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Archive for the ‘dollar’ Category

It has been abundantly obvious from day one that Ben Bernanke has no understanding of “liquidity” — whatsoever.

Only 2 months (?) after Bernanke helicoptered $122 billion to AIG, AIG has come cap in hand to Uncle Sam with a down face and a confession: “The money’s all gone.” AIG supposedly wants $200 billion in new money.

AIG in talks with Fed over new bail-out

By Francesco Guerrera in New York

Published: November 8 2008 02:00 | Last updated: November 8 2008 02:00

AIG is asking the US government for a new bail-out less than two months after the Federal Reserve came to the rescue of the stricken insurer with an $85bn loan, according to people close to the situation.

AIG’s executives were last night locked in negotiations with the authorities over a plan that could involve a debt-for-equity swap and the government’s purchase of troubled mortgage-backed securities from the insurer.

People close to the talks said the discussions were on-going and might still collapse, but added that AIG was pressing for a decision before it reports third-quarter results on Monday.

AIG’s board is due to meet on Sunday to approve the results and discuss any new government plan, they added.

The moves come amid growing fears AIG might soon use up the $85bn cash infusion it received from the Fed in September, as well as an additional $37.5bn loan aimed at stemming a cash drain from the insurer’s securities lending unit.

AIG has drawn down more than $81bn of the combined $122.5bn facility. The company’s efforts to begin repaying it before the 2010 deadline have been hampered by its difficulties in selling assets amid the global financial turmoil.

AIG executives have complained to government officials that the interest rate on the initial loan – 8.5 per cent over the London Interbank Borrowing Rate – is crippling the company.

They compared the loan’s terms with the 5 per cent interest rate paid by the banks that recently sold preferred shares to the government.

One of AIG’s proposals to the Fed is to swap the loan, which gave the authorities an 80 per cent stake in the company, for preferred shares or a mixture of debt and equity.

Such a structure would reduce the interest rate to be paid by AIG and possibly the overall amount it has to repay. An extension in the term of the loan from the current two years to five years is also possible, according to people close to the situation.

The renegotiation of the loan could be accompanied by the government’s purchase of billions of dollars in mortgage-backed securities whose steep fall in value has been draining AIG cash reserves.

AIG is also proposing the government buy the bonds underlying its troubled portfolio of credit default swaps in exchange for the roughly $30bn in collateral the company holds against the assets.

Losses on the mortgage-backed assets, which were acquired by AIG with the proceeds of its securities lending programme, and the CDSs caused the company’s collapse.

Since the government rescue, they have continued to haunt AIG, which is required to put up extra capital every time the value of these assets falls. AIG and the Fed declined to comment.

Red staters get a lot of sh*t from their coastal cousins for being stupid. I will say one thing in red staters’ defense, though: it truly takes a blue coast, blue-blood stupidity to concoct such dangerous national policy as Bernanke’s.

It’s the kind of stupidity that only an Ivy League education can buy.

What is Bernanke going to do when he issues $2 trillion in Treasuries next year, and nobody buys?

All the people who thought they got a great deal when Pepsi priced its last bond at 7.5% are going to feel pretty damn stupid 12 months from now. Either that, or AAA corporates will have lower yields than Treasuries.

At the primary dealer desks, there is no net Asian sovereign demand for US sovereigns anymore.

Right now, Uncle Sam is printing the money and planning to float Treasuries “soon.” I am not exaggerating. It is the dirty secret that every FX macro desk at every major institution knows: the Treasury is printing now and issuing later.

In the ivory towers at Treasury and the Fed, “printed” money will be converted to Treasuries soon, because the Fed and Treasury (okay, just the Fed) think that there is an “irrational” “liquidity crisis”, which will abate any day now.

It won’t abate. It will get worse: all bond yields are based on Treasury yields. Treasury yields are definitely going up in the next year. All other yields (corporates … munis … ) will go up too.

That will be the real “credit crisis.” We are just mostly through the second act.

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Hello again.

I’m back. I am sorry for the unannounced absence.

(Work has been insane.)

I doubt I will be able to maintain my previous tempo of posts, but I should be able to post from time to time, from now on.

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Limits Put on Some Oil Contracts On ICE Amid Outcry Over Prices
By IAN TALLEY
June 17, 2008

WASHINGTON — The U.S. commodity futures regulator Tuesday said ICE
Futures Europe has agreed to make permanent position and
accountability limits for some of its U.S.-traded crude contracts,
subjecting itself to the same regulatory oversight as its New York
based counterpart.

Following intense scrutiny and censure by Congress over skyrocketing
oil prices, the U.S. Commodity Futures Trading Commission also said it
would require daily large trader reports, and similar position and
accountability limits from other foreign exchanges.

Many in Congress have criticized the agency for not doing enough to
rein in what they believe is rampant speculation contributing to
record energy prices and have pointed the finger in particular at
trading on IntercontinentalExchange’s ICE Futures Europe.

ICE and other foreign exchanges have been exempt from the many of the
rules that govern the New York Mercantile Exchange, which critics
charge has attracted a host of financial investors intent on pushing
prices higher. The new agreement, made in consultation with the U.K.’s
Financial Services Authority, will subject ICE to the same oversight
as Nymex.

“This combination of enhanced information data and additional market
controls will help the CFTC in its surveillance of its regulated
domestic exchanges,” while preserving the integrity of its
cross-border cooperation with other regulators, acting CFTC Chairman
Walter Lukken said in prepared testimony.

“We have not found a smoking gun… [but] we’re definitely taking
constructive steps to make sure the markets are working correctly, to
make sure there is not excessive speculation driving the markets,” Mr.
Lukken said.

Specifically, the agreement will require trader reports on positions
in the benchmark U.S. crude contract — the West Texas Intermediate
contract — traded on the ICE Futures exchange. The contract is linked
to the WTI contract on the regulated New York Mercantile Exchange.

ICE has 120 days to implement the new reporting requirements.

On the Nymex, where the majority of oil futures are traded, most
traders face accountability levels and position limits on their
positions in crude oil and other commodities. Accountability levels
are guidelines for trading in all futures contracts, while position
limits are hard-and-fast caps on the number of front-month contracts a
trader may hold in the last three days before the contract expires.

