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Archive for April, 2008

The eye in the storm, of a perfect storm.

Posted by Adrian on April 30, 2008

The question, in which the so called optimists commentators are making, is the worst over in the financial markets?

I remember four years back when the optimists were saying that there isn’t going to be a slow down, that the US housing market will be ok and consumer sentiment will remain high (ad infinitum). That growth will be steady and constant or the global economy will slow to a nice gradual pace. It was a handful of commentators that saw some worrying signals, they are: Nouriel Roubini, Marc Faber, Paul Grugman, Paul Kasriel, Robert Schiller and others that offered an realistic viewpoint to an unrealistic expansion in global economies; in which a housing market in the US that was so inflated a crash was inevitable, then a contraction would occur in the credit markets, with widespread deleveraging to follow. Hence the credit crisis we have today. Now as I mentioned the optimist have reemerged (in fact they should concede to defeat and except reality of the markets) claiming the credit crisis is finishing or finished. The optimists, on the back of a very unstable Federal Reserve policy of massive amounts of liquidity being pumped into the financial system, hope that a steady return to credit valuations and security trading will return to normal market conditions (‘normal’ being a paradoxical assessment of free markets).

When I first started trading in the markets, I learnt about volatility. Although at the time in early 2000, the markets will far calmer to what they are now. Credit expansion had begun in earnest, when the Fed fund rate was chopped down to 1.0% by Greenspan on June 25th 2003. The bull run in global markets ensured, stocks and bonds rallied. Even betting on the EUR against the JPY (with a high leverage) would give a good return. But with the collapse of the credit markets, onset by the collapse of the subprime mortgage market. Volatility hit hard, the Federal Reserve under Ben Bernanke slashed rates (from 4.75% in 2007 to the current 2.25%) and went bonkers with liquidity injections – most likely bailing out a few US banks (apart from the Bear Stearns) that were on the brink of insolvency. The worlds central banks either tightened in small increments or got the timing somewhat wrong and have tightened in dangerous financial environments (retail banks tightening their lending and increasing interest rates on loans). So central banks that did have a tightening bias started to cut interest rates, note Bank of Canada from July 10th 2007 key interest rate at 4.50% now (22nd April 2008 ) 3.00%.

Soon the Australian and most likely New Zealand reserve banks will cut rates, rather than increase them. Recently economist Stephen Roach recommended that China should increase it’s interest rate by 1.00%. In respect to fighting inflation in China and protecting the yuan, rather than be concerned about economic slow downs. Rate cutting to help prop up slowing economies has been at the expense of inflation, in which has increased the chances that he global economy will enter into a simultaneous stagflation recession.

Every country is facing high inflation, oil, food (rice, flour), rental and utilities; with property and stock market prices collapsing.

The Federal Reserve with it’s chairman Ben Bernanke will cut rates another 0.25% this week. If the Fed decided to hold their rate cutting policy (after the 25 point cut – which will bring the Fed rate to 2.00%) we will not see a dramatic drop in commodity prices.

If there is a perfect storm of collapsing asset markets, with inflation that is out of control. It is a synchronized storm that has hit on a global scale and there could be small eye of the storm we are now residing in.


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Australia entering in hyperinflation? (update 6)

Posted by Adrian on April 23, 2008

The Australian current cash rate is at 7.25%, behind the New Zealand cash rate at 8.25%. Both high cash rates have been implicated by both the Reserve Bank of Australia and The New Zealand Reserve banks in an effort to contain inflation. Australia, like most of the developed world, ran a hot property market. When the credit crunch hit last August in 2007, the governments and banking press of course played down global problems with the credit markets and higher interest rates on short term and long term loans. The public was unfortunately mislead, in regards to the severe nature of a credit freeze in global markets and the RBA decided to hold rates until early 2008. Until the banks all disclosed their problems with interbank funding, this created uncertainty in the market at the same time. Some mortgage brokers went under, or were bought by banks, property trust that were heavily leveraged went bust – and liquidity in the Australia credit markets started top dry up. Hence the RBA injected funds into the banking sector through out the early months of 2008. Bank stocks in Australia were slaughtered, dropping the All Ords down -20% in the last quarter. In all this turmoil, the banks have been passing up costs to the consumer, namely interest rates from 0.5% up to 1.00% on loans. These increases have been incremented and almost timed with the RBA interest rate hikes that have brought the Australian cash rate now to 7.25%.

