Archive for January, 2008

As Bernanke immolates his credibility by insisting that inflation remains contained, the dollar union is cracking up. The Gulf sheikdoms, which have all been pegged to the dollar for decades, are tired of double-digit and rising inflation so that they can maintain an antiquated currency peg with an obviously politicized central bank.

“Kuwait really did very little,” al-Ibrahim said.

His comments helped the euro strengthen against the dollar. The US currency fell to a two-week low against a basket of major currencies yesterday ahead of a US interest rate decision later in the day.

“The comments are very sensible. Any currency reform needs to be substantial,” said Marios Marathefis, Standard Chartered’s regional head of research. Gulf states should allow their currencies to appreciate by 20% against the dollar, he said late last year.

Simon Williams, senior economist at HSBC, said: “The comments are a very strong sign that the Qatari authorities are seriously examining all of their policy options to deal with inflation, including monetary reform.”

Qatari officials will make foreign-exchange policy recommendations to the government of HH the Emir Sheikh Hamad bin Khalifa al-Thani this year, including possibly a call to revalue the currency, al-Ibrahim said, without saying exactly when.

“We are studying all kinds of possible ways to price our exchange rate or to price our currency,” said al-Ibrahim, who heads Qatar’s General Secretariat for Planning. “The government is willing to look into these alternatives,” al-Ibrahim said.

Qatar currently holds the chair of the GCC which ispreparing for monetary union as early as 2010. “Really, we would like to do everything we can through the GCC,” he said.

“As a small country we cannot float our currency … it has to be tied.”

Still, when asked if Qatar could act unilaterally, he said: “I think we can.”

Gulf states are constrained in their fight against inflation because dollar pegs force them to track US monetary policy at a time when the Federal Reserve is cutting rates.

Gulf currencies rallied last year after the UAE called for the region’s central banks to sever their dollar pegs.

Saudi Arabia dismissed the idea and the Gulf states agreed last month to retain their dollar pegs and keep any talks on currency reform secret.

Qatar, which is contending with the region’s highest inflation rate, reopened the debate last week when its finance minister said that Gulf states could consider revaluing their currencies together at some stage to fight inflation.

The central bank, the General Secretariat for Planning and a state inflation committee are debating several policy options, al-Ibrahim said, after inflation hit 13.73% in September.

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MBIA credit default swaps have traded at junk levels for the past two weeks. However, the authorities agree that it’s still AAA material. Reality has been suspended — for now.

MBIA Defends AAA Insurer Rating, Dismisses Bankruptcy Rumors
By Christine Richard

Jan. 31 (Bloomberg) — MBIA Inc. Chief Executive Officer Gary Dunton said the world’s largest bond insurer has more than enough capital to keep its AAA credit rating and dismissed speculation the company may go bankrupt.

Dunton, speaking on a conference call after Armonk, New York-based MBIA reported a $2.3 billion fourth-quarter loss, blamed “fear mongering” and “distortion” for driving the company’s stock down more than 80 percent in the past year.

“It’s very difficult to see the reputation of a company you love coming under fire,” Dunton said.

MBIA is in the best position among its peers to survive the losses and downgrades on securities the industry guaranteed, Dunton said. MBIA’s capital raising efforts will exceed the requirements necessary to keep its top credit ranking at Moody’s Investors Service, he said, adding that speculation about MBIA’s holding company liquidity risk is “nothing further from truth.”

Dunton’s comments helped alleviate concerns that the company would lose its top ranking, driving MBIA up as much as 14 percent in New York Stock Exchange trading and fueling a rally in the Standard & Poor’s 500 Index. Without the AAA stamp, MBIA’s business would be crippled and ratings on $652 billion of securities would be thrown into doubt.

Not a good day for monoline-short selling Bill Ackman, that’s for sure.

Once again, political strong-arming screws over the short seller who did the quality research, in favor of the institutional behemoth that screwed up; dollar holders will pay the difference.

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MOSCOW, January 31 (RIA Novosti) – Russia’s Finance Ministry said on Thursday it had divided the Stabilization Fund, set up to accrue surplus revenue from high world oil prices, into the Reserve Fund and the National Prosperity Fund.

The Stabilization Fund held 3.852 trillion rubles ($157 billion) as of January 30.

Pyotr Kazakevich, deputy director of the ministry’s department for international financial relations, government debt and government finances, said the Stabilization Fund was transformed on January 30, when its assets were credited to the accounts of the new funds.

The Reserve Fund, designed to cushion the federal budget in the event of an oil price plunge, totaled 3.069 trillion rubles ($125 billion) just after its formation, while the National Prosperity Fund, expected to help Russia carry through pension reforms, held 783 billion rubles ($32 billion), Kazakevich said.

The ministry official said that 80% of resources in the newly created funds will be invested in government bonds of countries approved by the Russian government, 15% in the bonds of foreign government agencies and central banks, and 5% in international financial institutions.

From not too long ago:

… Some analysts have speculated that the Kremlin-friendly oligarch Oleg Deripaska was roped in by the state to buy the country’s seventh-largest oil producer, Russneft, which is struggling under the weight of hundreds of millions of dollars in tax claims. Its former president, Mikhail Gutseriyev, was recently placed on an Interpol wanted list after fleeing the country to escape what he has called politically motivated charges against him.

The campaign against Gutseriyev and Russneft has prompted comparisons with Yukos, which was felled by more than $30 billion in back tax claims and the jailing of its founder, Mikhail Khodorkovsky. Khodorkovsky accused Igor Sechin, Putin’s deputy chief of staff and chairman of Rosneft’s board, of orchestrating the campaign against him.

Rosneft has now gobbled up most of Yukos’s assets, growing from a middling oil concern into the country’s largest oil company mainly through its purchase of Yukos’s largest production units, Yuganskneftegaz, Tomskneft and Samaraneftegaz. Absorbing those acquisitions will take up much of Rosneft’s attention as it prepares to go global and challenge the likes of Shell and BP.

Sechin must be pretty fat and happy right now. He has been agitating for exactly this for a while.

Rosneft has been like a python trying to digest a cow — its gobbling up of Yukos was funded by $23 billion in debt. Sechin has been mad about it ever since, and he saw the $157 billion in reserves as the solution to his problem. I guess he got what he wanted.

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Karl Rove, quack doctor

Karl Rove has some “lessons” from the latest campaign. Typically for the Beltway, they run the gamut from “obvious” to “myopic” to “wrong.” A few highlights:

The new rules include:

– The big bounce is gone.

Obama? Iowa? McCain? New Hampshire? Michigan was the aberration because it has been the ancestral stomping ground of the Romneys. As for South Carolina, McCain was lucky enough to have Fred Thompson, a man billed to the base as a credible conservative, who was in all likelihood nothing more than a stalking-horse leech on southern whites for John McCain the entire time.

