Archive for February, 2008

Here we have occasionally noted the latest iteration in the evolution of state control over the people: incremental violence, under “nonviolent,” “nonlethal” auspices, most publicly on display in Tbilisi, Georgia (yet another of George Soros’s Open Societies gone wrong) when Soros Mikhail Saakashvili needed to secure re-election in the face of a very disillusioned Georgian population.

In addition to probable ballot-box stuffing, Mikhail Saakashvili used expensive sound cannons to disorient and disperse protesters. But, hey, it was nonviolent. So it’s okay, right?

Anyway, all you dirty hippies out there better watch out, ’cause who else but the San Jose Police Department is a-gonna to fry your eardrums and knock you to the ground the next time you whine about something? (TOH the civil-liberties vigilantes at Infowars)

New tool for police is a blast of sound

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Think louder than a jet engine. Think the front row of a Metallica concert. Think of the piercing scream of a smoke alarm – inches from your ear.

Now, imagine a bad guy, holed up with hostages, refusing to budge, surrounded by sharp-shooters and anxious neighbors.

Instead of bullets, San Jose police can blast him with the latest in high-tech cop gadgetry: a dish-shaped, sonic weapon.

This ear-splitting, mind-blowing device is growing in popularity around the globe, used by soldiers flushing terrorists out of caves in Afghanistan to cruise ships scaring off pirates in the sea off Somalia.

So why did San Jose plunk down $27,000 in state grant money for its own Long Range Acoustic Device?

Police say it will be used mostly as a high-grade sound system to clearly amplify a police officer’s order at great distances. But it can also be used as another of the department’s “less-lethal” weapons, along with Tasers and 40mm projectile guns.

Sgt. Dave Newman, a veteran SWAT officer, said the LRAD’s sound blast could be used on a barricaded and armed suspect who refuses to surrender.

“This is just a tool in a tool box,” Newman said. “We try to come up with tools that will provide a safe solution to the problem. That’s why we have the Tasers. That’s why we have” pepper spray.

The LRAD, Newman said, is a way for police tactics to evolve so they don’t “become a dinosaur and head for the La Brea tar pits.”

... Cops said that talking to a crowd was the whole point of the LRAD. [LOL–ed] Sometimes suspects, arrested during rowdy crowded events, complain that they don’t hear the order to leave.The LRAD, police said, will solve that.

The LRAD’s legend grew in 2005 when the captain of the Seabourn Spirit luxury cruise ship used one to help repel pirates who attacked the vessel with rocket-launched grenades off the coast of Somalia.

While most of the 1,000 or so LRADs that have been sold have gone to the U.S. military, about a dozen public safety agencies, including Sacramento and Santa Ana police, have also purchased them. The New York Police Department used the megaphone feature for crowd control during the 2004 Republican Convention.

The Santa Ana SWAT team used the LRAD to get 10 gang members holed up in a house to surrender.

“I know they have those crowds during Mardi Gras in San Jose,” said John Gabelman, commander of the Santa Ana SWAT team. “That will be an excellent tool for them.”

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SAN FRANCISCO (MarketWatch) — In an effort to calm grousing consumers as prices rise to 11-year highs, China is raising minimum wages across the country, a move analysts fear could further stoke inflation.
Guangdong, China’s richest province, said it plans to raise minimum wages by as much as 18% in some cities starting April 1. The decision followed similar actions in other areas, notably the major cities of Shanghai and Beijing. Tibet, an autonomous region administered by China’s central government, raised minimum wages by nearly 50% at the beginning of this year.
The wage increases, aimed at relieving food and other price pressures, could instead fuel inflation, analysts said. Higher wages are also likely to raise prices of U.S. imports from China, and possibly reduce China’s attraction as the world’s manufacturing center.

China is wrestling with consumer inflation that accelerated to 7.1% in January, up from a 6.5% rise in December, the National Bureau of Statistics reported last week. …

China’s dilemma
Since last year, Chinese residents have seen prices of food and other staples increase more than their pay checks, a factor analysts said could potentially unleash social unrest. In light of that, some fear the minimum wage increase came too late.
“It’s a dilemma for China,” said David Riedel, president of overseas-stock specialist Riedel Research Group. “The reality of higher food and fuel prices has to be offset with higher wages. This is more wages catching up to where the market is today.”
The wage increases could feed inflation, he said, explaining that companies absorbing higher wages have to pass those costs onto their customers.
Guangdong will increase the province’s minimum wages by an average 13% on April 1, the province’s labor bureau said in a news release last week. The southern China province produces about 13% of China’s economic output, the most among the country’s 32 provinces.
Minimum wages in the capital city Guangzhou will rise to 860 yuan ($120) per month from 780 yuan, an increase of 10%. Wages of other cities in the province will also get a boost, with those in some inland cities up nearly 18%.
China’s other provinces took similar actions earlier this year. Starting Jan. 1, four provinces hiked their average minimum wages by more than 20%, with the increase in Tibet topping the list, according to data collected by Citigroup. Five other provinces increased average wage caps by more than 10%.
Beijing and Shanghai, China’s two biggest cities, last year raised their minimum wages to 730 yuan and 840 yuan respectively, in the face of rising consumer prices.
Average minimum wages in China have risen 15% in 2007, Citigroup said in a report, and 21% in 2008 based on available data.
Higher inflation
The wage hike came as some analysts were already reconsidering their estimates for Chinese inflation.
“The current consensus view is that this year’s inflation should peak in the first quarter,” said Lan Xue, an analyst at Citigroup, in a separate research note. However, Xue said “we are getting nervous that not only may we not see a moderation in the second quarter,” but that inflation could even continue rising into second half or even 2009.
Recent inflation has even spread to home appliances, one of the most oversupplied goods in China.
Haier, China’s biggest appliance producers and an exporter of mini refrigerators and other appliances, said last week it will raise domestic prices of refrigerators and washing machines by 7% to 10% in response to higher producing costs.
The prices rises are notable because winter is usually the slowest season for selling appliances, according to Citi’s Xue, who added that it is “probably the first time in the past 15 years that we have seen price increases” in that sector.

Guangdong province, whose minimum wages will be the country’s highest as of April, is China’s largest manufacturing center for home appliances. That could put even more upward pressure on appliance prices.

Vindication for those of us who have never trusted Chinese statistics. “7.1%” Chinese CPI is a total fabrication. When the China myth has collapsed, common sense and a smidgen of on-the-ground experience will have trumped Wall Street’s credulous, all-too-fashionable quants and permabull prophets yet again.

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Nigerian states support discontinuing payment in dollars

Section: By Kunle Aderinokun
This Day, Lagos, Nigeria
via AllAfrica.com
Wednesday, February 20, 2008


ABUJA, Nigeria — A few days after President Umaru Musa Yar’Adua stopped the payment of their share of monthly allocations and excess crude proceeds in US dollars as earlier proposed by the Central Bank of Nigeria, the 36 states of the federation yesterday said they supported the decision because the dollar is not the nation’s legal tender.

Also yesterday, the Federal Government directed the Office of the Auditor General of the Federation to carry out a comprehensive audit of all revenue inflows into the Federation Account from the Nigeria Customs Service, Nigerian National petroleum Corporation, Federal Inland Revenue Service, and Department of Petroleum Resources, as well as review the petroleum subsidy account.

Fielding questions from finance correspondents after the monthly meeting of the Federation Account Allocation Committee yesterday at the Ladi Kwali Hall of Sheraton Hotel and Towers, the Ondo State commissioner for finance and economic planning and chairman of the Forum of Finance Commissioners, Chief Tayo Alasoadura, said the states’ support for the stoppage of the dollar payment was predicated more on the need to keep the country’s pride and independence than pecuniary reasons.

Chief Alasoadura said, “We are happy with the decision. We don’t want dollar payment because the dollar is not our legal tender. Why should the highest revenue body of the country be paying money in dollars?