Traditionally, the U.K.’s FSA has had informal accountability levels
of 10,000 contracts in West Texas Intermediate crude, but no position
limits, an ICE spokeswoman said. The new CFTC rules will make ICE oil
trading consistent with practices on Nymex: a 3,000 contract position
limit in the last three days of trading, and a 20,000-contract
accountability level.

Lukken said the same oversight requirements would apply to the Dubai
Mercantile Exchange if it were to also offer the WTI contract.

The Nymex and DME have been mulling offering such a contract and will
decide in the next few months, said Nymex chief executive James
Newsome.

ICE Warns Oversight Won’t Lower Prices

The CFTC will incorporate the ICE data into its commitment of traders
report, a weekly report categorizing positions held by speculators and
companies that use futures contract to hedge against operations in the
physical energy market.

ICE said it would comply with the new regulations but warned tighter
oversight won’t lower oil prices.

“With a mere 15% market share of global WTI, on a futures equivalent
basis, we feel it is highly unlikely that the ICE Futures Europe’s WTI
market is the primary driver of WTI prices,” Charles Vice, ICE
president, told a special Senate committee exploring exploring
oversight and resources for the CFTC.

“Therefore, any expectation that WTI crude oil prices will fall as a
result of increased restrictions on this relatively small portion of
that market are likely to go unmet,” he said.

Jennifer Gordon, an analyst at Deutsche Bank in New York said the
greater regulatory oversight was driving volatility and leading to
less liquidity in the oil markets. “So whatever the CFTC is doing, it
is certainly scaring away the marginal player,” she said. Ms. Gordon
noted that the CFTC move was “adding to the bearish tone on crude,” in
Tuesday trading.

Oil prices climbed within shouting distance of $140 a barrel on Monday
before slipping towards $134.03 on Tuesday, down 58 cents. Prices are
still up about 40% so far this year.

The CFTC action follows rebuke by Congress, which has ratcheted up its
efforts to regulate oil-markets trading. Several of the most powerful
U.S. senators and representatives have introduced proposals that would
give more money and power to the agency.

In the past several weeks, the CFTC has announced a raft of
investigations and new initiatives targeting speculation, the role of
financial participants in current prices and the potential for market
manipulation. Mr. Lukken said the agency couldn’t rule out that market
manipulation was going on in the commodity markets.

The agency disclosed in late May that it is conducting a broad
investigation into practices surrounding the purchase, transportation,
storage and trading of crude oil and related derivative contracts.

Mr. Lukken said the agency was studying the impact of swaps deals and
index trading in the commodity markets and would report back to
Congress by Sept. 15.

The agency said the massive increase in commodity trading, the growing
complexity of the market and an aging CFTC workforce meant that it was
just about able to maintain a business status quo.

“This agency’s lack of funding over the course of many years has had a
negative impact on our staffing situation, rendering it unsustainable
for the long run,” Mr. Lukken said.

“Given our staffing numbers, the agency is working beyond its steady
state capacity and is unable to sustain the current situation for much
longer without being forced to make…choices about which critical
projects should be completed and which ones will be delayed,” the
acting chairman said in his testimony.

The agency is now requesting a 20% rise in its funding for the next
fiscal year to $157 million, from $130 million previously requested.

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From
June 13, 2008

Vietnam on brink of Thai baht-style currency crisis of 1997

Vietnam, until recently a poster child among emerging economies, is on the brink of a currency collapse, which would mirror the rout of the Thai baht that sparked the Asian crisis in 1997.

This week the State Bank of Vietnam effectively devalued the dong 2 per cent against the dollar, a move that analysts said was designed to head off a speculative attack on the embattled currency.

The move highlighted concerns that Vietnam, where consumer price inflation is running at more than 25 per cent, is poised to suffer an exodus of foreign-controlled capital.

The nation’s benchmark equities index has lost 60 per cent of its value since January, making it the world’s worst performing stock market. Vietnam’s trade deficit for the year to May, at $14.4 billion (£7.4 billion), exceeds the $12.4 billion shortfall for 2007.

Claire Innes, at Global Insight, said: “The weakening of the currency is principally aimed at preventing speculative attacks.”

Matthew Hildebrandt, an economist at JP Morgan, said the move “will embolden the view that Vietnam is on the verge of a [balance of payments] crisis and larger devaluation.”

On the streets of Vietnam’s cities, there has been growing disquiet over the fate of the dong. Vietnam’s black-market currency exchange rate has reportedly jumped to a record high of more than 18,000 dong to the dollar – above last week’s official rate of 16,268.

Sherman Chan, at Moody’s economy.com, said: “A sense of déja vu and fears of sky-rocketing inflation are causing individuals and merchants to hoard rice, cement and steel, a return to old habits formed back when annual inflation exceeded 60 per cent.”

She added that inflationary pressures has prompted a stampede into gold: “The price of gold has tended to be a reliable proxy for the public’s assessment of the Government’s ability to stabilize the economy. Gold’s price in recent months underscores their stunning lack of confidence.”

The situation underscores the sharp reversal of sentiment over the Vietnamese economy, which, until last year, was among the fastest growing in Asia. In March 2007, the combined value of stocks on the Ho Chi Minh City and Hanoi stock exchanges stood at about $29 billion – up from less than $1 billion in 2005.

Economists say that a recent suggestion by the Vietnamese Government that it does not have sufficient foreign reserves to fend off an attack from speculators, who may bet on the dong suffering a sudden and sharp drop, was ill-timed.

Ms Chan said: “The bitter lessons of the Thais and Indonesians in 1997 are clear: even $22 billion can be used up very quickly when the currency is under heavy pressure from determined and well-financed speculators.

“The only way to regain credibility is by employing serious tools to attack the roots of the problem, which are an overheating economy and excessive inflation.”

She added: “To prevent a currency and balance of payments crisis, it is necessary that the Government take a tough tightening stance. This could dampen growth in the near term but the benefits outweigh the downside, as it would take an extended period for an economy to recover from a major crisis.”