– Television ads don’t matter as much as they used to.

Free media has always been much more valuable than paid media. The notion that one ad can shift a campaign is so much bunk. One ad guy can conceivably swing a state, which can conceivably swing an election, but the rate of occurrence is vanishingly rare. The fact that advertising consultants have built such a cult of political power around themselves is a testament to the lack of sentient thought in DC. The good political consultants are the ones who can build national grassroots turnout machines, not the ones who make awesome ads. “Great ad men” don’t add to any bottom line besides their own: classic examples include the George Allen campaign of 2006 and the Romney campaign of the 2008 GOP primary.

Young voters have blocked out television advertising completely, I think. For the rest, it’s the same as always: the free media narrative is what matters, because that’s the impression of the horse race that the preponderance of voters will see.

– Technology allows a candidate to raise money quickly and inexpensively.

Welcome to the 21st century. Eight years late. Didn’t learn much from the Dean campaign, did you?

– Debates are a great way to come on late and make up for a lack of resources and endorsements. Mike Huckabee was an asterisk for most of the campaign. But he is an excellent debater with a terrific sense of humor who hit his stride, especially in the debates, just as activists and party opinion leaders were starting to pay close attention before the Iowa caucuses.

Mike Huckabee was an asterisk until he convinced a bunch of people unpersuaded by all of Romney’s ad money to vote for Huckabee instead. The media liked him because he sucked up to them and was socially pleasant. Ames was what the media needed to boost Huckabee. These debates are a total waste of time, and 90%++ of people who watch primary debates are people who have already made up their minds. The amount of debate psychoanalysis has been nothing short of stupefying.

As Barack Obama’s “Pakistan gaffe” (“I will not use tactical nuclear weapons in Pakistan”) showed, what matters is how a debate is covered, not what actually happens. The favor of the MSM columnists, who are a liberal, myopic, decrepit and gossipy lot, is the determining factor. If you don’t kowtow to them, as was the case with Obama, they will make you look bad, even if you say something that’s commonsensical and that the crowd applauds. And then your horse race numbers get screwed, in spite of your best effort.

Politics is infuriating. It’s like watching two disabled eleven-year-olds playing tennis: the number of unforced errors is staggering, and whoever makes the more mind-numbing amount of them is the one who loses. Interest in politics is a curse.

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Stratfor tells us that Yuri Luzhkov, Moscow’s hybrid of Bill Daley and Al Capone, is in Vladimir Putin’s sights.

Luzhkov wields unprecedented mayoral power over the Russian capital, with close ties to major bankers, media moguls and the city’s biggest businesses. When he became mayor in 1992, his wife Yelena’s small construction company, Inteco, burst onto the Moscow scene, performing 20 percent of all construction work in the capital. Now, Inteco accounts for most of the construction in Moscow and many other cities, making Yelena Russia’s only female billionaire. …

Putin has long wanted to go after Luzhkov and end his reign over Moscow and the construction business, but the president has held back because of Luzhkov’s many political backers in the Duma and supposed Mafia ties. Moreover, Luzhkov is on the board of Putin’s political party, United Russia.

The straw that broke Putin’s back was the December 2007 legislative elections; not only was voter turnout in Moscow low, but votes for United Russia also were abysmal. …

Stratfor sources say Putin has given Luzhkov until the fall to tie up loose ends in his mayoral post, and he must then resign. Moreover, Putin is already clearing out Luzhkov’s supporters in the Duma, stripping Alexander Chiligarov of the Duma vice presidency and Iosif Kobozon of his place on the Duma Commission.

It remains to be seen if Putin will just strip Luzhkov of his mayoral title or if he intends to go after the mayor and his wife’s construction and real estate empire. Many Kremlin insiders and other oligarchs have been salivating at the thought of getting their hands on Luzhkov’s assets.

But Luzhkov is not the sort to go quietly. He still has some tools — mainly his alleged ties to the largest Mafia in Russia — that he might be tempted to use against Putin and the Kremlin, though making such a move would amount to suicide.

But on the other hand, Putin could use this time to prove to the Moscow Mafia that his control over the country will not be shaken by any move that the Mafia — or anyone else — would want to make against the Kremlin. Some of Putin’s loyalists allegedly have their own ties to the Moscow Mafia, and the president could use the Mafia members who supposedly are connected to Kremlin insiders against those said to be loyal to Luzhkov, fracturing one of the most powerful mafias in the world.

I don’t know that much about Russian politics, and most of what I do know, I learn from Stratfor first. But it bears repeating, over and over again, that one sniper bullet between the eyes of Putin, Vladislav Surkov, Igor Sechin, Dmitri Medvedev, Alexei Miller, or Oleg Deripaska would probably spark another violent spiral into 1990’s-style gangland warfare.

Putin has not been making very many friends on the Russian political scene. The KGB/FSB, the institution that made him, is bridling at the material damage Putin has inflicted upon the clan of Igor Sechin, which basically comprises the Ministry of Justice, the old-line security bureaucracies, and Rosneft (the devourer of Mikhail Khodorkovsky’s Yukos).

Yuri Luzhkov is a billionaire many times over, and Moscow is his fief. If he goes, his construction and real estate empire (nominally his wife’s) will exist solely at the pleasure of Putin’s clique — which has shown itself to be ruthlessly acquisitive against “big boys” who aren’t part of the Kremlin club.

Even if Luzhkov is willing to run that risk (which is doubtful), what about Moscow mafiosi, who probably murdered central banker Andrei Kozlov, among thousands of other important people over the past eight years?

One day, somebody will refuse to yield his fief. Everyone who has seen his fief cut back or wholly confiscated during the Putin years will be thirsty for revenge.

The Kremlin has become a clearinghouse for political power, and Putin is its chief market maker. But Sechin’s entire clan (the Rosneft bloc) is restless at the growth of Surkov’s Gazprom clan. As Putin demonstrated in his liquidation of Vladimir Barsukov’s Tambov mafia, Putin is not loyal to the institutions which made him the power he is.

Putin holds substantial power and wealth himself, and through Surkov and Deripaska he has the allegiance of much more. But the Yeltsin oligarchs in exile have been fighting a war on the run with Putin for years — Boris Berezovsky, for example, has four identical limousines which take different routes to wherever he goes — and they have been out in the cold for a very long time. George Soros and Marc Rich have been fighting a different kind of battle with the Kremlin since well before Yeltsin’s day. The Sechin clique has been unhappy for its own reasons. The Tartarstan clique, a group of “Russian” Tartar and Bashkir oligarchs whose fiefdom has been functionally independent from Moscow for years, knows it is not far down Putin’s most-wanted-assets list, as well.

Putin has many committed enemies. From Putin’s track record, one doubts Putin has many reliable friends.