“We are degrading our own currency for other currencies. Let us have our money in naira. Anyone who wants to convert to dollars can go to the market to buy dollars. The legal tender of Nigeria is naira and we should be paid in naira. We are all in agreement with the president on this matter.

“Our rejection of dollar payment is not because of depreciation of the dollar. Our decision is based on the country’s pride and our independence. We should be paid in our own legal tender. We don’t want dollar payment.”

Earlier, while declaring open the Federation Account Allocation Committee meeting, the minister of state for finance, Mr. Remi Babalola, said that the issue of payment of statutory allocations to all tiers of government in foreign currency had been laid to rest following the presidential directive.

“As some of you may already be aware, the president and commander-in-chief of the armed forces has directed that any plan to disburse federation account funds to federal, state, and local governments in foreign currency should be stopped forthwith. With this development, I believe that this matter should be laid to rest,” he said. …

Nigeria discarded the dollar. You know, that country that spams you with scams all the time? They’re tired of watching Bernanke aggravate their own inflation problems.

Oh, and guess what else happened today? Greenspan urged the Gulf nations to dump their dollar pegs.

Alan Greenspan, the former chairman of the US central bank, or Fed, has said that inflation rates in Gulf states, which are reaching near record levels, would fall “significantly” if oil producers dropped their US dollar pegs.

Speaking at an investment conference on Monday in Jedda, Saudi Arabia, he said the pegs restrict the region’s ability to control inflation by forcing them to duplicate US monetary policy at a time when the Fed is cutting rates to ward off an economic downturn.

Debate is rife in the Gulf on how to tackle inflation.

Levels have hit seven per cent in Saudi Arabia, the highest in 27 years and a 19-year peak of 9.3 per cent in the United Arab Emirates in 2006.

Free float?

“In the short term free floating … will not fully dissipate inflationary pressure, although it would significantly do so,” Greenspan said.

Saudi and UAE central bank chiefs are in favour of retaining dollar pegs, but Sheikh Hamad bin Jassim bin Jabr al-Thani, the prime minister of Qatar, is pushing for regional currency reform to avert possible unilateral revaluations designed to curb inflation.

According to Hamad Saud al-Sayyari, governor of the Saudi central bank, floating the Saudi riyal would not be appropriate for an economy that relies on oil exports.

“Floating is beneficial when the economy and exports are diverse … as for the kingdom it remains reliant on the export of a single commodity,” he said.

Investor attraction

The dollar peg was also defended by Sultan Nasser al-Suweidi, the UAE central bank governor, at a conference in Abu Dhabi on Monday.

He said the policy was helping Gulf states attract foreign investments.

“They did very well for our economies because it has led to more capital flows,” al-Suweidi said.

Qatar, has the region’s highest inflation, and is considering the revaluing of the Qatari riyal to combat inflation currently at 13.74 per cent.

The exchange rate contributes to about 40 per cent of inflation in Qatar, where the riyal is believed to be 30 per cent undervalued.

Qatar’s stand

“We prefer always to act with all the GCC countries,” Sheikh Hamad said.

Qatar currently chairs the six-nation Gulf Cooperation Council.

“It’s now time for the Gulf to have its own currency,” he said.

Sheikh Hamad said such a currency should be “like the Japanese yen or other currencies”.

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The New York Republican Party has enjoyed one lifeline over the past century: its control of the state Senate. The NY GOP has always driven hard bargains on redistricting, pork, and other gimmickry to bolster not only their own fortunes, but also the district makeups of NY House Republicans.

As of last night, that’s over.

Dems shocking New York state senate victory

Tue Feb 26, 2008 at 08:01:12 PM PST

Democrats picked up a state senate special election in New York today, SD-48. Yeay for us! Except that this victory is particularly incredible.

First of all, this isn’t the kind of seat Democrats win. In fact, it had been over a century since that had happened — since 1880, to be exact, or 128 frackin’ years. Second of all, this was about as solid a district as you can get.

No Democrat has held the North Country seat for at least a century and enrollment appeared to favor [the Republican] Barclay – 78,454 Republicans to 46,824 Democrats, but there were also 35,000 independent voters.

That’s 49R, 29D, and 22I. Yet despite that 30,000 edge in voter registration, Democrat Darrel Aubertine won the race 52-48.

Incredible. If a district this Republican has given up on the GOP, then that party is truly dead in New York. Democrats are well poised to pick up the additional seats necessary to take full control of the state’s legislature this November, and the state will have its first Democratic trifecta in half a century. As a bonus, assuming Democrats hold those gains and the state governorship, redistricting will be in our hands. A 100 percent Democratic U.S. House delegation is well within reach, if not by the ballot box, then by the redrawing of the new districts.

It’s almost certain that some Republican will be bought out now, if they don’t bolt outright out of sheer self-preservation. Once the state Senate tips to the Democrats, the Democratic trifecta will axe a lot of quirks that the state GOP hardwired into the system (such as counting the prison population towards totals in Republican districts, even though they are ineligible and unable to vote — sort of a modern incarnation of the English “rotten boroughs”). They will redistrict everything more favorably, and will win a landslide next time around.

The point is that 4-6 of New York’s 6 House Republicans are now endangered, at a time when the Republicans can’t afford it.

In not very related politics news, Alaska — Alaska! — has joined the list of Senate seats favored to tip Democratic this year.

Such are the wages of hubris and betrayal ..

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What the debt market believes, and what the ‘Save the Sheeple’ monolines/ banks/ realtors caucus believes, are clearly two very different things.

Feb. 27 (Bloomberg) — Moody’s Investors Service and Standard & Poor’s say MBIA Inc. has enough capital to withstand losses and justify its AAA rating. MBIA’s debt investors aren’t so convinced.

Credit-default swaps indicating the risk that Armonk, New York-based MBIA’s bond insurance unit won’t be able to meet its obligations are trading at similar levels to companies such as homebuilder Pulte Homes Inc., which is rated 10 steps lower.

The discrepancy illustrates the skepticism debt investors have about the safety of MBIA’s rating after the company posted $3.4 billion of losses on subprime mortgages last quarter. Moody’s and S&P both said that while at least $4 billion of writedowns lie ahead, MBIA’s management has made enough changes to warrant the top rating.

Pardon me if I find this a little hard to believe,” said Richard Larkin, director of research at municipal-bond brokerage Herbert J. Sims & Co. in Iselin, New Jersey. “This is basically the same management that put MBIA into this hole in the first place.’

Moody’s yesterday ended a five-week review of MBIA, the world’s largest bond insurer, removing the threat of an imminent downgrade. S&P did the same a day earlier and also affirmed the top rating of New York-based Ambac Financial Group Inc., the second-biggest. Ambac is still under review from both S&P and Moody’s.

Credit-Default Swaps

Credit-default swaps tied to MBIA’s insurance unit rose 3 basis points today to 363 basis points, according to London-based CMA Datavision. The contracts, which rise as investors see increased risk and fall when confidence improves, have dropped 24 basis points the past three days. That’s still up from less than 100 as recently as October. The contracts rose above 720 last month as banks, securities firms and investors used them to hedge against the risk that the firm wouldn’t be able to make good on its insurance obligations.

Contracts on Bloomfield Hills, Michigan-based Pulte are trading at about 370 basis points, CMA price show. The BB+ rated homebuilder has reported five straight quarterly losses. The company is considered junk, or below investment grade.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

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EUR-USD 1.5105 0.0130 0.87
USD-JPY 106.4700 -0.8100 -0.76
GBP-USD 1.9903 0.0032 0.16


Oil 100.68 -0.20 -0.20
Gold 958.40 9.50 1.00

Fannie Mae, Freddie Portfolio Limits to Be Lifted, Ofheo Says
By Jody Shenn

Feb. 27 (Bloomberg) — Fannie Mae and Freddie Mac, the two largest providers of money for U.S. home loans, will have restrictions on the sizes of their portfolios removed.

