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Saturday, November 15, 2008

Federal Reserve Balance Sheet Explodes

The Federal Reserve's balance sheet continues to explode.

As of November 13th, 2008 the Total Factors Supplying Reserve Funds have expanded to $2 250 204 000 000 ($2.250 TRILLION). That's an increase of $142 371 000 000 ($142.371 BILLION) from LAST WEEK.

Click on the chart to enlarge the magically enlarging balance sheet.

If you're wondering where the money is coming from and where it is going, take a look at the Really Scary Fed Charts: NOV, US Bankrupt? for a clue.

In comparison, TARP is a mere $700 billion total (currently). As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group (AIG).

The Job

Oh how quickly things can change...

Friday, November 14, 2008

Fed and ECB Collateral

[ HT MacroMan ]

It's Go Time

Yesterday the Bulls made a move and the Bears retreated. This may be the big test of the lows everybody was waiting for.

Cobra's Market View calls it a Key Reversal Day.
Afraid To Trade takes A Look Inside that Action using 1 and 5 minute charts.
Toro's Running of the Bulls makes a convincing comparision in 1974 & 1987 Redux.
EconomPic points out that despite the mega rally, LIBOR moved higher.
Macroman adds his Two Observations. Caution is warranted.
Mish is expecting a multi-week rally in Crash Count Updated despite exploring the Strange Case of Falling International Reserves.
Naked Capitalism expects More CDO Defaults.
Market Ticker is asking Where's The Change? as Obama embarks on more of the same...
New N Econmics says the FDIC Reported 19 Bank Failures, But Its Really 16.

Thursday, November 13, 2008

The Five Stages of Collapse, Where Are We?

Stage One of the Five Stages of Collapse is Financial Collapse. Take a look at the charts in Really Scary Fed Charts: NOV, US Bankrupt? It would appear that stage one is well under way.

It is critically important to arrest the collapse at Stage One. A fire break is required to halt the contagion. Stage Two is Commercial Collapse. You do not want to get to Stage Two, because once it manifests in the real economy it becomes almost impossible to halt and reverse. The US and the world are dangerously close to commercial collapse as evidenced by the complete and utter destruction of the Baltic Dry Shipping Index.

The Five Stages of Collapse by Dmitry Orlov (Click on the link for the original article including Power Point slides.)

Wednesday, November 12, 2008

Economic Nuclear Winter

This is a refreshingly blunt and realistic assessment of the global financial situation from China.

I don't even think we can blame the evil Black Swan for this... because it really was entirely predictable AND avoidable.

Nuclear Winter: “The global financial crisis is far from over, and now a global economic crisis seems to be unfolding. Recent economic data suggests that the global economy is decelerating rapidly. Even though the US Congress reluctantly passed the USD 700 billion Wall Street rescue plan, stock markets are already focusing on the economic downside. Many investors are bearish enough to talk about a “nuclear winter” for the global economy. How bad could it be?

The Anglo-Saxon economies will follow a similar pattern to that which East Asian economies experienced a little over a decade ago, when the Asian financial crisis led to a 70-90% drop in asset prices, and a 5-10% contraction in most East Asian economies. Australia, the UK, and the US could contract by 2-5%, only held up by their large service economies and strong social welfare systems.

A contraction of such magnitude for large developed economies has not occurred since the Second World War. Hence, the term “nuclear winter” to describe the coming economic downturn may not be an exaggeration.

Anglo-Saxon economies account for over one-third of the global economy and have been a demand driver through their large current account deficits. Their downturn will drag down their trading partners. The eurozone is already stumbling, as the weak dollar has allowed the US to gain market share against EU exporters, and the unfolding US recession has cut demand for European products in their largest market. This will drive the eurozone, particularly export-reliant Germany, into a recession, with Japan following closely on its heels.

China’s exports will also suffer, possibly going into decline in 2009. China’s exports are 36% of GDP in nominal value and probably 25% of GDP in value added. In previous downturns, China was small and cheap enough to expand its exports through market-share gains, but now, as the largest exporter in the world, there is nowhere left to expand to.

If the property bubble were to burst, as now seems to be happening, its economic impact would be much bigger than what we’ve seen so far. And with hot money leaving China as investors rush for safe havens, and weakening exports exacerbating the liquidity drain, there seems to be little that can be done at the moment to reverse falling property prices. Exports and property are currently the biggest drivers of Chinese growth. While I expect infrastructure construction will pick up, fiscal stimuli simply can’t offset the impact of a fall in these two markets. China’s 2009 growth rate will likely reach a 10-year low.

What about America’s USD 700 billion bailout package? The package may stabilize the financial system, i.e., save large financial institutions from bankruptcy, but it won’t stimulate lending and keep the real economy afloat. In Anglo-Saxon economies, consumer lending, built on rising property values, sustained a prolonged consumption boom. With property prices falling, it’s hard to imagine households wanting to borrow, let alone banks actually giving them the money. The USD 700 billion is likely to sit on the banks’ balance sheets, not return to the real economy.