Luzhkov’s clique faces the choice between capitulation with uncertain results, “amiable exile” a la Roman Abramovitch, or standing for its fief, and hoping that other clans rally to it.

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Bush has been awful for the dollar. Could the Democrats be worse? …

On Tuesday, House Financial Services Committee Chairman Barney Frank told Reuters a Democratic president might want to appoint a Federal Reserve chairman in 2010 “more in tune with Democratic views,” implying the current chairman, Ben Bernanke, ought to be replaced. Mr. Frank issued a lengthy statement today clarifying his remarks, saying “I am on the whole favorably impressed with Chairman Bernanke’s role at the Fed.”

Mr. Frank said: “This is a very difficult time for our economy and unbalanced and unfair criticism of Mr. Bernanke is therefore not simply a matter of his feelings, but of potentially, even if inadvertently, undermining the confidence people must have in the public policy response to our current problems.” –Greg Ip

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Why not just cut the funds rate to -5 percent?

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Olmert, we learn, made a “reasonable” choice in sending 30 Israeli soldiers to die in the last day of the war. His management of the war, also, was “reasonable.”

Judge Eliyahu Winograd, issuing the panel’s final report on the Second Lebanon War, told a packed auditorium in Jerusalem that the war ended without victory and the army did not provide an effective response to Hizbullah’s rocket fire on Israel.

He also said that while the cabinet decision to embark on a ground operation was correct, the last-minute ground offensive did not improve Israel’s position and there were “serious failings” in army command.

He said that both the military and the political echelons were responsible for the tardiness of the ground offensive.

Winograd went on to say that “Israel’s decision to go to war without necessary preparations was a severe failure.”

He went on to say that although the report does not hold specific individuals responsible for the war’s failings, this does not mean there is no personal responsibility.

Earlier, defense officials said that the final report concluded that Prime Minister Ehud Olmert did not fail in his handling of a key battle and that his decisions were reasonable.

Basically, he’s saying Olmert is at fault, without saying so where it matters. Pathetic.

I am about to say something I knew I would never say: The CIA was right. Israel is too myopic to be a credible ally. I am already grappling with schizophrenia as I type: one side of my brain is still telling me that the CIA can never be right about anything. Somehow, contrary to everything I have ever known, the CIA has called the ball perfectly on this.

Anyway, as I posted yesterday, if the Israeli public were serious about allocating responsibility and preventing future failures, it would have already brought down the Olmert government. There was no reason to expect a sheaf of paper to do the Israeli public’s work for it. Israel’s future is much bigger than one much-delayed report, and a nation serious about its future would not have waited eight months before acting on what everyone already knows.

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Required reading

I am a huge fan of Professor Michael Pettis’ “China financial blog“. He has two long but very worthy posts up for anyone interested in a less in-the-clouds, more realistic perspective on the Chinese economy:

  • The new China-Europe-US world order” :: Prof. Pettis heaps scorn upon the latest outbreak of Sinosupremacism, a typically in-the-clouds piece by an NGO baby who (yet again) extrapolates China’s bogus figures out 30 years into the future and prognosticates the end of American hegemony.
    • There is a longish and much-discussed article in this Sunday’s New York Times (“Waving goodbye to hegemony”) by Parag Khanna, a senior research fellow in the American Strategy Program of the New America Foundation, which strikes me as a sort of compendium of a lot of fashionable and muddled thinking about the evolving geopolitical order. […]  when it comes to the hugely symbolic acts of rising powers, I think Japan in the 1980s blows out all of the current contenders – although perhaps Khanna is not old enough to remember.


      Khanna supports his analysis by pointing out that in the past two years he has visited forty countries around the world, but at the risk of sounding like a world-weary snob, this does not impress me much – in fact I am a little worried by the Starbucks school of comparative politics.  It reminds me of something a Canadian China scholar once told me – for him the biggest difference between China experts who have never visited China and those that visit twice a year is that it is sometimes possible to convince the former when they are mistaken.

  • Things have gotten grimmer in China” ::
    •  Last Thursday Premier Wen Jiabao told the State Council that 2008 was going to be an extremely difficult year – an extraordinary admission by some accounts and indicative of how much pressure he is under.  Rising inflation and energy shortages have been made worse by the huge snowstorm that has hit the country, severely damaged crops, and closed train lines just as Chinese families were gearing up for the all-important Spring Festival, driving food inflation before this all-important family holiday much higher.
      Rumors are flying about the possibility of a reversal of the tightening measures announced last October. […]

      … On the other hand overheating has been a serious problem for the Chinese economy and if 2008 were to experience the same breakneck growth as it did last year, the adjustment will almost certainly be more difficult.  If the US slowdown is not as great as some think it might be, or if its impact on Chinese exports is less than many worry, expansionary policies in China may set off one last, crazy bull run.


      On the inflation front the news is even grimmer.  The rate of inflation will almost certainly rise in January. To above 7% from 6.5% in December and 6.9% in November, even in spite of downward pressure put on it by recent government measures to make holiday conditions as good as possible – selling off food reserves and freezing price increases.  That almost certainly means that there will be more inflationary pressure in March and thereafter as these measures are unwound. …

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Supposedly, the Baltic Dry shipping index is a very reliable forward-looking commodities indicator. Basically, if shipping falls, commodities will almost certainly fall in the not-too-distant future. Shipping is a lot like refining: when demand is above capacity, prices soar, and when demand is below capacity, prices plunge. So volatility is the order of the day, and a “Black Monday” does not mean a 3% drop; it means a lot more than that.

Commodities hounds have noticed that the Baltic Dry Index has tanked 40 percent since November. Bearish for commodities, right? You would think so … except ….

A recent theory doing the rounds of the shipping and commodities world lays blame for the slide in dry bulk shipping rates – and consequently the BDI – on a single Taiwanese shipping magnate: Nobu Su, whose privately held Taiwan Maritime Transport is the largest participant in shipping futures markets, according to the FT’s transport correspondent Robert Wright.

Wright reported last week that Su denied playing a pivotal role in the past few weeks’ decline of dry bulk shipping rates, saying it resulted from fundamental market changes.

But participants in dry bulk markets have attributed the decline in rates from last year’s record highs partly to TMT’s heavy betting on a fall in futures markets. There have also been claims from competitors that Mr Su, chief executive, has helped to push rates towards his position by chartering out some of his 130 ships at below market rates.

TMT excites strong passions because of its reputation for making large — and often successful — bets on rate movements in the futures market. It is also unique among large futures market players in owning a substantial fleet of ships.

Not surprisingly, Su through his spokesman told Wright he could not have moved the market on his own. “It’s no longer the case that one man could single-handedly influence the direction of the market,” he said.

On the claim that TMT was chartering ships at below market rates to bolster its futures position, Su said he simply aimed to get the best price. Sometimes it’s below the market average, sometimes above,” he said. “It just depends on the price we’re offered.”