The limits, imposed after accounting errors at the government-chartered companies, will be lifted on March 1, according to a statement sent by e-mail today from the Office of Federal Housing Enterprise Oversight.

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Fed Vice Chairman Don Kohn:

“I do not expect the recent elevated inflation rates to persist. In my view, the adverse dynamics of the financial markets and the economy have presented the greater threat…

“I expect the run-up in headline inflation to be reversed and core inflation to edge lower over the next few years. This projection assumes that energy and other commodity prices will level out, as suggested by the futures markets…”

Yes, Don. Core inflation. Exactly.

Out. To. Lunch.

Buy more gold mining stock, even if you have already accumulated disproportionate gold-miner holdings. The devaluation train has a long way to go.

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The Drudgico:

EDINBURG, Texas – For all the positive press Barack Obama receives, as he moves closer to clinching the Democratic nomination he is establishing himself as the candidate who keeps the most distance from the national media.

Reporters covering Obama can no longer move freely among the thousands of zealous supporters at his events — unless the reporter receives a staff escort through the security gates. (In one city, that meant using a port-o-potty outside because the route to the indoor plumbing ran through the crowd.)

And the traveling press corps has been shut out of monitoring Obama’s satellite interviews with local media outlets, which is a normal practice on Sen. Hillary Rodham Clinton’s campaign.

On top of that, the traveling media has been tussling with Obama aides to keep conversations with the candidate on his campaign plane on the record.

In any other campaign year, the media strategy might not raise eyebrows since it is standard practice for a front-runner. But this is a year when the likely Republican nominee, Sen. John McCain, has set a new standard for press accessibility, creating a potentially stark general election contrast between a reticent Democrat and the most accessible GOP nominee in decades.

Watch out, Barack — tell us what we want to know, or you will have a “stark general election contrast” to deal with!

Obama has received grudgingly ambivalent coverage throughout the campaign because he 1) presents himself frankly, humorously, and sometimes intelligently, as opposed to a latter-day Lady Macbeth; and 2) does not have any real dirt on him.

The press, especially CNN, ABC, and Fox-Drudgico, loved Hillary because, besides the fact that her weakness makes her easier to control, her advisers are devout acolytes of the “news cycle” “image management” school of politics: the candidate’s popular standing is all about the best possible connotations in the headlines. Which means they are all about sucking up to reporters, giving them what they want plus a few extra scoops, offering lavish expense accounts, and so on.

The Obama campaign treats the “image management” school of political consulting as half scam, half kabuki. They have never treated MSM reporters respectfully — which is a great thing. With reporters it’s all about openly extrapolating from something completely irrelevant — eg the stunningly ridiculous “Obama in Somali dress” boomlet — wondering about how this will be reported by a critical mass of the reporters themselves, and how many dumb hoi polloi will be subsequently misled. The internet has revealed to ordinary news junkies the pointless, self-referential nature of the entire process. The MSM has lost its power — and the Obama campaign knows it. Hillary’s campaign doesn’t.

It’s also true that press conferences with national media tend to veer into areas that do not necessarily underscore the campaign’s message of the day. The focus is often not on issues like the economy or health care, but on process and punditry, which campaigns loathe.

“The questions that seem to dominate now are superdelegates, pledged delegates, Florida and Michigan,” Gibbs said. “I just don’t know that they provide a tremendous insight into the type of president” he would be. …

Around the Super Tuesday primary elections on Feb. 5, the barriers around the press area at Obama events went from easily penetrable, fabric rope lines to interlocking metal gates manned by vigilant gatekeepers.

Bottom line: The media can no longer roam free.

For months prior to that, reporters could mingle among hundreds of supporters after rallies as Obama worked the rope line. It was a chance to see him interact with voters – and one of the few opportunities to squeeze in a question.

But camera crews and reporters often clogged the rope line, which annoyed Obama because he viewed it as his time to meet voters. Foreign TV crews would sometimes do stand-up shots there.

Now, reporters must usually flag down a staff member before entering the rope line area.

An outrage! An outrage!!

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I have told anyone who will listen that China is a deflationary depression waiting to happen. Banks that neglected their cultural homework, ignored preposterous P/E valuations, and brushed off gaping macroeconomic inefficiencies, such as Morgan Stanley, are now paying the price of being too fashionable too late in the race.

Morgan Stanley’s Chinese prize loses some shine

By Jamil Anderlini, Paul Betts and Andrew Hill

Published: February 25 2008 18:25 | Last updated: February 25 2008 18:25

More than 12 years after it helped set up China International Capital Corp, Morgan Stanley is preparing to sell its 34.3 per cent stake in the top underwriter of initial public offerings in the world’s biggest IPO market.

Most likely the stake will go to one of a handful of US private equity firms.

But while access to the largely closed Chinese brokerage industry is tempting, bidders for the stake, including TPG, Bain Capital and others, are realising the prize is not as sweet as it first looked.

For one thing, the Chinese stock market is down nearly one-third from the highs it reached last October, trading volumes are around a third of what they were at their peak in the middle of last year, and just yesterday the securities regulator said it planned to rein-in large secondary listings in the domestic market.

As for CICC itself, Morgan Stanley has been sidelined by Levin Zhu, the firm’s powerful chief executive, who is also the son of former Chinese premier Zhu Rongji. Many in the Chinese financial world privately say Mr Zhu rules CICC like his own kingdom, while Morgan has progressively ceded control.

Anyone who buys a piece of CICC could be buying a troubled relationship.

The vast majority of Chinese “capitalism” is the same old Communist clan networks, thinly veiled with “capitalist” ownership structures. The subservience of economics to politics, lack of respect for spirit of contract, institutional inefficiency, and state subsidies have not really changed. Once the Chinese lower class realizes how quickly the pie is shrinking, “red capitalism” will join dirigisme, METI, and Nixonism in the trash heap of economic history. Anyone who read “Mr. China” or “One Billion Customers” would have considered those facts before blowing billions of dollars on a luridly overpriced bank purchase.

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Producer price inflation has advanced 7.8 percent in the past twelve months, including 1 percent in January alone (compared to January a year earlier). And as usual, professional economists were the only ones who were surprised.

Feb. 26 (Bloomberg) — U.S. stocks fell for the first time in three days after producer prices increased more than forecast, spurring concern inflation may accelerate even as the economy slows.

General Motors Corp., General Electric Co. and Alcoa Inc. led declines in New York trading after the Labor Department said wholesale prices climbed more than twice the rate forecast by economists. Office Depot Inc., the world’s second-largest office-supplies retailer, tumbled the most since December after saying small businesses and consumers curbed spending. Google Inc. dropped to the lowest since May after UBS AG slashed its earnings estimates for the most-popular search engine.

The Standard & Poor’s 500 Index dropped 6.01 points, or 0.4 percent, to 1,365.79 at 10:32 a.m. in New York. The Dow Jones Industrial Average lost 38.51, or 0.3 percent, to 12,531.71. The Nasdaq Composite Index slid 6.63, or 0.3 percent, to 2,320.85. About eight stocks dropped for every seven that rose on the New York Stock Exchange.

“High inflation creates a difficult environment for equity investors,” said Steven Neimeth, a Jersey City, New Jersey- based mutual-fund manager at AIG SunAmerica Asset Management Corp., which manages $56 billion. …

Interestingly, for the first time in this monetary easing cycle that I can remember, the dollar fell on a higher-than-expected inflation reading. Normally, if the market is surprised by higher inflation, the dollar rallies. Inflation is theoretically a backward-looking statistic, and higher inflation means that the Fed has less perceived bandwidth to ease; therefore, future expectations of Fed easing decline on a higher inflation report, pushing the value of the dollar up.

It’s pretty interesting that that didn’t happen this time. The USD is kissing $1.49 per euro, very close to its all-time low.

