Soybean Acres to Surge, Displacing Corn, USDA Says
Tony C. Dreibus, Jeff Wilson

 

March 31 (Bloomberg) — U.S. farmers will plant more soybean and wheat crops this year after prices reached records, while corn and cotton acres will drop, the U.S. Department of Agriculture said.

 

The government survey showed growers will seed 74.793 million acres with soybeans, up 18 percent from 63.631 million last year, the USDA said today in a report. Spring-wheat planting will jump 7.8 percent, as corn planting drops 8.1 percent and cotton acres fall 13 percent, the USDA said.

 

 

 

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