In a separate post for FT Alphaville last week which contains a beautifully clear explanation of BDI mechanics and the fallout from the SocGen trading scandal, Wright examined the conspiracy theories about falling commodities prices because, he said:

Before Thursday’s SocGen revelations, analysts had found a new favourite indicator to justify falls in equity prices. It could be, of course, that the many analysts who have talked up in the last fortnight the significance of the plunge in the Baltic Dry Index — it’s down 40 per cent from its record peak in November — are long-term, serious students of freight rates.

A bullish factor for commodities in the medium term.

Furthermore, proprietary research indicates that the rising price of oil will be easily offset within the dry bulk industry by increased coal shipments. The business is still exploding. Credit is still soaring. All levers are reflating. The monolines situation will resolve itself much more efficiently, as Berkshire takes over the business.

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If gold were dumped because of the poor economic numbers (implying lower liquidity expectations) then it should have bounced back somewhat as expectations of a larger Fed cut would have increased.

Seems like somebody expects a lower than anticipated Fed cut today. If history is any guide, that’s a very dangerous bet …

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We now know that the European Central Bank bailed out Spanish banks to the same tune that the UK bailed out Northern Rock (although not nearly as much as the FHLB and Fed have in the United States).

This kind of secretive bailing out reinforces my conviction that central banks must be abolished. European savers were taxed without their knowledge, to save some overspeculative Spanish banks.

When I blew up not so long ago, I didn’t get a dime’s worth of repos, interest-rate basis points, discount FHLB loans, or discount Fed loans. And I didn’t deserve any.

Neither do these people.

The ECB seems to be trying to have it both ways, taking a publicly hawkish stand while quietly funneling bailouts to the worst-afflicted banks. It all amounts to politically driven currency devaluation. It’s yet another reason to go longer on gold. The exporter central banks, with their trillions of depreciating euros and dollars, haven’t even begun to crack.

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Two columns by respectably sentient market commentators today:

Ben Bernanke at Year Two

By John Tamny
This week marks Ben Bernanke’s second anniversary as Chairman of the Federal Reserve. Since his nomination in 2005, the dollar has plummeted against major currencies worldwide, while the price of gold has nearly doubled on its way to an all-time high. And with both domestic and world markets presently gyrating due to monetary and economic uncertainty, his stewardship of the world’s most important central bank is increasingly being called into question.

Unhappiness with Bernanke might surprise some considering the mostly glowing praise he received upon his nomination over two years ago. Though he possessed a conventional academic background, he was thought to be open to classical views suggesting economic growth is inflation’s worst enemy, that marginal tax cuts are useful for facilitating long-term growth, and that the price of gold is an important signal to follow when it comes to understanding the existence (or lack thereof) of real inflationary pressures. Bernanke was seen as a worthy successor to Alan Greenspan, and one who would soothe investors understandably fearful of change at the top of the Fed.

Two years later stock markets and the economy are as mentioned uncertain, and contrary to assumptions from the past suggesting he was open to classical ideas, his public utterances since then have shown him to be every bit the conventional academic so many investors hoped he was not. Perhaps owing to the latter, investors are disappointed, but they should not be surprised.


Some might say we should be surprised by the state of things, but that’s unfair. Bernanke gave fair warning of who he was long before his nomination. Instead, blame lies with a Bush Administration that failed to do its homework on Alan Greenspan’s replacement. And with that same administration lacking any dollar policy other than one of “benign neglect,” it has essentially outsourced its policy to Ben Bernanke, a Fed Chairman whose seeming countenance of dollar weakness weighs on the Administration’s approval ratings like no other policy today.

To which I say, “Dead on.”

There was also this bit by Robert Samuelson:

Hordes of money managers, commentators and economists have joined Cramer in ridiculing Bernanke and other Fed officials. They’re “clueless” and “behind the curve.” The blunt message: Cut interest rates; revive the economy; boost stock prices. …

… Whenever either seems threatened, there’s a clamor for action. Last week, Bernanke’s Fed seemed to capitulate by cutting its overnight Fed funds rate from 4.25 percent to 3.5 percent (as recently as mid-September, it had been 5.25 percent). Another cut could come this week. Of course, the Fed doesn’t think it was surrendering to critics. Instead, it was trying to avert a financial stampede. … The trouble is that this may be a distinction without a difference, because market sentiment — what sends prices up or down — is heavily shaped by the financial populists operating through the business cable channels, Internet-distributed commentaries and print press. There is a vast echo chamber in which if something is repeated often enough, it becomes its own reality. …

The “echo chamber” is in full force because the traders know what a weakling Bernanke is. It’s not any kind of grand conspiracy; it’s just something that they all understand — that Bernanke lacks the private sector standing and experience to stand up to apocalyptic fearmongering from traders who had made the wrong trades. The traders also know that Bernanke is tacitly auditioning for a reappointment under a Democratic administration, and he is going for broke.

Greenspan knuckled under a lot of the time, but there were also (a few) times when businessmen would whine for rate cuts, and Greenspan would, in so many polite words, tell them to shut up. Bernanke can’t even do that much.

And, well, this is a pointless request, but I am so tired of hearing academics pontificate about liquidity. Larry Summers, Bernanke, Mishkin, and the lot of them have never executed a single trade in their respective lives. Unless you have executed trades, or overseen trade execution, you are almost certainly clueless about liquidity. It’s obvious that Mishkin, Summers and Bernanke don’t.

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The one rationalization I have gotten from the National Intelligence Estimate, a revolt by the CIA, DNI and probably the Navy which crushed America’s negotiating leverage with Iran over the future of Iraq, is that Israel cannot be a credible linchpin of American foreign policy after Hezbollah defeated them in 2006. Adding insult to injury, Israel further wrecked its credibility by allowing Ehud Olmert to keep power after the Israeli military’s biggest institutional failure since the Yom Kippur War of 1973. Basically, Olmert’s coalition partner, Labour, must put off a new election for as long as possible in the hope of turning its abysmal poll numbers around. Binyamin Netanyahu’s strategy of bolting from Ariel Sharon’s Kadima party has paid off, and Likud is poised to return to power in the coming election. Labour’s ideology of diplomacy with the Palestinians has fallen completely out of favor with the Israeli public. Their mooring to Olmert, combined with Labourite Defense Minister Amir Peretz’s shambolically politicized performance during the Lebanon war, have crippled Labour’s credibility.

Israel established a “blue-ribbon commission,” the Winograd committee, to ruthlessly analyze the what, when and why of Israel’s 2006 failures. Somehow, Olmert has apparently suppressed its findings for over a year, with the tacit support of Israel’s discredited Labour establishment. Israelis have not waited with such baited breath on one set of findings since they waited for Moses at the bottom of Mount Sinai.