Yesterday, Frederic Mishkin — whom the market sees as a clone of Bernanke — maintained his delusion that “core” inflation should remain the focus of Fed targeting. Damn the inflation, full steam ahead.

Inflation expectations officially became unmoored today, if they weren’t already.

Analogously, on Monday, S&P and Moody’s maintaind the charade of AAA ratings for MBIA and Ambac.

NEW YORK (Standard & Poor’s) Feb. 25, 2008-Standard & Poor’s Ratings Services today took rating actions on several monoline bond insurers following additional stress tests with respect to their domestic nonprime mortgage exposure.

The financial strength ratings on XL Capital Assurance Inc. (XLCA) and XL Financial Assurance Ltd. (XLFA) were lowered to ‘A-‘ from ‘AAA’ and remain on CreditWatch with negative implications;

The financial strength rating on Financial Guaranty Insurance Co. (FGIC) was lowered to ‘A’ from ‘AA’ and remains on CreditWatch with developing implications;

The ‘AAA’ financial strength rating on MBIA Insurance Corp. was removed from CreditWatch and a negative outlook was assigned;

The ‘AAA’ financial strength rating on Ambac Assurance Corp. was affirmed and remains on CreditWatch with negative implications; and

The ‘AAA’ financial strength ratings on CIFG Guaranty, CIFG Europe, and CIFG Assurance North America Inc. were affirmed and retain a negative outlook.

The downgrades on XLCA, XLFA, XL Capital Assurance (UK) Ltd., and Twin Reefs Pass-Through Trust (a committed capital facility supported by, and for the benefit of, XLFA) reflect our assessment that the company’s evolving capital
plan has meaningful execution and timing risk.

The downgrades on FGIC, FGIC Corp., and Grand Central Capital Trusts I-VI (a committed capital facility supported by, and for the benefit of, FGIC) reflect
our current assessment of potential losses, which is higher than previous estimates.

The removal from CreditWatch of, and assignment of negative outlooks on, MBIA Insurance Corp., MBIA Inc., and North Castle Custodial Trusts I-VIII (a committed capital facility supported by, and for the benefit of, MBIA) reflect MBIA’s success in accessing $2.6 billion of additional claims-paying resources, which, in our view, is a strong statement of management’s ability to address the concerns relating to the capital adequacy of the company.

My guess is that both monolines dumped a lot of their CDO garbage into the Fed Term Auction Facility or the FHLBs again (i.e., the taxpayer), using this bailout smokescreen. It’s ludicrous that $3 billion, and a canceled dividend by MBIA, will salvage the monoline business model. They got more help from somewhere.

The ‘political’ solution is to cannibalize the little monolines and consolidate them under MBIA and Ambac, I guess. But a political solution is, almost by definition, a long-term problem. In the short term, it’s inflationary: either Uncle Sam just swapped short-term debt guarantees in exchange for CDO garbage — printing money, effectively — or this will crap out.

Either way, precious metals are the place to be right now.

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More grist for us bears.

Mike Burgur returned from work last month to interrupt a break-in at his rented Clearwater Beach condominium.

The intruders were stripping fans off the ceiling and the knobs off the doors. They had carted out the refrigerator and yanked up a toilet. They’d even pulled the plates off electrical outlets and unscrewed the faucet handles.

As he stepped around the broken eggs and jelly jars on the kitchen floor, Burgur had no trouble recognizing the culprit: It was his own landlady.

“I’m going to strip this mother,” the 70-ish property owner raved to Burgur, as she ripped apart the 950-square-foot unit on Island Way.

Welcome to a dark corner of the foreclosure business: People who lose their homes to foreclosure and in a pique of revenge strip the homes before the bank takes them back.

Local experts estimate such borderline looting occurs in roughly 20 percent of bank repossessions. But foreclosures are such an explosive growth industry in the Tampa Bay area – hundreds of properties enter the mortgage default pipeline each month – that home stripping affects scores of properties.

“She even took my shower rod and coffee pot,” Burgur said of his landlady, who hadn’t paid her mortgage in full for more than a year before the bank seized the $300,000 condo in January.

The law is a bit foggy on the difference between personal property that is portable and real property that is not. Is the stained glass window you installed in the bathroom your personal property or does it stay with the house? The same goes for built-in book shelves, curtain rods and your grandmother’s antique chandelier.

“That’s like saying that when a bank takes back your car, you’ll go back and take the speakers out of it,” said Miami-based banking expert Ken Thomas. “The house was never yours. You had a mortgage on it.”

But there’s no denying that many strip jobs are deliberately destructive. Witness this single-story beige stucco house in St. Petersburg’s Northeast Park neighborhood. The old owner bought the house near the peak of the market in 2005 for $152,800 and couldn’t make the payments.

Neighbors were shocked last month when, as the bank zeroed in on the house, the former owner leased a Bobcat excavator and uprooted the wooden privacy fence and five palm trees. Postholes still litter the yard.

That wasn’t the end of it. The ex-owner dismantled and removed the garage door and the double French doors in the rear, leaving the home exposed to the elements. A piece of plywood now covers the gap in the back.

That’s what happens when you give a house to somebody for free.

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From Merrill Lynch forecaster-in-chief David Rosenberg’s morning memo:

“… New York Times article by Louis Uchitelle in December 1990 on the housing and credit crunch. In the article, there is a quote that goes like this –

“This is different from the experience of the Great Depression, but something related to the 1930’s is beginning to happen”.

Guess who it was that said that…

“Ben Bernanke, a Princeton University Economist”

Is there a single “adverse feedback loop” that Bernanke didn’t think was the beginning of the next Great Depression?

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Any enviros want to refresh me on how well the 2007-8 temperature forecasts of Pope Al and the cardinals of climatology stacked up to reality?



Snow cover over North America and much of Siberia, Mongolia and China is greater than at any time since 1966.The U.S. National Climatic Data Center (NCDC) reported that many American cities and towns suffered record cold temperatures in January and early February. According to the NCDC, the average temperature in January “was -0.3 F cooler than the 1901-2000 (20th century) average.”China is surviving its most brutal winter in a century. Temperatures in the normally balmy south were so low for so long that some middle-sized cities went days and even weeks without electricity because once power lines had toppled it was too cold or too icy to repair them.There have been so many snow and ice storms in Ontario and Quebec in the past two months that the real estate market has felt the pinch as home buyers have stayed home rather than venturing out looking for new houses.In just the first two weeks of February, Toronto received 70 cm of snow, smashing the record of 66.6 cm for the entire month set back in the pre-SUV, pre-Kyoto, pre-carbon footprint days of 1950.And remember the Arctic Sea ice? The ice we were told so hysterically last fall had melted to its “lowest levels on record? Never mind that those records only date back as far as 1972 and that there is anthropological and geological evidence of much greater melts in the past.

The ice is back.

Gilles Langis, a senior forecaster with the Canadian Ice Service in Ottawa, says the Arctic winter has been so severe the ice has not only recovered, it is actually 10 to 20 cm thicker in many places than at this time last year. …

According to Robert Toggweiler of the Geophysical Fluid Dynamics Laboratory at Princeton University and Joellen Russell, assistant professor of biogeochemical dynamics at the University of Arizona — two prominent climate modellers — the computer models that show polar ice-melt cooling the oceans, stopping the circulation of warm equatorial water to northern latitudes and triggering another Ice Age (a la the movie The Day After Tomorrow) are all wrong.

“We missed what was right in front of our eyes,” says Prof. Russell. It’s not ice melt but rather wind circulation that drives ocean currents northward from the tropics. Climate models until now have not properly accounted for the wind’s effects on ocean circulation, so researchers have compensated by over-emphasizing the role of manmade warming on polar ice melt.

But when Profs. Toggweiler and Russell rejigged their model to include the 40-year cycle of winds away from the equator (then back towards it again), the role of ocean currents bringing warm southern waters to the north was obvious in the current Arctic warming.