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on today’s seismic Treasury selloff:

“The point is that the world was long Treasury, and we can see how they’ve been suckered.”

In other news, more insanity from the federales, who think they can permanently reduce commodities prices by shoving out leveraged players.

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Didn’t get this memo. No sir.

Fetch your tin helmets once again. The European Central Bank is opting for a monetary purge. So too is the US Federal Reserve, now ruled from Dallas.

Über-hawks and Cromwellians have gained the upper hand at the great fortress banks. Whether or not they admit it, both are embarked on policies that must lead to retrenchment across the Atlantic world.

The City mood turned wicked as the full import of this policy switch sank in last week. On Wall Street, the Dow’s 396-point dive on high volume late Friday had an ugly feel.

“There is now the distinct possibility of a simultaneous sell-off in global bonds, equities and commodities,” said Jonathan Wilmot from Credit Suisse.

I dunno. I saw Lehman almost die again, and we all knew that the Fed was ready to fire a paper fusillade in the hole.

Trichet’s hawkishness is not in doubt. Bernanke’s is. Spain and Ireland do not a dovish majority make.

Bernanke’s hawkishness is in doubt.

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Thomas Palley, Open Society Institute pontificator emeritus cum DC-cocktail laude, mocks himself best when he’s most honest. As do most political people.

Defending the Bernanke Fed

Filed under: U.S. Policy, Uncategorized — Administrator @ 6:37 am

Federal Reserve Chairman Ben Bernanke has recently been on the receiving end of significant criticism for recent monetary policy. One critique can be labeled the American conservative critique, and is associated with the Wall Street Journal. The other can be termed the European critique, and is associated with prominent European Economist and Financial Times contributor, Willem Buiter.

Brought up on the intellectual ideas of Milton Friedman, American conservatives view inflation as the greatest economic threat and believe control of inflation should be the Fed’s primary job. In their eyes the Bernanke Fed has dangerously ignored emerging inflation dangers, and that policy failure risks a return to the disruptive stagflation of the 1970s.

Both argue the Fed has engaged in excessive monetary easing, cutting interest rates too much and ignoring the perils of inflation. Their criticisms raise core questions about the conduct of policy that warrant a response.

At least he didn’t call us “liquidationists.” Generous.

Rather than cutting interest rates as steeply as the Fed has, American conservatives maintain the proper way to address the financial crisis triggered by the deflating house price bubble is to re-capitalize the financial system.

Correct.

This explains the efforts of Treasury Secretary Paulson to reach out to foreign investors in places like Abu Dhabi. The logic is that foreign investors are sitting on mountains of liquidity, and they can therefore re-capitalize the system without recourse to lower interest rates that supposedly risk a return of ‘70’s style inflation.

“Supposedly.

The European critique of the Fed is slightly different, and is that the Fed has gone about responding to the financial crisis in the wrong way. The European view is that the crisis constitutes a massive liquidity crisis, and as such the Fed should have responded by making liquidity available without lowering rates. That is the course European Central Bank has taken, holding the line on its policy interest rate but making massive quantities of liquidity available to Euro zone banks.

In other words, the Buiter critique advocates one set of interest rates for banks, and a very different one for individuals, without regard to respective credit risk. Presumably, there would be no arbitrage between these two bifurcated markets. Presumably, liquidity provisions to other banks–“inflation by other means”–would both 1) save the banks, and 2) not institutionalize higher prices on the tabs of the people who didn’t take the stupid risks.

Never made much sense to me either. [I used to like Buiter because he was the only person who trashed Bernanke way back in the day. Unfortunately his “lender of last resort” bailout loophole was an unforgivable leap of illogic, and while formally very different from the Bank of Japan’s disastrous early-1990’s bailout, was functionally indistinguishable.]

According to the European critique the Fed should have done the same. Thus, the Fed’s new Term Securities Lending Facility that makes liquidity available to investment banks was the right move. However, there was no need for the accompanying sharp interest rate reductions given the inflation outlook. By lowering rates, the European view asserts the Fed has raised the risks of a return of significantly higher persistent inflation. Additionally, lowering rates in the current setting has damaged the Fed’s anti-inflation credibility and aggravated moral hazard in investing practices.

The problem with the American conservative critique is that inflation today is not what it used to be.

It’s different this time.

1970s inflation was rooted in a price – wage spiral in which price increases were matched by nominal wage increases. However, that spiral mechanism no longer exists because workers lack the power to protect themselves. The combination of globalization, the erosion of job security, and the evisceration of unions means that workers are unable to force matching wage increases.

DC establishment liberal: “Inflation is okay now, because workers have to eat all costs themselves.” As if workers will just sit back and take this? As if they can’t read these internet posts, which presume weakness, ignorance and stupidity on the part of American workers?

The problem with the European critique is it over-looks the scale of the demand shock the U.S. economy has received. Moreover, that demand shock is on-going. Falling house prices and the souring of hundreds of billions of dollars of mortgages has caused the financial crisis. However, in addition, falling house prices have wiped out hundreds of billions of household wealth. That in turn is weakening demand as consumer spending slows in response to lower household wealth.

Different. This. Time.

Countering this negative demand shock is the principal rationale for the Fed’s decision to lower interest rates. Whereas Europe has been impacted by the financial crisis, it has not experienced an equivalent demand shock. That explains the difference in policy responses between the Fed and the European Central Bank, and it explains why the European critique is off mark.

The bottom line is that current criticism of the Bernanke Fed is unjustified. Whereas the Fed was slow to respond to the crisis as it began unfolding in the summer of 2007, it has now caught up and the stance of policy seems right. Liquidity has been made available to the financial system. Low interest rates are countering the demand shock. And the Fed has signaled its awareness of inflationary dangers by speaking to the problem of exchange rates and indicating it may hold off from further rate cuts. The only failing is that is that the Fed has not been imaginative or daring enough in its engagement with financial regulatory reform.

Copyright Thomas I. Palley

The bottom line is, DC policy emerati are profoundly ignorant, sycophantic, and irresponsible people.