Every “political analyst” thinks that the Winograd report will destroy Olmert, whenever it comes out. But everyone already knows Olmert and his clique performed disastrously. I am not sure what this changes, really. It’s analogous to publishing the number of bullets that hit somebody a year and a half after s/he was murdered. Everyone has already moved on.

Anyway, the FT thinks this will be a big deal.

Lebanon verdict puts Olmert in line of fire

By Tobias Buck

Published: January 29 2008 01:02 | Last updated: January 29 2008 01:02

They call him the “Houdini of Israeli politics”, but Ehud Olmert may well need more than the skills of the famous escape artist if he is to survive the latest challenge to his embattled tenure as prime minister.

On Wednesday, the high-profile Winograd committee will publish its findings into the government’s handling of the disastrous war in Lebanon in July and August 2006.

The report is widely expected to criticise Mr Olmert’s leadership both in the planning and execution of the war. Even before publication, it has triggered a wave of protests by the prime minister’s domestic opponents and families of soldiers who died.

The report will focus on the final two days of the conflict, when Israel threw its troops into a last-ditch battle against Hizbollah forces in southern Lebanon. The final assault was intended to inflict severe damage on the militia before a UN-sponsored ceasefire took effect on August 14. But the poorly executed attack changed little on the ground, and Hizbollah’s tough resistance killed 33 Israeli soldiers.

The episode came as a shocking blow to an Israeli public that is deeply attached to its revered armed forces and expects elected leaders to show a high degree of military competence.

Mr Olmert has declared that he will not step down in the wake of the report, and the Winograd committee is not expected to issue a direct call for the prime minister to leave office.

… But the man who may feel the pressure of the Winograd report even more intensely than Mr Olmert played no role in the war at all. Ehud Barak, the defence minister and leader of the Labour party, returned to politics only last year, joining Mr Olmert’s government more than 10 months after the last shot of the Lebanon war was fired.

In a promise that has come back to haunt him, Mr Barak at the time vowed to pull Labour out of the coalition government headed by Mr Olmert’s Kadima party after the publication of the Winograd committee’s findings.

The former prime minister now finds himself facing an unenviable choice. He can stick to his pledge, bring down the government, and force new elections.

But according to all opinion polls, a fresh vote would further reduce Labour’s seats in the Knesset, the Israeli parliament, and return his arch-rival, Benjamin Netanyahu of the right-wing Likud party, to the prime minister’s office.

To make matters worse, that outcome would almost certainly put an end to the Israeli-Palestinian peace talks – which enjoy the support of Labour voters.

Or Mr Barak can break his promise, and retain Labour’s crucial backing for the Olmert government. The defence minister knows, however, that this would deal a severe blow to his credibility and expose him to harsh attacks from both inside and outside the party.

Moreover, staying in the government may merely prolong the inevitable, with Mr Olmert’s fragile coalition already crumbling at the fringes.

Some officials and analysts point to a middle way. According to their scenario, Mr Barak could either force Mr Olmert to agree to early elections maybe a year from now, allowing the government to continue the peace talks and giving Mr Barak time to reverse Labour’s standing in the polls.

Or he could call on the Kadima party to replace Mr Olmert with another leader – most likely Tzipi Livni, the foreign minister – in return for staying in the coalition.

The ambitious Ms Livni has made no secret of her desire to replace the prime minister, and she and Mr Barak are said to have a good working relationship.

Without knowing the precise content of the report Israel’s political scene has entered a phase of fevered speculation. Mr Barak has so far refused to clarify his position, stressing that he will read the report first before deciding on a course of action.

For Mr Olmert, however, one thing is already clear. No matter how ingeniously he performs over the coming days, the fate of his government is now at least partly in the hands of Mr Barak.

The damage has already been done. Israel’s pathetically myopic execution of the war, and irresponsible aftermath, have damaged its credibility permanently. The United States’ Middle Eastern policy can now be summarized as “sustainable withdrawal.” Israel is a credible investment only insofar as it can exert vastly disproportionate leverage over Middle Eastern affairs, and it was manhandled by one arm of the Iranian state. Meanwhile, its politicians prefer throwing away the lives of Israeli soldiers to assuming responsibility.

Israel will be fine without the United States. It will always be a Jewish Switzerland, and Russia’s perpetually insecure Jewish oligarchs, e.g., Lev Leviev (diamonds), Roman Abramovitch (oil) and others, will always need a haven. (That was why Russia and Israel agreed to mutually unfettered immigration — russki have no interest in Israel, and Russian Israelis have no interest in going back, but Russian Jewish oligarchs need a place to go on very short notice.)

But the American-Israeli romance is drawing to a close.

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Buffett is in

Buy! Buy! Buy!

Buffett’s Bond Insurer to Go National, Regulators Say (Update2)
By Josh P. Hamilton

Jan. 28 (Bloomberg) — Warren Buffett’s Berkshire Hathaway Inc. agreed to expand its new bond insurer nationwide in exchange for faster licensing, a group of U.S. state regulators said today.

Cathy Weatherford, chief executive officer of the National Association of Insurance Commissioners, on Jan. 10 offered to help speed approvals if Buffett’s new company agreed to simultaneously apply to all states with a uniform application, NAIC spokesman Scott Holeman said today.

“Berkshire has committed,” Holeman said in an interview.

Berkshire’s bond insurer may help stabilize debt markets, which have been roiled by the prospect that MBIA Inc. and Ambac Financial Group Inc., the industry’s biggest guarantors, may lose their top credit rankings. A downgrade may affect $2.4 trillion in assets industrywide, and Fitch has already stripped its AAA rating from Ambac after losses tied to subprime loans.

Ajit Jain, head of the Berkshire insurance unit in charge of the new Berkshire Hathaway Assurance Corp., declined to comment today. He previously said he would first seek licenses in the larger states, including California, Texas and Florida. Berkshire’s bond insurer began operating in New York last month.

To induce Omaha, Nebraska-based Berkshire to submit the application to all states, NAIC proposed a pilot program waiving a requirement that an insurer using a uniform application have a track record in the type of insurance for which it wants new licenses, Holeman said.

Heading Off Writedowns

“The agreement with Berkshire Hathaway is a win-win for states and the company,” said Weatherford in an e-mailed statement. “Because the bonds in this agreement are insured, states should be able to sell more — creating a positive impact on state economies.”

Billionaire Buffett, 77, transformed Berkshire over four decades into a $200 billion investment and holding company that gets about half its profit from insurance units including Geico, General Re and National Indemnity. Berkshire has a AAA rating and more than $40 billion in cash. Its new unit will avoid the mortgage-backed bonds and other structured securities that led to losses at other guarantors, Jain has said.