Last month, Oleg Sorokhtin, a fellow of the Russian Academy of Natural Sciences, shrugged off manmade climate change as “a drop in the bucket.” Showing that solar activity has entered an inactive phase, Prof. Sorokhtin advised people to “stock up on fur coats.”

He is not alone. Kenneth Tapping of our own National Research Council, who oversees a giant radio telescope focused on the sun, is convinced we are in for a long period of severely cold weather if sunspot activity does not pick up soon. …

Talk about being “anti-science” — I don’t care how sophisticated the climatologists’ quantitative models are. Calling climatology “science” insults science. A Roman priest forecasting weather with pig entrails would be a more reliable forecaster than climatological models.

Of course, both Beltway candidates, and the entire infrastructure of 2008’s favored party, have invested man-eons evangelizing this religion. The Beltway’s capacity as wealth-destroying contrary indicator stands unrivalled.

I still want to know the gas mileage of a Prius going 100 mph.

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The antideflationist occult reigns sadly supreme chez Trichet … and has hamstrung the hesitant hawk in Mervyn King:

Lloyds accesses European Central Bank funding

By Jonathan Sibun and Philip Aldrick

Last Updated: 10:30am GMT 25/02/2008

Investment banks are secretly profiting from emergency European Central Bank funding by acting as brokers to funnel billions of euros of much needed liquidity to Britain’s banks and building societies.

UK lenders with no operations in Europe are particularly at risk of funding problems because they have been struggling to access central bank money.

While the ECB has pumped more than $500bn (£254bn) into the wholesale funding markets, dropped its penal rate and widened the collateral it accepts as security, the Bank of England has injected just £20bn.

In what one executive said was a way of “levelling the playing field” for those without access to eurozone funding, investment banks are acting as go-betweens to provide smaller UK lenders with ECB access.

Lloyds TSB chief executive Eric Daniels last week confirmed the bank, which has a European presence, had used the ECB to “fund at the best rate we can”. Other UK banks such as Barclays, Royal Bank of Scotland and HBOS are thought to have made similar moves.

For those without a European presence, the funding works in two stages. First, the UK domestic lender parcels up assets and pledges them to investment banks in return for liquidity. Those investment banks can then pledge the assets on to the ECB, which becomes the ultimate funding source.

The investment banks make their money by charging a higher rate of interest than the ECB.

Alliance & Leicester demonstrated the scale of the opportunity last week, revealing it paid £150m to secure funding through to 2009 in what finance director Chris Rhodes labelled “the cost of the credit crunch”.

A&L has securitised £17bn of its mortgage assets in two vehicles, pledging “a material proportion” as collateral against new facilities. It is not clear if the investment banks have exchanged the pledges for funds at the ECB but it is understood that A&L’s collateral would be acceptable once restructured.

Building societies are also likely to be using the facility. One banker said: “If you were a UK lender and you had assets against which you could draw down funds, why wouldn’t you do it?”

Bankers said the fact that UK lenders were having to access the ECB through the back door exposed failures at the Bank of England.[ha]

I continue to be mystified by the “incipient deflation” argument, articulated most concisely by Mish Shedlock. Basically, the money supply (MV) is going down because, they argue, although the Fed is clocking up M, M is still not rising by nearly as much as V is falling. Remember Japan? they say. V went to practically zero even though the BOJ exploded M. And the result was (gasp) deflation.

Every iteration I’ve seen of this argument as applied to today’s circumstances leaves out several relevant facts.

1) No mention of the FHLBs, about which I have already orated ad nauseam.

2) Why did V continue falling after the Japanese went to zero percent interest rates? Because the Japanese reacted rationally to the exploding negative interest rate differential between Japan and the world: they parked their money in higher-yielding economies. This further aggravated the collapse in V, demanding more M, etc.

The Japanese tried to repeal deflation. They institutionalized massively higher domestic asset prices and a lower quality of life for people who did not have the opportunity to take their capital abroad (children and the poor). None of it showed up in CPI, because CPI had ignored the asset price inflation from 1975-89. “Deflation” relative to massive previous inflation is unpleasant but necessary, inevitable, and healthy over the long term, if policymakers shelve their arrogance and allow it to occur.

The mutually reinforcing cycle of an artificially cheap currency; lending leveraged on asset price inflation; and still greater subsequent trade surpluses, was the undoing of Japan in 1989/91, of the United States in 1929, and will be the undoing of China at some point. Because you must be doing things right if you are the world’s biggest creditor and exporter, right? Certainly the ridiculous asset valuations were justified?


The currency appreciates dramatically to its true market price, and internal liabilities explode relative to external assets. The banks, which own external assets and lend to companies, blow up, although not before calling in massive amounts of internal loans, in a last-ditch attempt to rebalance.

How many times do we have to go through this?

“Deflation” is not the enemy!

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Satyajit Das:

Trompe L’oeil Markets

Emerging market equities, especially the Shanghai and Mumbai markets, have decoupled. Bizarrely, they “de-couple” only if the US markets fall but “re-couple” if the US market goes up!

Increases are driven by substantial short-term capital flows fleeing developed markets and the US dollar. The assumption is that valuations and earning growth are sustainable. Some prices in India and China are reminiscent of the surreal valuations of the dot.com and (earlier) Japanese equity bubbles. The quality and performance of recent initial public offerings have been variable and (in some cases) poor.

Earnings quality is variable and sometimes questionable. Earnings growth has increasingly been driven by investment income – stock market and property speculation. In a strong market, this accentuates earnings as higher investment earnings feed increasing share prices in a virtuous cycle. In a falling market, this works in reverse accelerating losses.

Returns on capital investment are variable. Chinese state funded businesses with access to cheap funds are not earning investment returns anywhere near the cost of capital. Many projects are predicated on high, continued economic growth well into the future.

The Indian and Chinese stockmarkets are trompe-l’oeils – paintings designed to deceive the eye. They provide a dangerous illusion of a modern economy for foreign investors. Electronic trading, complex financial instruments and (at least in the case of China) gleaming glass and steel structures mask deep structural problems.

The markets are far from being free and transparent. There is a nagging suspicion that prices are prone to being influenced by insiders and their associates. In the case of China, most traded shares are in government enterprises that continue to be controlled by the State. Chinese shares aren’t even really shares as they don’t convey full ownership rights equally to all shareholders.

The Indian and Chinese markets have been driven by a number of initial public offerings generously priced to provide investors (themselves privileged insiders) with large gains. A few shares contribute disproportionately to market performance. The rise in India’s Sensex Index in late 2007 was driven by few stocks. This reflects the lack of liquidity in many stocks. In China, restrictions on foreign investments by domestic investors and the lack of investment alternatives has contributed to the sharp increase in the price of Chinese stocks. Borrowings by corporations and individual investors have been channeled into the stock market creating dangerous levels of leveraged exposure to share prices.

Both markets fall a long way short of true financial markets designed to channel savings to productive investments.

Decouplings and Recouplings

De-coupling assumes that emerging markets will not be significantly affected by a US slowdown. Emerging markets fortunes generally are tied to the vagaries of globalised trade. Exports account for one-third of Chinese economic growth and 10% of GDP. India is dependent on export growth. Russian and Brazilian growth depends on commodity demand and high commodity prices. 80% of Asian intra-regional trade is driven by demand for outside Asia. A slowdown in the USA and Europe will affect growth.

Europe has the added problem of a weak US dollar. EADS (Airbus’ parent) recently complained that the strong Euro placed the firm’s viability in question – the plane maker’s chief executive used the phrase “life-threatening”.

Belief that domestic consumption can take over from exports as the growth engine in emerging markets is untested. Any Xie (a former Morgan Stanley economist writing in the South China Morning Post) speculated recently that: “In China, people make money to, well, make money. Happiness comes primarily from counting the money, not spending it.” The total number of the mythical middle class consumers in emerging markets that obsesses Western analysts is probably exaggerated.