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There were about five pieces of news on Friday that delivered such a massive upside kick to oil.

1) Chinese oil consumption numbers came in much higher than expected.

Wall Street is still being blindsided by the impact of the Sichuan earthquake, and apparently most of it is ignorant that ~30 percent of Chinese oil/ natgas/ heating oil comes from Sichuan and Gansu (which was also thrown into chaos by the quake).

2) Shaul Mofaz rattled Kadima’s flimsy sabre at Iran, again. Anyone who took that seriously is ill-informed.

3) The dollar continued hemorrhaging. Brokers are cutting back trading with Lehman Brothers, and Bernanke will probably be called out on his fateful March 17 nationalization of banks’ default risk. He will have to throw hundreds of billions of dollars in Treasuries at Lehman’s crippled balance sheet, further debasing Treasuries specifically and US financial credibility generally.

4) Morgan Stanley said oil would go to $150.

5) The USD and EUR are both heavily overvalued. As long as China keeps its currency peg alive, the dollar and euro will both be overvalued. The only other large currency alternative is commodities, so that’s where money is going.

As I have said many times, government witch hunts against “speculators” never signal the top of a bull market.

Israel’s saber-rattling might have been good for 1 percent of oil’s gain. Obama’s triumph in the US presidential primaries multiplied that, for a total of maybe 3 percent.

In the meantime, Asia’s cracking currency regimes are effectively increasing their subsidies of fuel.

HONG KONG: Buckling under the weight of record oil prices, several Asian countries have cut or are thinking of cutting their fuel subsidies, which raises a pressing question for Beijing: Can China afford its own oil subsidies at a time when it is spending billions on post-earthquake reconstruction?

The short answer is yes, because China is blessed with both large trade account and fiscal surpluses. The reconstruction cost is projected to amount to about 1 percent of China’s gross domestic product, while the fuel subsidies account for another 1 percent, JPMorgan estimates.

Remember that China had a fiscal surplus of 0.7 percent of gross domestic product last year, or $174 billion. So even if spending on post-earthquake rebuilding and fuel subsidies were to cause a 1 percent fiscal deficit, that would still be very manageable.

But here is a more important question: Why should China keep domestic fuel prices at about half of the global average?

The usual answers are to keep inflation in check and stave off social instability that could result if prices were to rise too quickly.

But by distorting fuel prices, China is encouraging fuel consumption and discouraging the use of new energy. Since the Chinese still live in an $80-a-barrel oil environment, demand for anything from cars to chemical products will spiral higher and raise the risks of economic overheating.

Increasing subsidies on fuel will crowd out more investment in other areas, such as education or health care, to name two possibilities.

What’s more, a worsening fiscal situation might put downward pressure on the yuan. Fuel subsidies have exaggerated inflation in the developed world, while understating inflation in the developing world. China’s inflation could well hit 15 percent if Beijing were to free up caps on energy prices, Morgan Stanley estimates.

“If China is not able to take away the subsidy and cut down its demand, it will have huge implications for the world,” said Shikha Jha, a senior economist at Asian Development Bank.

Countries like China and India, along with Gulf nations whose retail oil prices are kept below global prices, contributed 61 percent of the increase in global consumption of crude oil from 2000 to 2006, according to JPMorgan.

Other than Japan, Hong Kong, Singapore and South Korea, most Asian nations subsidize domestic fuel prices. The more countries subsidize them, the less likely high oil prices will have any affect in reducing overall demand, forcing governments in weaker financial situations to surrender first and stop their subsidies.

That is what happened over the past two weeks. Indonesia, Taiwan, Sri Lanka, Bangladesh, India and Malaysia have either raised regulated fuel prices or pledged that they will.

Actions taken by those countries will not be able to tame a rally in prices though unless China, the second-largest oil user in the world, changes its policy. While the West is critical of China’s energy policy, there is little outcry for change within the country, except for complaints from two loss-making refineries.

By contrast, Indonesia has convinced its people that fuel subsidies benefit the rich more than the poor, because rich people drive more and consume more electricity. Jakarta rolled out a $1.5 billion cash subsidy program to help low-income Indonesians cope with higher prices. Although no country wants to build a system on subsidies, the cash subsidy at least makes fuel subsidy cuts politically feasible.

“The people need to wonder, who pays for the subsidies?” said Louis Vincent Gave, chief executive of GaveKal, a research and asset management company. “Most Asian countries are printing money to pay for them.”

Fuel subsidies compromise countries’ ability to control their own budget spending. If China and India can cut their subsidies, they would be able to spend more on infrastructure and education.

While Asian governments dole out cheap food and cheap energy, Asian currencies settle the bill. Morgan Stanley expects some emerging market currencies to face downward pressure, probably for the first time in a decade, as those countries unwind their fuel subsidies and domestic inflation shoots up.

China’s domestic fuel prices are among the lowest in the world, equal to about 61 percent of prices in the United States, 41 percent of Japan and 28 percent of England. The longer it waits, the more painful it will be when it tries to remove the subsidy.

China actually doesn’t have much freedom to splash dollars for fuel. Its entire macroeconomic policy can be summarized as “long USD, short RMB.” Not a good trade.

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Apologies

for the lack of posting recently.

I have been extremely busy, but things should lighten up by Saturday or Sunday.

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“With Bold Steps, Fed Chief Quiets Some Criticism”:

[…]

“It has been a really head-spinning range of unprecedented and bold actions,” said Charles W. Calomiris, professor of finance and economics at Columbia Business School, referring to the Fed’s lending activities. “That is exactly as it should be. But I’m not saying that it’s without some cost and without some risk.”

[As yours truly noted back in November, Charles Calomiris wrote a verbose and obtuse article for VoxEU which proclaimed that there was no credit crisis — a restatement of his August claim that there was no credit crisis. I guess that makes him almost as good a forecaster as Bernanke is. ]

Timothy F. Geithner, president of the Federal Reserve Bank of New York, and a close Bernanke ally, defines the Fed chief’s “doctrine” as the overpowering use of monetary policies and lending to avert an economic collapse. “Ben has, in very consequential ways, altered the framework for how central banks operate in crises,” he said. “Some will criticize it and some will praise it, and it will certainly be examined for decades.”