Berkshire fell $700, or 0.5 percent, to $138,400 at 4:17 p.m. in New York Stock Exchange composite trading. The stock rose about 28 percent in the past 12 months while the Standard & Poor’s 500 Index dropped 4.7 percent.

Ambac, MBIA

Municipal bonds make up about 33 percent of the insurance premiums collected by MBIA and half of revenue for Ambac. A rating downgrade affects all bonds an insurer covers.

Lower ratings for bond insurers could spawn a new round of writedowns on holdings at the world’s financial companies. A downgrade might force banks to raise another $143 billion to shore up capital, analysts at Barclays Capital said last week in a report.

The state regulators have scheduled a Feb. 6 conference call to approve the waiver, Holeman said. Assuming they agree, Berkshire can submit a single electronic application. A final conference call would be scheduled where states can ask Berkshire questions or request additional materials. Each state may then do its own final review and rule on a license.

Some states are ready to grant a license almost immediately, Sean Dilweg, Wisconsin’s insurance commissioner, said in an interview.

“Everybody sees this as a priority,” Dilweg said, adding that Berkshire is likely to have several licenses in hand by Feb. 14.

It’s time to buy equities. … I dunno about US ones; I think looming US political risk will be devastating for US stocks. They will beat fixed income any day of the week, though.

As a commenter just noted, I have a hard time being bullish. I am bullish on commodities, partially because I think the recession fears are overwrought and over-priced into the market; and partially because Washington, DC’s inflationistic ideology will goose consumption, goose production, and goose commodities.

Right now, I am seeing a commodities mini-rally until the Beijing Olympics are over. That means I’m bullish on Australia, Canada, Russia (very bullish on Russia), Ukraine, Mexico (yes, there’s a new one), and Peru. Long term I am most bullish on Brazil, although Brazil was a huge hot money destination and needs more shaking out. I am also bullish on Pakistan and Vietnam in the short term, and India in the long term (after a Brazil-esque shakeout; India is well overbought even after last week’s rout).

Continental Europe is an interesting dilemma right now, and one I haven’t really figured out. I think Eastern Europe and Turkey will be at the epicenter of a savage recoupling, although Turkey will ride it out without much trouble.

Sarkozy, like so many would-be Thatchers, has exchanged potential conservative revolution for 24-7 media adulation and what amounts to a celebrity lifestyle. He squandered the possibility of truly awakening the French economy.

Germany is witnessing a major left-wing comeback, even though the German economy has never had it so good, with such a rich euro. Italy and especially Spain are on the cusps of very hard landings, and I do not see Italy or Greece remaining in the eurozone over the long term.

I am extremely bearish regarding both China and Japan — over any time horizon. Remember that the Japanese yen has appreciated from ~250 yen per USD to 106 now. Japan’s Nikkei is currency-weighted, so Japan’s index today under the 1984 yen would be at about 32,000. Especially when combined with Japan’s declining human productivity from its rapidly graying workforce, the Japanese have really coped quite well, when you think about it.

(The Nikkei, btw, topped out at about 38,000, as foreigners piled into Japanese assets to take advantage of the inevitable appreciation of the yen. A couple of sideways years after that was priced in during 1984-6, the Nikkei crashed. Yet another parallel Japan and China share, with a 20 year lag.)

I am also bearish on HK, Taiwan and Indonesia for the foreseeable future.

In sum, I’m bullish on pretty much everything outside of the US, Japan, China and Europe.

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ABX 53.50 +1.33 +2.55%  
CEF 12.08 +0.40 +3.42%  
RGLD 31.47 +1.24 +4.10%  
GG 38.40 +0.54 +1.43%
S&P 500 1,343.00 +12.39 +0.93%

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It is high time for investors American and foreign to consider political risk as a sizeable risk factor in weighing whether or not to invest in the United States.

With the Kennedy endorsement of Obama, Obama is at worst a coin toss against Hillary Clinton, if not the favorite. According to Novak, members of Obama’s inner circle have indicated that Obama will nominate John Edwards for Attorney General.

January 26, 2008

WASHINGTON, D.C. — Illinois Democrats close to Sen. Barack Obama are quietly passing the word that John Edwards would be named attorney general in an Obama administration.

Installation at the Justice Department of multimillionaire trial lawyer Edwards would please not only the union leaders supporting him for president, but organized labor in general. The unions relish the prospect of an unequivocal labor partisan as the nation’s top legal officer.

John Edwards had a reputation for being somewhat stupid, at least among intelligent political spectators and real politics professionals (who work for real private institutions, not Beltway pols). He always pandered way too much. His political career is riddled with contradictions even by Beltway standards. His campaign was a running laughingstock. He called Fortress Investment Group repeatedly and bitchd at them over the phone when he found out that they were into subprime debt, as if he had been in a coma during for the full duration of his $500,000 Fortress “internship,” and as if it was Fortress’s fault that Edwards’s campaign was such a total joke.

(I am told that Fortress hates Edwards’ guts, and the only reason they manage half of Edwards’s ~$35 million fortune and put up with him is to insure themselves against subprime liability from prowling class action lawyers. But I digress.)

Edwards was also a very successful trial lawyer, in the sense that Blackbeard was an incredibly successful pirate. Actually, that’s an insult to Blackbeard. He probably wasn’t as much of a parasite as John Edwards was. It would take far too long to detail the different kinds of doctors Edwards has driven out of North Carolina, the good people whom he bankrupted, and so on. The fact of the matter is that if Barack Obama wins the nomination, a trial-lawyer parasite among parasites, and hypocrite among hypocrites, is in all likelihood going to be running the Department of Justice.

High-level investors have been all too aware of the DOJ’s shameless financial overreach over the past six years. Moving money into and out of the US requires a full-time phalanx of well-paid lawyers. Federal snooping of international-US money flows has reached unacceptable levels (it’s the main reason why London has replaced NYC as the financial capital of the world). Combined with headline-grubbing DOJ prosecutors who will ruin anyone in order to grab publicity, and Bernanke’s eagerness to ruin years of accumulated capital in the naive hope that incoming Democrats will reappoint him, and you can begin to understand the real reasons why foreign investors have soured so completely on the United States.

However, with Edwards and Obama coming in, things are bound to get even worse. “Card check” legislation will dramatically empower unions. The Department of Justice will interpret labor legislation much more selectively and aggressively under Edwards, and the prosecutions of the Scruggs and Milberg-Weiss tort mafias will be shuttered. Litigation in the United States consumes more than 1.5 percent of GDP per year, an order of magnitude higher than the UK, the nearest competitor with well under one percent.

And then there’s the EPA.