India and China also face infrastructure constraints. Shortages of educated and skilled workers are forcing up labour costs rapidly. Essential infrastructure gaps like transport and power in India will take years to correct. Inflation from imports (energy and commodity costs) and rising domestic costs is driving local currency interest rates up. In China, concern about speculative bubbles driven by debt has led the central bank to both increase interest rates but also limit lending. This may choke off growth. A widening interest rate differential against the US dollar also causes currency appreciation attracting capital flows whilst reducing local currency earnings of exporters.

There are feedback loops. Corporate earning growth in developed countries assumes an increased contribution from sales to rapidly growing emerging markets, just look at the Boeing and Airbus projections. Any slowdown in emerging markets will in turn hit corporate earning in the USA, Europe and elsewhere. Commodity prices and the fortunes of commodity producers are underpinned by the emerging market growth story. In an origami moment, the “flat world” actually folds back on itself.

Some emerging markets are also dependent upon foreign capital. For example, India is running a trade deficit of around 10% of GDP and a budget deficit of around 3%. This must be financed. To date, this has been financed by foreign capital – both portfolio investments and foreign direct investment. Changes in global financing conditions may adversely affect India and its growth prospects.

The additional risks of emerging market investments are also not properly priced. Enforceability of property rights, good corporate governance, equal access to timely, accurate financial information, corruption and political risks are being ignored.

China’s Shanghai market is down about 20% off its recent highs. In late 2007, the Indian market recorded an intra-day move of around 14 % (8% down followed by 6% up) when regulations regarding foreign investment were mooted. Such volatility is de-stabilising.

Tellingly, savvy and well connected investors from Singapore (GSIC and Temasek Holdings (a government controlled investment fund)) are steadily divesting from China and switching to other assets including distressed bank stocks in Europe and the USA.

Narrative Fallacies…

The risks of the new investment orthodoxy are high and largely ignored. As Keynes observed: “It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree when we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

I knew India’s trade deficit was pretty high, but I didn’t know it was 10 percent of GDP …

India has excellent “long long-run” prospects, but for now, it’s probably at least as overbought as China is.

China’s growth hurdles aren’t going to come from Beijing’s monetary tightening, because Beijing isn’t tightening at all. Even if it did, the provinces would ignore the directive (you could argue that that’s exactly what they’re doing now). Michael Pettis, channeling Victor Shih, has already informed us that the PBOC’s “loan curbs” have been a joke.

Not to dump on Das too much, but he is committing the typical Western error of believing that because Beijing made a pledge about something, they will therefore follow through on that pledge to a significant extent. Beijing does not have the ability to curb lending, because the provincial Chinese elites are even more addicted to cheap credit than Beijing is. China is trying to one-up Japan for the dubious mantle of “greatest asset price deflation of the past 100 years.”

China‘s Credit Boom



The rest of the global economy may be experiencing a credit crunch, but not China, where easy credit has fueled a spectacular run-up in real estate prices and stock markets. Despite a cascade of State Council decrees restricting bank lending this year and a high-profile Politburo meeting in November that focused on the risk of inflation, bank lending last month grew by over 800 billion renminbi ($112 billion) — equivalent to 22% of the total loan quota that Beijing’s technocrats meted out to state-owned banks for 2008.



This rate of credit expansion is similar to the rate last seen in the second quarter of last year, when China’s economy grew by nearly 12% from a year earlier. And it comes just as the Party is trying to ratchet down inflation, which in January hit 7.1% year-on-year on consumer prices.



Technical factors don’t fully explain why the monetary base grew with such fervor in January. The lunar new year holiday took place earlier this year than usual, driving up demand for cash. However, new year cash spending usually means withdrawing one’s savings, not borrowing from banks. A severe winter snow storm forced the central government to release tens of billions of renminbi in funds to pay for emergency spending. But this amount would be a blip in the Chinese monetary landscape, which runs into the trillions of renminbi in a given quarter.



More convincingly, major borrowers are pressuring banks to lend out as much of the credit quota as possible. Companies want to take advantage of low real interest rates and lock in cheap cash for the remainder of the year. Although large firms, many of which are powerful state-owned entities, are undoubtedly exerting pressure on banks, State Council loan ceilings precisely seek to minimize the effect of firm pressure by coordinating all banks simultaneously to cut back on lending. However, bankers called the technocrats’ bluff and proceeded to lend with gusto. In effect, they are daring Beijing technocrats to enforce the credit ceiling and risk a widespread liquidity shortage in the latter part of the year.



This is an unusual game of chicken. China’s major banks, all of which are majority state-owned and run by managers appointed by the Communist Party, are simply ignoring decrees issued by the highest authorities.. In a state-dominated banking system, this is as unexpected as mid-level managers blatantly acting against the wishes of both the CEO and the board of directors. Formally the technocrats have the full backing of the ruling Communist Party and can dismiss any banker at any time. However, senior state bankers do not behave as if they take the threat of removal seriously. They’ve stared down such threats before, anyway — in China, elite political discord has often compelled banks to disobey formal decrees.



Politics may be at work here. First, the increasingly vocal National People’s Congress, China’s rubber-stamp legislature, is slated to open its new session at the beginning of March. Many top technocrats, including central bank governor Zhou Xiaochuan, will receive new appointments. Others will simply be reappointed to their posts. Thus, technocrats may hesitate to enforce loan ceilings because they do not want to anger regional and industrial lobbies represented in the NPC that want easy credit. But although the NPC formally votes to appoint ministers, in reality, their appointments are decided by the Politburo Standing Committee — the same body that voted to support retrenchment policies in November. Thus, the technocrats should not feel threatened by the NPC, even though the NPC may not prefer retrenchment.



There are plentiful historical precedents for these kinds of politically driven loan surges. In the 1980s and ’90s, feuding elite factions cheered their provincial followers to borrow heavily from the banks. Banks, knowing that elite politicians in the Communist Party’s Politburo supported loose lending, felt they had little choice but to open the monetary spigot. Likewise, because the technocrats knew that banks were lending due to elite political pressure, they could do little to punish banks. Both the technocrats and the banks served the same master — the political elite in the Communist Party. This often led to serious inflation trouble until the faction with the most to lose from an economic crisis decided to support senior technocrats and crack down on lending, thus ending loose lending policy and stifling inflation.



Something similar may be happening today. When faced with rising inflation late last year, President Hu Jintao decided to support Premier Wen Jiabao’s retrenchment policies. There were signs, however, that not every member of the ruling Politburo Standing Committee agreed with retrenchment policies. Days before the November meeting, for instance, Premier Wen announced on a trip to Singapore that lowering asset prices was a high priority. Yet, the Politburo meeting did not endorse this policy goal, strongly suggesting that some members of the top elite opposed it.



The most likely opponents of strict monetary policies are powerful “princeling” officials — children of the Communist Party’s founders — who have close connections with economic interests in China’s big coastal cities. Some of these interests, which include manufacturers and real estate developers, have suffered from the tight monetary environment. Detecting elite discord on retrenchment policies, bankers are then emboldened to disregard central decrees, betting that their elite supporters would protect them from the wrath of the technocrats.



The Chinese government needs to continue monetary tightening by raising interest rates and the bank’s reserve requirements. Furthermore, Messrs. Hu and Wen need to overcome internal opposition and make it clear to bankers that flouting central decrees begets serious consequences, including dismissal. Otherwise, they risk allowing inflation to spiral toward dangerous levels. In the opaque Chinese political system, strong signals, in addition to decrees and laws, continue to be necessary ingredients of credible policies.

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Hans-Hermann Hoppe couldn’t have stated it any better.

Although a quiet, reflective man, the prince decided to take a rare public stand. Accused of aiding and abetting tax fraud – the banking principality does not recognise it as a criminal offence [where do I apply for citizenship?–ed] – he shot back that Germany had “trafficked in stolen goods.”