Central banks around the world cut interest rates last month, despite high inflation, hoping to boost demand. This will, in all likelihood, merely lead to greater inflation. Rate cuts stimulate demand by encouraging borrowing, but they can’t work magic. With household balance sheets so damaged, credit demand will only return when households are again on a sound footing.

Weak demand, however, won’t erase inflation. First, energy and food prices remain elevated due to supply and demand issues – demand in the ex-Soviet bloc is rising rather than falling, and demand among oil exporting countries is especially strong. Second, manufacturing prices won’t fall. Ten years ago, as multinationals moved factories from developed economies to China, prices converged towards China’s production costs. But, now China’s costs are rising, and its production capacity is shrinking, both of which will cause prices to rise. Third, IT is fully integrated into production costs.

The dollar rallied over the past month, bringing it back to center stage in traders’ consciousness. The Australian dollar (AUD) and the euro are down 15% against it, the pound sterling down by half as much. It isn’t yet anything to get excited about though. The dollar’s bounce is due to the unwinding of carry trades. The rapid appreciation of the yen against the AUD, for example, is due to high interest rates in Australia attracting even retail investors who borrowed yen at 0.5% interest and bought the Australian dollar at 7%. When Australia cut its interest rate, the carry trades were unwound quickly, and the AUD tumbled.

The dollar’s strength has also had a big impact on commodity prices. Many speculators have invested heavily in the “long commodities and short dollar” trade. As the dollar strengthened, they unwound their positions in commodities too, causing prices to tumble. As I argued above, though, the constraints on the supply side and demand in emerging economies will favor high energy and agriculture prices for years to come.

As the technical factors run their course, speculators will come back into energy and gold. Real interest rates are already negative, and rate cuts could accentuate this. With paper currency depreciating in real value, it is rational for investors to buy value-preserving commodities like energy and gold. The bullish story for energy and gold may last for a decade. Of course, they will fluctuate, as the current trend demonstrates. But they will remain good assets in an era of inflation.

The dollar’s strength will continue for three to six months. As the US economy slows, so will its imports. The trade deficit may fall quickly enough to strengthen the dollar further, but monetary loosening measures will come back to bite later. The US Federal Reserve (Fed) cares more about the economy than inflation. Indeed, when the market shifts its attention to the ballooning debts of the Federal government, the dollar could have a bigger crisis than the last one.

In addition to bailouts and rate cuts, more radical measures are coming. The Fed is already talking about buying commercial papers that businesses issue. The market for commercial papers is pretty much dead now. The risk premium as priced in a credit default swap market is far too high for businesses to function normally. If the Fed purchases the papers directly, it is essentially lending to a business at a risk premium that wouldn’t be touched on the open market. Investors don’t trust these businesses, because they can’t understand their balance sheets. The Fed would use taxpayer money to take on this risk.

Also, central banks could buy government bonds to monetize national debts. With the US’ budget deficit likely to be 4% of GDP in 2008 and an astonishing 6% of GDP in 2009 — without counting the bailout costs — it may have to issue USD 3 trillion of new papers into the Treasury market. If the market cannot absorb this, and the Fed steps in to buy, it is equivalent to printing money to fund fiscal spending.

When it comes to the “inflation or deflation” debate, we should consider who Fed chairman Ben Bernanke is. He has spent his lifetime researching ways to stop deflation, i.e., finding new ways to print money. When push comes to shove, he will do anything to stop deflation. With Bernanke at the helm of the Fed, we should worry about inflation, not deflation.

The creative monetary measures ahead could stabilize the business sector, but won’t prevent a recession. Households first need to decrease leverage if they’re going to take out further debt. The total wealth in the world may have declined by USD 15 trillion. A similar amount could be lost in the next 12 months. It is not possible to get consumers spending again with wealth destruction of such magnitude.

After the recession, I don’t see how the global economy can resume robust growth quickly. Debt-driven Anglo-Saxon consumption has powered the global economy for years. But, after the fallout, investors are unlikely to make the same mistake twice. Most people have long memories.”

Russian Default Risk Jumps

After yesterdays 13% drop the Russian stock market remains closed today.

But, the rest of the world keeps trading… and the speculative attack on Russia continues.

It wasn’t too long ago that a confident Russian Bear flush with easy commodity bling threw caution to the wind and strutted into Georgia to establish dominance in the region.

(I first mentioned problems in the Russian banking sector on October 12th, 2007 in Russian Winter?)

To say Russia has quickly been humbled would be an understatement. After a brief period of complete shock, expect a sudden outburst of absolute rage from the Russian people and Russian politicians as they squarely lay the blame for their instant fall from grace on ‘the West’. Unfortunately Russia's regional neighours are likely to bear the brunt of that blind rage.

The future will not be pretty.

Russia Debt Risk Jumps After `Clumsy' Ruble Widening, Rate Rise: “The cost of protecting against a default by Russia soared after the central bank increased the ruble's trading band and lifted its benchmark interest rate to stem record capital outflows.

Credit-default swaps on Russian government bonds jumped to 7.87 percent of the amount insured from 6.14 percent yesterday, according to CMA Datavision prices. The yield on its 30-year dollar bonds increased to 10.77 percent from 9.1 percent, according to Bloomberg prices.