Mr. Bernanke’s actions have transformed his image as a self-effacing former economics professor.

“I am tempted to think of him as somewhat Buddha-like,” said Richard W. Fisher, president of the Dallas Federal Reserve Bank. “He’s developed a serenity based on a growing understanding of the hardball ways the system actually works. You can see that it’s no longer an academic or theoretical exercise for him.”

Did he just say “Buddha-like”?

Within the Bush administration, Mr. Bernanke’s willingness to work with Democrats in Congress on measures to prevent mortgage foreclosures has stirred unease. “The fact that he, an appointee of George Bush, has come very close to advocating — though he hasn’t quite advocated it — a piece of legislation that George Bush threatened to veto is an illustration of his willingness to put his head on the chopping block,” said Alan S. Blinder, a professor of economics at Princeton and friend of the Fed chief.

One reason Mr. Bernanke is sticking his neck out is that he believes the broader economy’s recovery depends on the housing sector, which remains in a serious slump. Plenty of new evidence surfaced on Tuesday that this year’s spring home-buying season will be dismal, with one report showing that prices fell 14.1 percent in March from a year earlier and another that new-home sales are down 42 percent over the last year.

Among Democrats, Mr. Bernanke, a Republican, had previously been criticized by such party luminaries as the two former Clinton administration Treasury secretaries, Robert E. Rubin and Lawrence E. Summers, who worried that he was downplaying the dangers of a recession. But that view has changed.

“I think in the last few months they’ve handled themselves very sure-footedly,” Mr. Rubin said of the Fed. Many Democrats in Congress agree.

“They say that crisis makes the man,” said Senator Charles E. Schumer, Democrat of New York and the chairman of the Joint Economic Committee. “He’s made believers out of people who were just not sure about him before.”

To lessen the chances of a financial collapse, Mr. Bernanke engineered the takeover of one investment bank, Bear Stearns, and tossed credit lifelines to others with exotic new lending facilities — the Fed now has seven such lending windows, some of them for investment banks as well as commercial banks.

He also allowed the Fed to accept assets of debatable value — mortgage-backed securities, car loans and credit card debt — as collateral for some Fed loans. For the first time ever, he installed Fed regulators inside investment banks to inspect their books.

Much to the dismay of conservative economists, Mr. Bernanke has also presided over an extraordinarily aggressive series of interest rate cuts, lowering the fed funds rate seven times, to 2 percent from 5.75 percent, since last September, though it has signaled a pause in further rate-cutting barring a further crisis. …

Bernanke and Paulson are the worst thing that’s happened to capitalism since Arthur Burns and Richard Nixon. Carter would have been awful, but conditions were so bad by 1979 that he had to authorize significant deregulation and capital gains tax cuts (from 35% to 28%, from memory) kicking and screaming.

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MZM (NSA) v USD value v commercial lending

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via

Using figures compile [sic] by independent research house GFMS Ltd., the council says the consumption of 31.5 tons in the first quarter shows a steep increase of 110% year-on-year and accounting for 43% of the world’s net retail investment demand of 72.2 tons in the period.

Vietnam’s arrival into pole position in the retail investment sector ousts India from the top slot with 31 tons, a decline by half from the first quarter in 2007 as Indian purchasers withdrew from the market and waited for lower and more stable prices.

The report says the surge in Vietnam’s demand was partly a response to soaring inflation, which hit 11.6% in 2007 and prompted a rush to buy gold, reflecting its perceived qualities as a hedge against inflation.

Demand was also spurred by the performance of gold relative to other investments such as equities and real estate, which have declined in value over recent months while gold has strengthened.

Furthermore, gold investments have been increasingly marketed by Vietnamese banks. High interest rates enable local banks to offer an interest rate on gold deposits since they can profitably sell the gold for dong, lend the dong out at high interest rates and hedge their gold position by entering into a forward buying agreement with an international bank.

Many Vietnamese prefer to hold gold rather than dong and the fact that this gold can earn interest from commercial banks makes it still more appealing as for investment option, says the report.

Vietnam’s gold demand for jewellery in the first quarter was 5.3 tons, that is stable from the previous quarter but down by 18.9% on a year-on-year comparison and the high price of gold was the primary reason for the decline.

Gold demand is divided into three purposes, jewellery demand, industrial and dental demand, and identifiable investment, comprising net retail investment (primarily bars and coins) and investment in Exchange Traded Funds and similar products (ETFs), the latter not yet available in Vietnam.

The world’s total gold demand in the first quarter fell 16% from a year earlier to 701.3 tons. Of which, jewellery demand was 445.4 tons, down 21%, industrial and dental demand fell 5% to 110.3 tons, while investment in ETFs was double to 72.9 tons and net retail investment dropped 35% to 72.2 tons.

(Source: SGT)

In some parts of the world, gold consumption and CPI are apparently correlated. Who knew?!

Let’s hope the rest of Asia picks up on the trend.

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Cokeflation

Sometimes anecdotal evidence is the best evidence” …

For decades, the Drug Enforcement Administration has measured the price and purity of illicit drugs. Its methodology is cryptic, but the dea says it’s a reliable way to spot trends.

And it says it has spied one: The cost of pure coke rose 44 percent in the United States between January and September 2007. The dea credits its own efforts, of course, along with increased Mexican and Colombian cooperation, for the downturn in supply it says caused the price hike.

But the agency omits an important factor: the plummeting value of the dollar, especially as compared to the soaring euro. Even as the dea has made it more bothersome to bring coke into the United States, the sliding dollar has made importing it less profitable. Both the UN and dea note that a kilo of coke brings in two times as much in Europe as it does in America.

As with any commodity, producers look to maximize earnings by selling in markets with the strongest currencies. But unlike oil, for instance, the value of which is measured in dollars, the cocaine market is more fluid. “The euro has become the preferred currency for drug traffickers,” declared then-dea administrator Karen Tandy at an anti-drug conference last May. “We’re seeing a glut of euro notes throughout South America,” she said, adding that “9 of 10 travelers who carried the $1.7 billion euros that came into the United States during 2005 did not come from Europe…They came from Latin America.”