In an apparent allusion to Germany’s belligerent history last century, he added it “still” did not know how to treat friendly nations and obviously placed “fiscal interests above the rule of law”. If it were a more direct democracy with a better tax system perhaps its citizens would not cheat, he suggested.

Liechtenstein’s critics suddenly had to consider that the pocket state, wedged between the Rhine river and an Alpine precipice, might be not only of Lilliputian geopolitical clout but also Brobdingnagian media savvy. They were stunned by the attack.

“Totally out of order,” said Kurt Beck, leader of the Social Democrats, a junior partner in the German coalition government; “rogue state” muttered a senior Berlin lawmaker.

In Liechtenstein, however, Prince Alois was swept up on a wave of adulation. “It was sensational, what he said,” enthused Maria-Loreto Corbi, an assistant in a tobacconist in the pedestrian shopping area of the capital, Vaduz. “We all feel he said what needed to be said. I see much more of his father [Prince Hans-Adam II] because he buys his cigars here. But what I have seen of the prince, I’d say he was quiet and intelligent and maybe this was his way of proving to his people: I am ready to rule.”

Although governed by an elected parliament, this 160sq km country is home to the Liechtenstein dynasty, one of the oldest noble families with a lineage tracing back to the 12th century. The family watches over its 35,000 subjects from a mountainside castle in Vaduz, which it has owned since 1712.

Sure, the FT is dramatizing things, but it’s still good fare as European food fights go.

In the long run, free trade and government power are mutually exclusive. Germany is hemorrhaging tax revenue to tax-avoidance fiefdoms. The same legislators who drilled so many loopholes into the German tax code are now calling for economic jihad against Liechtenstein to punish it for “stealing” “German” money.

Of course, the large democracies could moot the entire issue by simplifying their tax codes. But how could the legal and political class make such a comfortable living, if not by selling opportunities for tax avoidance?

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It was all quiet on the information front today, even if you include all the hullabaloo over the proposed Ambac bailout.

Ambac Rescue by Banks May Be Announced Next Week, Person Says
By Erik Holm and Bryan Keogh

Feb. 22 (Bloomberg) — Ambac Financial Group Inc., the bond insurer in rescue talks with banks, may announce an agreement early next week that would save its AAA credit rating and avoid losses on $566 billion of debt, according to a person familiar with the discussions.

Banks may invest about $3 billion in the company, said the person, who declined to be named because no details have been set. The New York-based company rose 16 percent in New York Stock Exchange trading today after CNBC Television said Ambac and its banks were preparing to announce a deal.

“Everything is being considered,” Ambac spokeswoman Vandana Sharma said in a telephone interview. “These are complicated things. We hope to have something shortly.” She wouldn’t discuss any specific plans.

A rescue that enabled Ambac to retain its AAA rating for the municipal and asset-backed securities guaranty units would help banks and municipal debt investors avoid losses on securities it guarantees. Banks stood to lose as much as $70 billion if the top-rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated.

“It’s been on the table for a while and if it happens it will certainly be a good thing for any bond insurer that gets a capital infusion,” said Donald Light, a senior analyst covering insurance at Celent, a consulting firm in Boston.

Eight Banks

Eight banks including Citigroup Inc. and UBS AG formed a group to consider providing financing, a person familiar with the matter said earlier this month. Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG, were also involved, said the person, who declined to be named because details hadn’t been set.

Spokespeople for Citigroup, UBS, Wachovia and BNP declined to comment on the rescue plans. Spokespeople for RBS, Barclays, Societe Generale and Dresdner didn’t immediately return e-mails or calls seeking comment.

Ambac, down 88 percent in the past year, jumped $1.48 to $10.71 in New York trading. Ambac is also considering raising money from shareholders, the Financial Times reported.

Credit-default swaps tied to Ambac’s bond-insurance unit fell 5 basis points to 406 basis points, according to CMA Datavision in London.

The Ambac CDS barely budged, then. That’s the market’s reaction to the news — a shrug.

Any bailout consortium led by Citigroup is automatically lacking in credibility. Remember, as of the end of Q407, Citigroup had borrowed $98 billion from the FHLBs alone — and almost certainly tens of billions more from the Term Auction Facility. This is a bank with a market capitalization of $140 billion. In other words, Citigroup’s obligations to the government are roughly equal to its market capitalization. More honest media would consider Citigroup nationalized.

Furthermore, the monoline business model is dead. All of these companies are headed for some muddle-through between bankruptcy and government bailout. And “government bailout” includes what Citigroup is doing — swapping garbage debt for Federal Reserve cash, and then extending it to a very exposed monoline (Ambac) to prevent an Ambac collapse, which would in turn force even more liquidations by Citigroup and the other banks involved. It’s a circular game by a whole bunch of very weak players, which is impossible without somebody on the outside (the Fed) paying for it.

My attitude on all of these bailouts is that they are political processes, which means I’m going to be far too late to the game to act on the information; therefore, I will let other people play those odds.

The interesting thing to be gleaned from this story is that RBS and Barclays are part of the bailout consortium. They have put on a very brave face so far, and kept their notional losses to a minimum. I suspect they will have a lot more losses if a monoline blows up or splits up. The banks are terrified of a split, because they have bought lots of insurance for CDO-type products which would be part of the “junk half” of any monoline split. In other words, the banks’ insurance would become worthless, and they would have to fire-sell again. Then they’d have to fire-sell more assets just to stay within their capital requirements. I don’t see any way out for the banks which doesn’t involve massive further dollar debasement (yet another reason to be long gold).

Fitch at least has stated that a further token infusion into any of the monolines will probably not matter insofar as how much Fitch docks their ratings. It’s the sensible attitude to take.

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The Pension Benefit Guaranty Corporation, the bleeding behemoth charged with insuring against shortfalls in private-sector pension plans, is moving massively into equities to help meet a $14 billion shortfall.

From a flow perspective, the shift would be large enough to
alter prices if the reallocation took place in a compressed
time frame. At the end of September, the fixed income
percentage of the portfolio was 72%, so a cut to 45% would
be a $14.9bn shift from long duration fixed income to
equities and alternative investments. On the equity side, we
are unsure of the current PBGC breakdown between US,
non-US developed market, and emerging market equities.
Nonetheless, it would appear that non-US and emerging
market equities will be larger beneficiaries than US equities.

The more important impact, however, is the powerful
signaling effect from this change. The PBGC was a visible
early adopter of an LDI investment approach. In 2004, they
shifted their investment mix to try to match the dollar
duration of their portfolio with the dollar duration of their
expected liability stream. Since then, many private pension
funds have followed in their footsteps, shifting their fixed
income benchmark from the intermediate duration Lehman
Aggregate to a long duration benchmark. …

This could greenlight smaller pension fund shifts into the “losers’ game” of chasing impossibly-higher returns by moving from fixed income into equities.

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It’s hard to find a group of people who are so wrong, so often, given the time and money investment they have made in themselves, as academic economics.

Marty Feldstein has been one of my favorite targets, along with Ben Bernanke and Larry Summers. His proposed “remedies” for the current “crisis” (i.e.: cut! cut! cut!)  have been oblivious, shortsighted and dangerous. Without so much as admitting the failure of his prior advice, Feldstein now admits that the Fed is intertemporally powerless, and rationing credit is, indeed, the policy equivalent of “pushing on a string.”

If a recession does occur, it could last longer and be more painful than the past several downturns because of differences in its origin and character. The recessions that began in 1991 and 2001 lasted only eight months from the start of the downturn until the beginning of the recovery. Even the deeper recession of 1981 lasted only 16 months.

But these past recessions were caused by deliberate Federal Reserve policy aimed at reversing a rise in inflation. In those cases, the Fed increased real interest rates until it saw the economic slowdown that it thought would move us back toward price stability. It then reversed course, reducing interest rates and bringing the recession to an end.