I like to call global warming “the faith-based initiative of the secular left,” because global warming’s adherents exhibit unwavering faith in a clerical class which, for all its secluded rituals and incomprehensible, unfalsifiable mumbo-jumbo scientific expertise, does not have a single correct medium- or longer-term forecast to its collective name, going back 40 years. The adherents of this particular cult also believe that The World As We Know It will end in about 50 years or less unless the whole of humankind immediately commences penance — excepting, of course, their own high priests, who are allowed to become ever more obese, and who may jet around to Bali and Davos and New York in ever more baroque, CO2-belching Gulfstreams.

These people are going to be running the EPA.

The EPA has done a lot of damage on its own. I personally believe that the rise of the environmental movement occurred mostly at the expense of unions, not extractive capital (which always either captured the relevant regulators, or went to other parts of the world). Capital found new workers whose “polluting” jobs were not hostage to any environmental cult, eg, China, Vietnam, etc. Yeah, yeah, there were plenty of other factors too, but extractive industry simply doesn’t grow in the United States anymore. What kind of idiot is going to plunk down one billion dollars for a new mine in the United States, when the EPA, the Department of the Interior, Congress, “civil society” organizations, or even an individual judge can put your investment on hold indefinitely? Are you kidding me? Mining companies have elevated their American political risk measurement to the same league as Russia’s and Venezuela’s for very good reasons. The United States is not a safe place for capital anymore. And the Democrats haven’t even taken office yet!

Taxes will also rise significantly, although that is to some extent inevitable. The top rate of income tax will be rolled up to 39.6 percent from 35 percent, for a start. The Democrats will also probably erase the cap on Social Security taxes, which in practice means that working Americans will shoulder yet another tax that upper class Americans will figure out how to avoid.

My guess is that capital gains will be left alone, because so much hedge fund money has gone to the Democrats, capital gains is very bad for hedge funds, and in any case most economists agree that capital gains is one of the most damaging methods of taxation on the books. Another good bet, in addition to the aforementioned, would be that Democrats will enact a 1986-style cleanup, cutting out thousands of arcane tax loopholes and lowering the corporate income tax to ~30 percent (from the current 35). The bottom line is that, for DOJ-, EPA-, tax- and labor-related reasons, ROI on US-based capital will plummet if a Democrat wins the White House.

Now, I am the first to admit that because of the systematic, calculated mistakes in CPI, real inflation has almost certainly exceeded CPI (and significantly) for the past 13 years, which means workers’ real wages have dropped. So labor deserves something at capital’s expense. But the regulatory damage a Democratic administration will inflict upon the wider economy will far outweigh the justice that labor deserves.

Finally, a Democrat-“supervised” Fed will savage the dollar even more than Bernanke has, if that’s possible.

Anyway, the Democratic primary has played out long enough for investors to realistically price in the risk, for example, that Obama will be the Democratic nominee and presumed favorite for the Presidency. The outlook is not good.

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Rupert Murdoch has not had a good run of late. “Fox Business News” is possibly the greatest fiasco in MSM memory, with the only Nielsen figures showing that FBN has about 8,000 daily viewers; at that level, I’m sure Fox gets more viewership out of laughter (see: “Shitigroup”) than out of genuine interest.

Then there have been Murdoch’s two attempts at political gamesmanship, assisting center-leftist powermongers Gordon Brown (UK) and Hillary Clinton. (Tony Blair counts too, although he wasn’t cut from the Brown-Clinton mold.)

Apparently Murdoch’s ventures into China have been equally disastrous; one wonders how Murdoch has ever managed to make a dime. (FBN, with its 50 Cent, Jermaine Dupri and other rapper interviews, “Wall Street Happy Hour” evening specials at strip clubs, etc., has been a particularly stunning case study of top to bottom corporate catastrophe.)

Again and again, Murdoch is taken for a ride by the Chinese. First, there was Richard Li, the son of the legendary Hong Kong entrepreneur Li Ka-shing, who in 1993, at the age of 23, sold most of STAR TV, a Hong Kong-based satellite service, to News for more than $500 million even as the company was hemorrhaging money.

Li forgot to tell Murdoch that Chinese consumers were pirating the signal. “Despite the tens of thousands of cable operators surreptitiously downloading the STAR TV signal and distributing it across the nation to tens of millions of subscribers,” Dover writes, “Murdoch was unable to collect a single cent in return.”

The Chinese would also clone the programming News was churning out, copying everything. Soon after the purchase, Murdoch made a monumental blunder during a speech extolling the virtues of satellite TV, when he uttered this fateful sentence: “And satellite broadcasting makes it possible for information-hungry residents of many closed societies to bypass state-controlled television channels.”

Within a month, China had banned the distribution, installation and use of satellite reception dishes anywhere in China. Murdoch’s access to top officials dried up. It took four years, and hundreds of millions in losses, before he was rehabilitated in Beijing, but the Chinese were far from finished ripping him off. Writes Dover: “Many of [those] who had been provided with all-expenses-paid trips to the UK to see the BSkyB [satellite] platform in operation loved the Murdoch concept and set about implementing it. They just excluded Murdoch from his own plan.”

I would never invest a dime in China. The Chinese economy is an eighteen-wheeler hurtling down an eight-lane superhighway to nowhere. Every fifty years or so, a “one billion customers” China craze devours unbelievable amounts of Western money before cannibalizing itself. (1850, 1910-30, 1980’s+)

This one will be over after the Olympics.

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Among uber-academia, I am pretty sure Willem Buiter is the only man of his degree of stature or higher who gives the Bernanke-Mishkin Fed anything near the level of scorn and contempt it deserves. I try not to be a promiscuously copy-pasting linkbot, but Willem Buiter is hands down the best credentialed commentator I have come across.

Don’t worry, be happy despite monolines and Société Générale

Even with a few days worth of hindsight, the Fed’s out-of-sequence, out-of-hours 75 basis points cut in the target for the Federal Funds rate continues to look extraordinary and deeply misguided. Indeed, it looks less and less like a decisive pre-emptive move in response to unexpected bad news designed to meet the Fed’s triple mandate of maximum employment, stable prices and moderate long-term interest rates, than a knee-jerk panic reaction to a global stock market collapse.Did the sharp global decline in stock values at the beginning of this week reflect a rational re-assessment of fundamentals? The only two candidate explanations I have heard are (a) that the collapse was probably triggered by concerns about the financial viability of the monolines and (b) that it was intensified by the unwinding by SocGen of the long equity positions taken by its employee of the year (not!). I find neither explanation convincing. …


[ … ]

Monolines are few in number and small. They don’t have a lot of capital. It seems unlikely that, in an even vaguely rational world, their existence would make a huge different to the performance of the credit markets and, indirectly, the equity markets. It is clear that, while they may well offer credible protection against idiosyncratic default risk of individual borrowers, they will offer no protection against a significant economy-wide increase in defaults, such as may be associated with a recession. Monolines are unbelievably leveraged: last year the value of their outstanding guarantees was 150 times capital, with the notional value of the insured assets at around $ 3.3 trillion and capital of between $20 billion and $25 bn.