Europe has become attractive to traffickers not just because of its healthy economy, but also for its open borders, less stringent drug policies, and increasing demand. American officials estimate that just a few years ago U.S. consumers snorted several times more blow than their Old World counterparts. That gap has dramatically narrowed as Europe feeds a cocaine binge that has been compared to America’s in the ’80s.

This new European focus is changing global drug-supply routes. West African nations have become important staging areas for packages on the way from South America to Spain and Portugal, the region’s main points of entry. The UN estimates that cocaine seizures in Africa increased nearly sixfold between 2005 and 2007 and that more than 90 tons of coke were intercepted in Portugal and Spain in 2006, more than was seized in all of Europe in 2004.

So how does all this affect the end market here at home? “The guy from the suburbs may be paying a little more, but there are no crackheads going without crack,” says Dale Sutherland, a narcotics investigator with the Washington, D.C., police department. That’s likely because increased costs are passed on down to low-level slingers who are more inclined to cut their product with talcum powder than risk being undercut by competitors. Indeed, the dea reported that during the same period when prices rose, there was a 15 percent decline in the purity of coke that officers seized or bought on the street. As they say on The Wire, “All in the game, yo. All in the game.”

The Wire was great, although too many main characters were dead or put away by the end of the third season, and anyway I won’t have the time to watch 4 & 5 for some while. Plus, the gratuitous seediness-to-plot ratio had deteriorated significantly.

It seems like when the cable shows start the ratings slide, they really go all-out on the skin…

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Soros must be fuming that he dumped commodities and called a bottom in equities when he did.

Soros’s public pronouncements are consistently somewhat at odds with how he actually invests. (He couldn’t have made money any other way; the track record of his public pronouncements is awful.) This instance, presumably, is no exception.

Not that he has any other viable choice.

George Soros: rocketing oil price is a bubble

By Edmund Conway, Economics Editor

Last Updated: 12:53am BST 27/05/2008

Speculators are largely responsible for driving crude prices to their peaks in recent weeks and the record oil price now looks like a bubble, George Soros has warned.

The billionaire investor’s comments came only days after the oil price soared to a record high of $135 a barrel amid speculation that crude could soon be catapulted towards the $200 mark.

In an interview with The Daily Telegraph, Mr Soros said that although the weak dollar, ebbing Middle Eastern supply and record Chinese demand could explain some of the increase in energy prices, the crude oil market had been significantly affected by speculation.

“Speculation… is increasingly affecting the price,” he said. “The price has this parabolic shape which is characteristic of bubbles,” he said.

  • ‘We face the most serious recession of our lifetime’
  • The comments are significant, not only because Mr Soros is the world’s most prominent hedge fund investor but also because many experts have claimed speculation is only a minor factor affecting crude prices.

    Oil prices stalled on Friday after their biggest one-day jump since the first Gulf War earlier in the week.

    At just over $130 a barrel, the price has doubled in around a year, causing misery for motorists and businesses.

    However, Mr Soros warned that the oil bubble would not burst until both the US and Britain were in recession, after which prices could fall dramatically.

    “You can also anticipate that [the bubble] will eventually correct but that is unlikely to happen before the recession actually reduces the demand.

    “The rise in the price of oil and food is going to weigh and aggravate the recession.”

    The Bank of England recently warned that soaring energy and food costs would push inflation above its target range for most of the next 18 months, making it more unlikely that it will cut borrowing costs soon.

    Mr Soros warns Britain is facing its worst economic storm in living memory, dwarfing those of the 1970s and early 1990s, with a housing slump and serious recession.

    He said: “The dislocations will be greater [than in the 1970s] because you also have the implications of the house price decline, which you didn’t have in the 1970s.”

    The warning undermines predictions that Britain will suffer only a brief and relatively painless recession, unlike the precipitous dives of previous years.

    Mr Soros also warned that the Bank’s inflation report represents a “Faustian pact”, obliging it to keep interest rates high to control inflation, even as the economy is starting to slump.

    “You had the nice decade,” he said. “Now that is over and you are in a straitjacket.”

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    Shortage fears push oil futures near $140

    By Carola Hoyos and Javier Blas in London

    Published: May 20 2008 19:06 | Last updated: May 21 2008 00:52

    Fears of a shortage within five years propelled long-term oil futures prices to almost $140 a barrel on Tuesday, further stoking inflationary pressures in the global economy.

    Investors rushed to buy oil futures contracts as far forward as December 2016, pushing their prices as high as $139.50 a barrel, up more than $9.50 on the day. The spot price hit a record $129.60 a barrel.

    Veteran traders said they had never seen such a jump and said investors were increasingly betting that oil production would soon peak because of geopolitical and geological constraints.

    Neil McMahon, of Sanford Bernstein, said: “Peak oil views – regardless of whether right or wrong – are seeping into the market and supporting high prices.”

    Anne-Louise Hittle, of Wood Mackenzie, added that investors were shifting their focus from the short-term to the medium-term, where supply fears played a bigger role. Since January, long-term futures oil contracts, such as those for delivery in 2016, have jumped almost 60 per cent, while near-term prices have gone up 35 per cent.

    That trend was exacerbated by T. Boone Pickens, the influential investor who believes world oil production is about to peak as aging fields run dry. He warned that oil prices would hit $150 a barrel by the end of the year.

    “Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87m,” Mr Pickens told CNBC. “It’s just that simple.”

    Mr Pickens’s view is still in the minority in the oil industry. But concerns over future oil supplies are fast moving into the mainstream and influencing investors.

    Politicians have expressed concern that speculators are forcing prices higher and Joseph Lieberman, the influential senator, said he was considering legislation to limit big institutional investors in commodities markets.

    Some energy executives have warned that geopolitical supply constraints will mean production will not be able to match demand as early as 2012 to 2015.