In contrast, the real interest rate in 2006 and 2007 stayed at a relatively low level of less than 3%. A key cause of the present slowdown and potential recession was not a tightening of monetary policy but the bursting of the house-price bubble after six years of exceptionally rapid house-price increases. The Fed therefore will not be able to end the recession as it did previous ones by turning off a tight monetary policy.

The unprecedented national fall in house prices is reducing household wealth and therefore consumer spending. House prices are down 10% from the 2006 high and are likely to fall at least another 10%. Each 10% decline cuts household wealth by about $2 trillion, and this eventually reduces annual consumer spending by about $100 billion. No one can predict the extent to which the coming fall in house prices will lead to defaults and foreclosures, driving house prices and wealth down even further. Falling house prices also discourage home building, with housing starts down 38% over the past 12 months.

But the principle cause for concern today is the paralysis of the credit markets. Credit is always key to the expansion of the economy. The collapse of confidence in credit markets is now preventing that necessary extension of credit. The decline of credit creation includes not only the banks but also the bond markets, hedge funds, insurance companies and mutual funds. Securitization, leveraged buyouts and credit insurance have also atrophied.

The dysfunctional character of the credit markets means that a Fed policy of reducing interest rates cannot be as effective in stimulating the economy as it has been in the past. Monetary policy may simply lack traction in the current credit environment.

Six months ago, Feldstein was pounding the table for a Fed cut from 5.25 percent to 3 percent, which is indisputably in negative-real-rate territory. Like GaveKal and every other permabull who was caught swimming naked when the tide of free-lunch liquidity ebbed, he declared with near-total certainty that CPI would come down as the economy slowed.

It must be nice, being a professional economist. You can continue writing prescriptions regardless of how much snake oil you prescribed the day before.

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Klaus Baader was one of the professional forecasters who defied conventional wisdom in 2006 and predicted that Trichet would continue raising interest rates, despite mounting political pressure.

He was proven correct then. Now he is going against the grain again, saying that Trichet will not cut rates, i.e., the euro is too cheap at the moment.

Trichet is in an impossibly complex spot right now, particularly after Kosovo’s secession from Serbia. Kosovo has already threatened to disturb a hornet’s nest of secessionist movements throughout Europe, the strongest of which are in Belgium, northern Italy, and Hungarian nationalists in Serbia and Slovakia. The lower interest rates are, the more economic laggards are subsidized at the expense of the wealthy powers, and the weaker secessionist influences are.

Feb. 21 (Bloomberg) — Financial markets have it wrong: Jean-Claude Trichet isn’t about to cut interest rates, according to the Merrill Lynch & Co. economist who defied conventional wisdom by correctly predicting the European Central Bank president’s course two years ago.

Klaus Baader, Merrill’s London-based chief European economist, said he doesn’t expect Trichet to lower borrowing costs this year. His view, shared by economists at Goldman Sachs Group Inc., ABN Amro Holding NV and Morgan Stanley, conflicts with the opinion of most investors and economists that the bank will reduce its key rate from 4 percent.

“The gap between market expectations and the ECB’s thinking is unusually wide,” said Baader, who two years ago bucked the consensus by forecasting accurately that Trichet would keep increasing borrowing costs. “The inflation outlook is too strong for rate cuts.”

Investors increased bets on a cut after Trichet on Feb. 7 withdrew a threat to raise rates and expressed concern that the outlook for growth had deteriorated. The yield on interest-rate contracts maturing in December is at 3.64 percent, down from 4.18 percent at the start of the year.

Baader’s view that the bank will keep rates higher than anticipated amounts to a bet that inflation, currently above the bank’s target, will remain Trichet’s chief concern, and that a U.S. slowdown won’t derail Europe’s economic expansion as it did in 2001.

Reversing Bets

If he and the other contrarians are right, investors will have to reverse their recent wagers that Trichet will cut rates by selling two-year government bonds or buying the euro.

Europe’s pace of growth halved in the fourth quarter to 0.4 percent, while retail sales and industrial production fell in December. UBS AG predicts the ECB will lower its key rate by a percentage point to 3 percent this year.

“We now have the economic circumstances in place for the ECB to embark upon easing,” said Julian Callow, chief European economist at Barclays Capital, who expects two reductions after starting the year forecasting none.

Erik Nielsen, Goldman Sachs’s chief European economist, disagrees. He said the ECB’s primary mandate is to preserve price stability, so it has no room to follow the Federal Reserve and the Bank of England, even as economic growth weakens. The Fed slashed its main rate by 1.25 percentage points last month, and the Bank of England cut its benchmark by a quarter point Feb. 7 for the second time in three months.


“Inflation and expectations for it are a hurdle for a cut,” Nielsen said. “Inflation is very stubborn” in Europe.

The annual pace of consumer-price increases in the euro region accelerated to a 14-year high of 3.2 percent in January, pushed above the ECB’s 2 percent limit for a fifth month by food and energy costs. Inflation in France, the euro-area’s second largest economy, accelerated in January to the fastest pace in at least 12 years, according to data released today.

Labor unions are demanding higher wages, and companies may compensate by boosting prices. IG Metall, Germany’s biggest union, yesterday won a 5.2 percent raise for steel workers at companies including Dusseldorf-based ThyssenKrupp AG, Germany’s largest steelmaker.

Commission Forecasts

The Brussels-based European Commission today highlighted the ECB’s dilemma by cutting its forecast for growth in the euro-area this year to 1.8 percent from 2.2 percent, while increasing its prediction for inflation to 2.6 percent from 2.1 percent.

History also suggests the ECB probably won’t act soon. While the bank reduced rates in 2001, even when inflation was above its target, inflation expectations, business confidence and money-supply growth were all lower than they are today, said Elga Bartsch, a Morgan Stanley economist. The ECB’s benchmark rate was also higher, at 4.75 percent.

“The data will likely deteriorate in the coming months, but it will need to cover some distance before it resembles 2001,” Bartsch said. She expects the ECB to raise rates next year.

The contrarians acknowledge risks to their forecasts. Data to be released tomorrow will show services and manufacturing industries close to contraction, according to the median estimate of economists surveyed by Bloomberg News.

`High Uncertainty’

Still, Baader and Nielsen said the ECB would have to cut its 2008 growth forecast next month to about 1.5 percent from 2 percent for them to rethink their stance.

While Trichet acknowledged on Feb. 7 “unusually high uncertainty” about growth, he also noted “upside” inflation risks. Bundesbank President Axel Weber and ECB Vice President Lucas Papademos have said since then that rate-cut expectations may be misguided.

“Market expectations for cuts are overdone,” said Nick Kounis, an economist at Fortis Bank NV in Amsterdam, who also expects the ECB to keep rates on hold this year. “Trichet was starting to move away from a tightening bias and is no longer set to raise rates, but in no way is he ready to move to an easing bias and cut rates.”

Record-low unemployment and increased spending by German consumers mean economic growth will “remain fairly solid in 2008, and even if it falls somewhat below trend, this won’t prompt ECB rate cuts,” said Dario Perkins, ABN Amro’s senior European economist in London.

Comparisons to 2006

Baader, 45, sees some similarities to 2006. At the start of that year, he predicted the ECB would push its benchmark rate, then 2.25 percent, to 3.5 percent by yearend, at a time when the median forecast among economists surveyed by Bloomberg News was for a smaller increase, to 2.75 percent. In December of that year, just as he predicted, the rate hit 3.5 percent.

This year as in 2006, the ECB will pay more attention than investors realize to its so-called monetary pillar, which uses money-supply growth as an early indicator of inflation, Baader said. On that score, he sees no “concrete evidence” that banks are reducing lending, with loans to the private nonbank sector growing 8.2 percent in November and 7.1 percent in December.

Does that last paragraph sound familiar? This is what I’ve been saying for a while with regards to USD lending …

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