With overseas investors looking at high yield currencies, this has also inflated the Australia $, pushing the dollar v’s the USD to 0.95 cents. The Australia economy, in someways is a smaller version of Europe in the sense that both Europe and Australia are desperately trying to contain inflation – although Europe suffers from the disproportional asset devaluation in some countries and a plateaued or rising assets in others, like Germany. However the AUD like the EUR is edging up to an inflated level (which may be intervened by sovereign funds – selling the EUR, to offset the collapsing USD). So both Europe and Australia with high yielded currencies, rising costs and inflation, declining markets (not all) shows that stagflation is now testimony to economies that have acted slow on interest rate hikes, and allowed inflation to overtake rapidly.

The fear that both the RBA and RBNZ have, is when the economy does slide further into a recessionary decline. To what point does the banks cut rates? if so, a rapid depreciation of the AUD and NZD could take place and at the same time that inflation is still not contained. Which moves both countries closely into hyperinflation.

Recent Australian CPI figures shows an increase of 1.3% from 3.0% December 2007, now at 4.2%. Although it could be higher.

I suspect the RBA will not lift interest rates in May (next meeting), nor do I think they will lift them later this year. The banks however will continue to pass on costs through their own interest rates on loans. The RBA would hope that this will slow the economy or send it sharply into a recession. In which the reserve bank then can cut interest rates later in 2008.

The banks will can get the blame for a recession.

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The developed world tax payers are bailing out the banking system – The US and UK will be the first to reveal a widespread liquidity trap.

Posted by Adrian on April 22, 2008

The Bank of England will be bailing out some larger to medium size banks, similar to the obscene bailout of Bear Stearns by the Federal Reserve and the Fed also adding billions on dollars of mortgage backed securities to their balance sheet. Mervyn King the BoE governor of course utilizes the ‘we are doing this for the public’ argument by taking on mortgage debt and essentially bailing out a bank. The possible bank in question is Royal Bank or Scotland.

Banks are private businesses, they make money and really don’t care about individuals. Which is an obvious aspect to their business model, banks are highly competitive and run a risk management section with no staff in it. They (banks) have made some horrendous miscalculations and errors in the history of the banking industry. A few banks should sink, go out of business, go bankrupt to teach the sector a lesson.

The unfortunate aspect of the central banks of the world, is the ability to play with taxpayers money to prop up a private industry. For an example, a central bank will loan a retail bank at a discounted rate. The monies used to loan, or bail that retail bank out (buying mortgage toxic waste) is from tax payer contribution. The business, which is the retail bank, will then loan you the money at a higher rate, so they can profit. Then you can also mix in the grossly overpaid CEO’s and upper management, even when a bank is failing – as a kind of insult to injury. The customer, or consumer is being fleeced. With central banks taking on risk and moving that risk (junk) to their balance sheets, it is inevitable that extra taxes are needed to shore up capital in central banks. So taxes remain high, or increase, combine that with inflation, deprecating assets (housing, stocks and pretty much everything connected with the assets markets). A terrible situation.

I agree with what Jim Rogers says, when he says that it is ‘socialism for the rich’ (bailing out banks). He is right, it is socialism for the rich when central banks should be there to protect the integrity of money, but instead are used to bail out an institution, that should be made an example of and allowed to go bankrupt.

So we also assume that the central banks of the world can afford to go on these bank rescue missions. This causes the central banks to increase money supply, since they have taken on risk, they have now allowed themselves to be seen in a position to bail out the whole banking sector – which extends beyond mortgage banked securities, there is also credit, car loans and other debt markets.

Recently the Reserve Bank of Australia has bought 320 million (Australian dollars) of MBS’s. This will of course lead to an increase of money supply, I am unsure that an increase in money supply in Australia could be offset by high yielded Australian dollar. Australia is clearly in realm of hyperinflation (hence the cash rate at 7.25%). The purchase could indicate that a smaller Australian bank is in trouble, and the RBA (albeit on a smaller lever – although could increase) is doing what the BoE and Fed have done and continue to do. With deleveraging, declining asset markets and inflation. The RBA may cut rates sooner than later, the bank has lost it’s battle with inflation (interest rate hikes were too late). Hence the talk by economists that interest rates are going to pause or be cut , as the Australian market is heading for a sharp downturn (local banks lending rates continue upward), especially the property market. In that case we could see a dramatic sell off of the AUD, with inflation continuing upward for the economy

The liquidity trap occurs when a central bank bails out a bank and we then have to assume, that these banks will then lend the money out. Not just shore up capital, which is what they are doing. Also, the world (in my opinion) is at the brink of recession (US already in recession, Japan, Singapore and parts of Europe following suit). This would mean that the consumers demand for credit will diminish. Not just from deleveraging, but also from collapsing asset markets like housing. If central banks are beginning to act reckless, just as the retail banks have done, is a liquidity trap going to occur?