    This comes as demand, especially from China, is set to continue to grow, while that of the US slows. Adam Sieminski, chief energy economist at Deutsche Bank, said: “The price is going to go up until governments that subsidise oil consumption in Asia and the Middle East can no longer afford it.”

    So far China is doing the opposite, having recently retrenched subsidies. Analysts say Chinese demand could surge further as the country faces shortages of coal and hydropower.

    Nervousness about Chinese energy demand was exacerbated on Tuesday when officials said 32 power plants had been forced to close because of coal shortages.

    PetroChina and Sinopec, the two biggest domestic oil groups, also have diverted fuel supplies to the quake-hit Sichuan region.

    Additional reporting by Geoff Dyer in Beijing

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    lolol…

    The brand spanking new Airbus 340-600, the largest passenger airplane ever built, sat in its hangar in Toulouse, France without a single hour of airtime.  Enter the Arab flight crew of Abu Dhabi Aircraft Technologies (ADAT) to conduct pre-delivery tests on the ground, such as engine runups, prior to delivery to Etihad Airways in Abu Dhabi.  The date was November 15, 2007.

    The ADAT crew taxied the A340-600 to the run-up area. Then they took all four engines to takeoff power with a virtually empty aircraft.  Not having read the run-up manuals, they had no clue just how light an empty A340-600 really is.

    The takeoff warning horn was blaring away in the cockpit because they had all 4 engines at full power. The aircraft computers thought they were trying to takeoff but it had not been configured properly (flaps/slats, etc.) Then one of the ADAT crew decided to pull the circuit breaker on the Ground Proximity Sensor to silence the alarm.

    This fools the aircraft into thinking it is in the air.

    The computers automatically released all the brakes and set the aircraft rocketing forward. The ADAT crew had no idea that this is a safety feature so that pilots can’t land with the brakes on.

    Not one member of the seven-man Arab crew was smart enough to throttle back the engines from their max power setting, so the $80 million brand-new aircraft crashed into a blast barrier, totaling it.

    The extent of injuries to the crew is unknown, for there has been a news blackout in the major media in France and elsewhere.  Coverage of the story was deemed insulting to Moslem Arabs.  Finally, the photos are starting to leak out.

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    IFR:

    [13:57 US GOVTS: Fallout From Credit Crisis Seen in TIC Data]

    Boston, May 15. Though foreigners continued to buy treasuries (a record $55 bln) and agency ($18 bln) paper hand over fist in the latest March TIC data the net flow for the month was actually a negative $48 bln. While far from an expert in these numbers it appears that the shortfall was made in the private flow category and specifically bank liabilities which fell $115 bln.

    The thinking is that the latter number ($115 bln) represents a falloff in US bank lending to their European counterparts over the heighten counterpart concern engendered by the subprime/credit crisis. If so, this may be yet another reason why the Fed is contemplating expanded both the size and term maturity of the TAF program.

    Either way, the data is causing quite a stir on the Street and is seeing a knee-jerk buying and curve steepening reaction in the treasury market as traders try to sort out what it all means.

    Interesting.

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    Abu Muqawama. (Good name–“Dr. iRack”)

    Added to blogroll.

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    Right-wing hedge fund legend Bruce Kovner, responding to the standard “How do you make all of your money?” question, supposedly said, “From stupid governments.” Speaking of which:

    Asian Ministers Agree to Pool $80 Billion of Reserves (Update1)

    By Keiko Ujikane and Seyoon Kim

    May 4 (Bloomberg) — Finance ministers from 13 Asian nations agreed to create a pool at least $80 billion in foreign- exchange reserves to be tapped by nations in case they need to protect currencies.

    Contributions from Japan, China and South Korea will total 80 percent of the pool, while the 10-member Association of Southeast Asian Nations will make up the rest, the ministers said in a statement after talks in Madrid, where the Asian Development Bank is holding its annual meeting.

    Asian governments are trying to avoid relying on institutions like the International Monetary Fund, which forced them to adopt harsh economic policies in return for bailouts during the financial crisis a decade ago. Pooling of foreign reserves may help prevent a repeat of the region’s turmoil.

    All 13 nations will contribute to the fund, and they will still manage their own reserves under the arrangement. Exact contributions have yet to be decided. Today’s talks involved Japanese Finance Minister Fukushiro Nukaga, China’s Xie Xuren, South Korea’s Kang Man Soo and their counterparts from Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

    Ministers last year agreed to set aside part of their $3.4 trillion of foreign reserves for emergencies, without deciding the size of the pool and when they would start the fund. The nations decided to accelerate discussions on the details of borrowing conditions, the statement said.

    `Appropriate Actions’

    On the economy, Asian governments “confirmed the importance of taking appropriate actions” to sustain economic activity, the statement said.

    “The regional economy has continued its strong growth and is forecast to remain robust although somewhat weaker,” the statement said. “Nonetheless, several risks remain such as further worsening of the growth prospects, vulnerability of financial markets, and continued inflationary pressures from rising oil and non-oil commodity prices.”

    Crude oil has soared, and rice prices have more than doubled since Asian finance ministers met a year ago in Kyoto, Japan. The increases have stoked social tensions and led to wider fiscal deficits as governments subsidize food and energy costs for their people.

    The reserve pool is an expansion of a current arrangement that only allows for bilateral currency swaps. It is designed to ensure central banks have enough to shield their currencies from speculative attacks like those that depleted the reserves of some countries during the Asian financial crisis in 1997 and 1998.

    During that crisis, Indonesia, Thailand and South Korea spent most of their foreign reserves to prop up their currencies. The three nations had to turn to the IMF for more than $100 billion of loans to shore up their finances when investors sold their currencies. The IMF forced governments to cut spending, raise interest rates and sell state-owned companies.

    In other words, they will dump their forex reserves to defend their currency pegs, for the privilege of subsidizing American consumption even more than they have for the past six years. Damn it (occasionally) feels good to be American!

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    May 2 (Bloomberg) — A month after the Federal Reserve rescued Bear Stearns Cos. from bankruptcy, Chairman Ben S. Bernanke got an S.O.S. from Congress.