It does not take a wildly implausible increase in the level of the average default rate to wipe out this capital. I don’t understand a business model for default risk insurance which implies that your capital will be wiped out if less than 0.7 percent of your insured assets go belly-up. The efforts by New York state’s Insurance Superintendent to get a posse of banks to put up between $ 5.0 bn and $15.0 billion to shore up the capital of the monolines, after one of the largest two (AMBAC) lost its AAA rating, seem modest compared to reasonable estimates of the expected losses of the monoline industry. Perhaps the decimal point should be moved one place to the right?

[ … ]

Société Générale

The fraud at Société Générale, resulting in a € 5bn loss will provide bloggers and columnists everywhere with material for weeks to come. It raises serious issues for regulators and supervisors of banks and other financial institutions. But it is not a macroeconomically significant event. Like all theft, the fraud itself merely redistributed wealth, without any obvious effects on aggregate demand. To make a loss of €5bn, there probably was an exposure of between €50 and €70bn. Société Générale closed all these positions in a hurry starting Monday. This may have contributed to the stock market decline in Europe, but the rout was already under way in Europe (and earlier in Asia), before Société Générale did its bit for the bears. I assume the Fed must have been informed of the Société Générale debacle by the French regulator (the Banque de France) before it decided on its rate cut (Monday evening US time).

The stock market sometimes loses its nerve. Left to its own devices, it will recover it. There is no monetary policy mandate to protect those who lose their nerve against those who don’t. So it looks as though the Fed, like the stock market, simply lost its nerve.

As an aside, I am usually a believer in the screw-up theory of history rather than the conspiracy theory of history, but in the case of Société Générale I am not so sure. How could one man, a junior trader, even if he is a wizz at Solitaire, carry a € 50 billion to € 70 billion position day after day without anyone else noticing? He is supposed to have been long equity. That cannot have been a long outright position, because this would have been noticed in the cash markets. It cannot have been in the equity futures markets either, because that requires margin payments whenever stocks fall. The perp would have been caught a long time ago. So how did he do it? Did he sell equity puts? Could he have done this on his own? Unlikely, I would say. He has also, conveniently, disappeared. If he is found hanging from a bridge somewhere, my suspicions that there is more to this than has thus far met the eye will have been confirmed.


The stock market giveth – the stock market taketh away; and then the stock market giveth again etc. Most of the high frequency movement in stock prices is fluff – noise that policy makers ought to ignore.

Many commentators talk as if a recession in the US is a done deal, with a recession in the UK not far behind and significant weakening in Euroland coming up fast in the outside lane. I am not so sure.

A recession in the US is possible, but not in my view the most likely outcome. Employment appears to be holding up better than would be consistent with the economy already being in recession or about to enter it. Clearly, the housing sector and the financial sector in the US have over-expanded in the latest credit boom and will have to contract painfully. Profits, capital and employment in these two sectors will all fall. But outside these two sectors there has not been any significant degree of excessive capital formation in the US economy. The same holds for the UK. In Euroland the situation is even better, because there the housing sector has only expanded excessively in a few cases (Spain and Ireland), while the financial sector appears to have expanded excessively only in the Netherlands, Germany, Spain and Ireland.

The contraction of the financial sector will have repercussions for the non-financial economy, especially for the household sector, which is more highly leveraged than the non-financial corporate sector. But as yet there is no sign of a major across-the-board decline in activity even in the US, let alone in the UK and in Euroland.

Both the housing sector and the financial sector are among the most vocal sectors in the economy. The amount of attention paid to these sectors by politicians, policy makers and the media is quite disproportionate, when compared to their fundamental economic significance. When regulatory capture extends to the central bank, the quality of monetary policy making is bound to suffer. We have seen this in the US since Greenspan took over from Volcker as Chairman of the Fed. And it continues today.

We will see a slowdown in global growth, with the most severe slowdown likely in the US and the UK. But even there I don’t understand how those yielding the R-word can be as confident as they pretend to be.

I don’t agree with all of it. I think a moderate recession is the most likely outcome. But he’s much closer to the mark than pretty much anybody else, certainly on this side of the pond.

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As I noted last night, the first “independent analyst” attempt to quantify the scale of a bailout of the bond insurance industry ($200 billion) seemed a tad sensationalistic and over-the-top. I said that $75-125bn sounded more accurate, on the basis of pretty minimal information.

Barclays has completed its own analysis. If the monoline ratings are cut one step, from AAA to AA, $22 billion would be required from the banks immediately. If the ratings are cut 4 levels, to A, $143 billion would be required.

Jan. 25 (Bloomberg) — Banks may need to raise as much as $143 billion to meet regulators’ requirements should rating firms downgrade bond insurers, Barclays Capital analysts said.

Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today. Banks own $820 billion of structured securities guaranteed by bond insurers, the report said.

“This is a huge amount, but the assumptions we use are also very aggressive,” Fenner-Leitao in London said in a telephone interview. The estimate shows how bank capital could be diminished in the event of significant downgrades, he said.

Fitch Ratings cut New York-based Ambac Assurance Corp. by two levels to AA last week, and Moody’s Investors Service and Standard & Poor’s are reviewing Ambac and MBIA for downgrades, casting doubt on the credit quality of $2.4 trillion of bonds the industry guarantees. Wall Street firms led by Citigroup Inc., Merrill Lynch & Co. and Bank of America Corp. raised $72 billion from investors after reporting more than $133 billion of writedowns and credit losses triggered by the collapse of the subprime mortgage market.

New York’s Insurance Superintendent Eric Dinallo met with executives of banks and securities firms this week to ask them to extend capital to bond insurers and stave off credit rating reductions. The regulator said yesterday its rescue plan will “take some time.”

Ambac rose today amid speculation that billionaire Wilbur Ross will buy the company. A deal may come within the next two weeks, the Evening Standard newspaper in London reported on its Web site.

Fitch is likely to cut the rankings of other bond insurers in the “very near term,” with Financial Guaranty Insurance Co. at greatest risk, Fenner-Leitao wrote in the report.

Of course, MBIA’s credit default swaps are trading to yield approximately 20 percent, which means that the CDS market rates MBIA as below CCC. One week ago, they were trading at 27 percent yield, which is CDS-speak for “halfway-plunged into the bankruptcy abyss.” This is why I can’t be bullish at all yet: there’s no point in buying until the monolines either are resolved or dissolve. Timing the resolution of the monoline situation is an insiders’ game.

So I guess the Egan Jones number is all about how far the bond insurers’ ratings are cut. But it also presumably doesn’t include the possibility of an outside entry into the industry (Buffett) or a private-equity takeover and recapitalization of one of the current ones (eg, Warburg Pincus). But I can’t see how Ambac or MBIA could survive without a massive, horrible government bailout.

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