Found this pierce written by Professor Paul Krugman, which goes into detail of what a Liquidity Trap means in relation to the Japanese markets of the 90’s. Some mathematical logarithmic equations in there, also an old piece going back to 1998. Nevertheless a good read.

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morbius glass quote of the month (April 2008) – The Wolfe, Pulp Fiction

Posted by Adrian on April 21, 2008

Morbius glass quote of the month will showcase some funny, some serious, but all relevant quotes that somewhat sum up our turbulent world (in one sentence).

These quotes can come from movies, politics and history.  This month’s quote is from The Wolfe played by Harvey Keitel in Quentin Tarantino’s Pulp Fiction.

In light of the turmoil in the worlds financial markets, the deceptive banking con guys, poor journalism and the confusion abut the severity of a credit crisis globally. A confusion from the lack of understanding (or willing to understand) starts with: 1. The banks are lying about their balance sheets 2. They haven’t disclosed all depreciating assets, in other words not all toxic waste has been written down. 3. The banks are fiddling with the interbank, or Libor, Euribor rates.  Those rates (banks lend to each other) should be higher.

So when you hear some over exuberant financial reporter saying the worst of the banking crisis is behind us, and the goes on to say how the Dow jumps at good earnings (only to collapse most of it’s rise the next day in a volatile market).    I always think of this scene from Pulp Fiction and that great quote…”let’s not start sucking each others…”.

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The bad gamblers of Wall Street; they loose money and say anything is ok. They want more money…

Posted by Adrian on April 17, 2008

I wouldn’t give them a $1dollar (or maybe a EUR) to invest. The appalling risk taking, greed and generally arrogance of their businesses model is almost unreal, hard to believe. Anyone can see the mess that was created form Wall Street, you don’t have to understand the overly technical debt markets to know what a loss is; and those flunkies have lost a ton of money, and there is more to come.

Merrill Lynch, Citigroup will be post more losses soon, Fannie Mae (mortgage bank) could sink, with deficits in accounts yet to be revealed. Any Wall Street investment bank that marks down values on it’s investments is trying to offload toxic junk on it’s books. The banking contraction and credit squeeze will reach new highs as soon as the bond insurers start to look nervous, especially when the losses in the Credit Default Swap markets have yet to reveal it’s ugly head. If the IMF and other monetary committees think the credit markets losses could go into the $900 billion plus, it’s the Trillion plus figure which is more of a realistic forecast. Especially when the CDS market officially starts to collapse.

Even with the US protracting into a deeper recession, the fear is Europe that is so vulnerable to credit markets (externally and internally) could collectively head into a recession independent to the US current recession. The European banks are a mess, Swiss bank UBS and UK banks like HSBC, HBOS, Northern Rock, not to forget German banks including State owned banks – have all written down and reported massive losses connected with the US subprime mortagage collapse. In which they (Euro banks) also have to manage local populous panics and possible credit defaults within their own markets.

So caution is the only way the markets should be approached, most investors know this and hence the markets still looking at risk aversion. All interbank rates remain high. Commodities are booming.

The rude awaking from the credit markets collapse, inflation and defaults on personal assets. Gives the consumer enough sense to know that the guys at the top in someways are responsible for all this mess; and haven’t got a clue about anything.

from bloomberg 16th April 2008

“The credibility of some of these people that are making these quotes is pretty lacking,” said Jon Fisher, a Minneapolis- based portfolio manager at Fifth Third Asset Management which oversees $22 billion in assets including JPMorgan shares. “I don’t pay any attention to them. They don’t have any credibility to be calling a bottom here.”

He is right.

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World Crisis scenarios for the 21st century – Peak Oil. (update 10)

Posted by Adrian on April 15, 2008

World Crisis scenarios for the 21st century – Peak Oil. (update 10)

Oil continues on with record breaking highs now at 113.79

refer to new high close of trade April 15th 2008 –

This is a steady climb, with the US Dollar declining in value and high inflation; it’s a no brainer that the commodity markets, particularly scarce commodities (such as oil) are used as a hedge against inflation. With constant deprecating value in the capital markets and asset market the commodity/oil market is an attractive investment.

A flip side of an appreciating oil price is the indicator that Opec may maintain it’s output levels at a rationed rate. China and India will both put pressure on the oil price. Both developing economies will gobble up as much of the resource that is available. No matter how dramatic the slow down will be in America, oil will continue to rise thanks to a combination of rate cutting by the Federal Reserve, and dwindling supplies that may just reaffirm the peak oil theory that oil is running out globally.

This of course effects everything in an oil dependent society. With global inflation out of control, particularly on foods such as rice and wheat. Inflation on oil from an ‘peak oil’ perspective can grind a society to a sudden halt, or exasperate a depressive economic downturn.