    There is “a potential crisis in the student-loan market” requiring “similar bold action,” Chairman Christopher Dodd of Connecticut and six other Democrats wrote Bernanke. They want the Fed to swap Treasury notes for bonds backed by student loans. In a separate letter, Pennsylvania Democratic Representative Paul Kanjorski and 31 House members said they want Bernanke to channel money directly to education-finance firms.

    The Fed’s loans to Bear Stearns were “a rogue operation,” said Anna Schwartz, who co-wrote “A Monetary History of the United States” with the late Nobel laureate Milton Friedman.

    `No Business’

    “To me, it is an open and shut case,” she said in an interview from her office in New York. “The Fed had no business intervening there.”

    There are already indications that investors perceive the safety net to be widening as a result of the actions by Bernanke, 54, and New York Fed President Timothy Geithner. The Bear Stearns bailout and an emergency facility to loan directly to government bond dealers triggered a decline in measures of credit risk for investment banks and for Fannie Mae, the Washington-based, government-chartered company that is the nation’s largest source of funds for home mortgages.

    Yield differences between Fannie Mae’s five-year debt and five-year U.S. Treasuries have fallen to 0.55 percentage point, from 1.15 percentage points on March 14, the day the Fed’s Board of Governors invoked an emergency rule to lend $13 billion to Bear Stearns.

    “The market understood that this is the method by which Fannie Mae and Freddie Mac could be bailed out if necessary,” Poole said.

    Wall Street Impact

    The cost of default protection on Merrill Lynch & Co. debt fell to 1.4 percentage point by April 30 from 3.3 percentage points on March 14, CMA Datavision’s credit-default swaps prices show. The cost of protection on Lehman Brothers Holdings Inc. securities has fallen to 1.5 percentage points from 4.5 percentage points over the same period.

    Fed Board spokeswoman Michelle Smith declined to comment, as did New York Fed spokesman Calvin Mitchell.

    On March 16, two days after the Fed provided its Bear loan, it agreed to finance $30 billion of the firm’s illiquid assets to secure its takeover by JPMorgan Chase & Co.

    The Standard & Poor’s 500 Financials Index had lost 12 percent in the three weeks prior to March 14; Geithner defended the loans before the Senate Banking Committee on April 3, saying that the Fed needed to offset risks posed to the entire financial system.

    A systemic collapse on Wall Street would also mean “higher borrowing costs for housing, education, and the expenses of everyday life,” Geithner, 46, said.

    While the Fed must by law withdraw its financing backstop for investment banks once the credit crisis passes, investors will probably still bet on its readiness to intervene. …

    […]

    The Fed also influenced market incentives last month when it introduced the so-called Term Securities Lending Facility. The program is designed to lend up to $200 billion of Treasury securities from the Fed’s holdings to Wall Street bond dealers in return for commercial and residential mortgage bonds among other collateral. Congress has noticed the program favors mortgage credits, and Dodd has asked the Fed to swap some of its $548 billion in Treasury holdings for bonds backed by student loans.

    Back to Congress

    Bernanke rejected Dodd’s request in an April 25 letter, saying it’s up to Congress and the Bush administration to address diminishing profits on the loans. He didn’t explain why the Fed is reluctant to swap Treasuries for bonds backed by student loans.

    “If there is a public purpose in lending to investment banks, and taking dodgy mortgage securities as collateral, then it is a question of degree about other potential lending,” Vincent Reinhart, former director of the Fed board’s Division of Monetary Affairs, said in an interview. “That’s the consequence of crossing a line that had been well established for three- quarters of a century.”

    Having extended welfare to Wall Street Republicans, the Fed cannot now refuse Democratic client industries, such as government-sponsored enterprises, education financiers, etc.

    Additionally, the Fed will be on the hook for the “containment” bailouts it arranged in the first stage of the credit crunch. The Bank of America acquisition of Countrywide, for example, was widely seen as a Fed “containment” move. CFC owed at least $51 billion of debt to the FHLBs, and $38 billion is the latest figure Bloomberg is bandying around. Bank of America appears poised to take every BofA asset it can and shovel the debts to the government into a bogus holding company, which will go bankrupt. It will be entertaining to watch the FHLBs make good on a $38 billion hole in their balance sheet. Ambrose Evans-Pritchard said that at one point, Citigroup owed $98 billion to the FHLBs. Assume that has been cut 25 percent by a combination of a slight credit recovery and the Fed taking a lot of what can’t be sold; that still leaves $75bn. The FHLBs are going to have to start calling in loans. There will be another deleveraging frenzy. What’s the Fed going to do then, since it’s already forked over $400 billion of its $950bn in Treasury “bullets” to the banks? Putting bad debt in different buckets doesn’t change the fact that it’s bad debt, especially when the new bucket is owned by the government.

    S&P estimated a couple of weeks ago that Fannie and Freddie alone would require a bailout of between $420 billion and $1.1 trillion – enough to jeopardize the United States’ AAA bond rating. Presumably that didn’t include Sallie Mae, the student loan originator.

    At any rate, the renewed sense of optimism on equities among “the big boys” ™ has been palpable for at least a week. Wall Street is once again cranking up the leverage. Hence the shift out of commodities and into equities effected by the tacticals (hedge funds) at the expense of the dinosaur pension funds and endowments, which piled into commodities very late.

    The data junkies tell me that broad money (MZM) strongly leads narrow money (BASE). The deflation-will-be-the-end-of-us-all crowd (eg, Mish Shedlock, John Mauldin, coming from somewhat different angles) has generally pointed to BASE as at least a quasi-justification of what Bernanke is doing. Bond vigilantes have pointed to MZM as a portent of severe future inflation. Obviously, I think the bond vigilantes are correct.

    For now, the “inflationary bull market” classes (leveraged equities and base raw materials) have won the argument against the stagflation asset classes (eg precious metals). As long as the Fed dilutes Treasuries by swapping them for MBS, precious metals will still woefully underperform. Gold has been hammered for the past few weeks and although I am still quite bullish about it in the 6-24 month time horizon, the past four weeks have obviously been very unkind to that thesis.

    Short Treasuries; long equities and precious metals.

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