From bloomberg,

“China, the world’s second-largest energy consumer, increased diesel imports as state refiners China Petroleum & Chemical Corp. and PetroChina Co. bought more to ensure supplies for the spring planting season.

Chinese oil demand this year will rise 4.7 percent to 7.9 million barrels a day, the International Energy Agency said in a report on April 11. Demand in the U.S., the world’s biggest- energy consumer, will contract 2 percent to 20.38 million barrels a day this year.

No Plans

OPEC has no plans to review output levels before a scheduled meeting in September, though ministers will have an opportunity discuss the oil market with consuming nations at an International Energy Forum in Rome scheduled for April 20-22.

“We are not producing enough oil,” U.K. Prime Minister Gordon Brown said today on Sky News in London. “We can take collective action to persuade OPEC and others to get the oil price down.”

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Australian economic commentators are…

Posted by Adrian on April 15, 2008

…on a whole are living in a journalistic fantasy land or are smoking crack or both. Not even worth analyzing their comments,

“The important point right now is that the IMF knows this — and it still believes it’s not going to put much of a dent in the real world global economy. Yes, the United States will go into recession, and Europe and Japan will see their growth halved. But the world can grow without them — and that is what the IMF predicts it will do.”

He seems to forget the present (global) economic killers are the deteriorating credit markets and expensive interbank rates, that the consumers are suffering from (high costs), mixed with inflation and collapse of asset values.

Jeez the IMF are playing catch up with economical global issues (which are happening faster than statisticians can keep up) and we rely on their forecasts? “Mild US recession”? Yet they (IMF) say this,

“The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression”

Contradiction and deceptive advice.

Make up your own mind.

Posted in Finance and Economics. Strategy and Society | Tagged: , | 2 Comments »

Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spain, Iceland – (update 3)

Posted by Adrian on April 15, 2008

Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spain, Iceland – (update 3)

Spain with it’s extraordinarily over inflated property market and a reported 130% of household debt eating up any disposable income, combined with inflation, that erodes anything left. Overextended their mortgage market, encouraging it’s banking sector to create a frenzy of funding from selling MBS or bonds connected with a booming property market.

With the credit crisis yet to claim a European country (Italy was a basket case, even with the global boom!’) as a victim (now consensus acknowledges the US is in recession, note IMF and G7 saying words like ‘mild’ recession and ‘sharp slow down’ and the like); the rest of the world continues to face inflation and deleveraging in rapid and worrying manner.

The European Central Bank will possibly cut rates very soon in 2008, which will do little to resurrect Spain’s interbank funding problems from the global liquidity crisis, as long as the Euribor rates stay high; the ECB will be reluctant to keep purchasing mortgage junk from Spanish banks. A Spanish bank will go under, with the beginning of a all out property crash in Spain in 2008.

But, like the US and possibly Singapore. Spain will be introducing a ‘stimulus package’ for the economy,


“The Spanish Government has announced plans to spend €10 billion (£8 billion) a year in an economic stimulus package intended to soften the blow of a looming housing crisis.”

This stimulus package would be more on par with political motivation than economical.

With a banking sector that relied on a mortgage market for funding, it would be interesting how illiquid the Spanish banks are, although reports;

“The Government also points out – and analysts mostly agree – that the country’s financial system is solid. Spanish banks are large, well capitalized and, because of close oversight by the country’s central bank, largely avoided stuffing themselves with bad-quality debt or off-balance “special purpose vehicles”.

I wonder how correct that assumption is on Spanish banks?

Posted in Finance and Economics. Strategy and Society | 1 Comment »

‘Planet Terror’ intro Cherry Darling

Posted by Adrian on April 14, 2008

Great soundtrack, awesome movie (check my review here) and one of the best intro’s you’ll see (love that soundtrack!)

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G7 rumours

Posted by Adrian on April 11, 2008

I never report G7 meetings, they are meaningless, just like any ‘friendly’ government get together. It is a place of the clueless elite, with no vision on anything get to waste time. But a rumour has come through that if the credit crisis gets worst (it’s already very bad), globally countries and their poor tax paying citizens will bail out the financial system; meaning the big banks and the worthless junk they carry. Scandalous at even the idea, but it is one idea that will never see the light of day – no governments will cooperate on that,

On the other hand the markets are reading everything in reality and real time. There seems an expedited problem with devaluation of assets, and the one thing the G7 will (should) discuss (with a lot of concern) is global inflation and food/oil shortage; not to forget Global Warming which is going to destroy economic growth more spectacularly than any recession.

The credit market crisis is not even half way through. The next blow up is the credit default swaps, credit card, car and motorcycle, student loans and margin calls on any brokerage firm that borrowed big (namely the Hedge funds).

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