The central bank's widening of its ruble target against a basket of dollars and euros by 1 percent yesterday “achieved nothing” and cost almost $7 billion of the nation's foreign- currency reserves, according to analysts at Renaissance Capital. Russia joins Hungary, Iceland and Pakistan among a handful of central banks raising interest rates to stem currency losses, as the rest of the world cuts the benchmarks to spur lending.

“The current pressures have largely been provoked by the central bank itself, whose recent clumsy steps in the currency market triggered a new speculative attack on the ruble,” analysts led by Alexei Moisseev at Renaissance in Moscow said in a report today.

Russia has drained more than 20 percent of its currency reserves, the world's third largest, to stem a 15 percent slide in the ruble against the dollar since the start of August as investors withdrew about $147 billion, according to BNP Paribas SA data to Nov. 10.

Fitch Ratings and Standard & Poor's said they may downgrade the nation's debt because the slide in reserves. The total at $484.7 billion remains more than double the combined international reserves of the eurozone nations.”

Related Posts:
Could It Happen to the Russian Bear?
Russia: First Bakn Run
Russia: Smashed Again, Halted Indefinately
Russian: One of the BRICs Just Bricked...
Russia Smells Blood, Commodities Bounce, The 'Great Games' Heats Up
The Russian Bear Awakens: Poland Threatened
War: Russian and Georgia
Russian Winter?

Tuesday, November 11, 2008

Could It Happen to the Russian Bear?

Capital flight is a terrible thing. It happened to Iceland in Iceland Melts, 77% Single Day Drop. In Iceland: What Happens After Imploding? the immediate consequences become apparent. They are not pretty.

Could it happen to the great Russian Bear too?

Ruble Devaluation Concern Triggers Stock Plunge, Rate Increase: “Russia's ruble fell the most in two months as the central bank loosed its defense of the currency amid the country's worst financial crisis since the 1998 devaluation.

Bank Rossii widened its range on the ruble against a basket of dollars and euros by 30 kopeks (1 cent) to increase the currency's “flexibility” and lifted its benchmark refinancing rate to 12 percent from 11 percent to arrest outflows, according to separate statements after the stock market closed. The Micex Index plunged 13 percent, the biggest decline worldwide, and won't open tomorrow, spokeswoman Anna Cheryomushkina said.

“They're going to move the line in the sand back a little bit, where they hope they can defend it,” while resisting a formal devaluation that would erode confidence in ruble deposits, Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, said in an interview today. “If people start to lose confidence in the banking system, we could have a massive run on the banks as we saw twice in the nineties, and then the game is up.”

Russia drained 19 percent of its currency reserves to stem a 17 percent slide in the ruble against the dollar since the start of August, prompting warnings of possible downgrades from Fitch Ratings and Standard & Poor's. Financial turmoil has forced the country's largest oil and steel producers to seek tax breaks, while the defense industry is failing to meet government orders.”

Really Scary Fed Charts: NOV, US Bankrupt?

Fed Defies Transparency Aim in Refusal to Disclose (Update1): “The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that's a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.”

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.”

While the Fed may be refusing to name individual firms, we can just look at the data from the Federal Reserve Bank of St. Louis to pin down exactly where the $2 trillion of emergency loans went. We can also determine how that in turn was deployed.

Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) went from $290.105 billion in September to $648.319 billion in October. That is a 123.50% increase in just one month or a 1481.73% annualized increase. That is also 4.7% of GDP (2007). Currently, there is no evidence at all that the pace of borrowing is slowing down. Obviously, there is an upper limit somewhere.

Non-Borrowed Reserves of Depository Institutions (BOBNONBR) went from -$187.305 billion in September to -$332.750 billion in October. That is a 77.65% increase in just one month or a 931.82% annualized increase. That is also 2.4% of GDP (2007). In plain simple English: Banks are insolvent as a group. The money coming out of the ATM is money borrowed from the Fed. Currently, there is no evidence at all that the health of banks is improving.

Total Borrowing (BORROW) and Non-Borrowed Reserves (BOBNONBR) have clearly blown past each other as the ponzi scheme that was the US financial system finally and suddenly unraveled. This is EXACTLY what happened in Japan. This is EXACTLY how Japan ‘liquefied’ it’s overleveraged, overextended and insolvent banks. Creating the infamous Japanese ‘zombie’ banks resulted in deflation and economic stagnation that is now referred to as the Lost Decade.

Total Borrowings (BORROW) can be broken down into its various sources. Discount Window Borrowings of Depository Institutions from the Federal Reserve (DISCBORR) are one such source. Discount Window Borrows went from $140.291 billion in September to $403.541 billion in October. That is a 187.65% increase in just one month or a 2251.75% annualized increase. Interestingly enough, the discount window wasn’t really tapped until September, with borrowings in August only being $18.078 billion. Clearly, this is a new source of funds for financial firms and may have to do with the fact that Bernanke has removed the negative stigma of tapping the window. He has also made almost everybody and his mamma eligible. Collateral requirements have also been severely degraded to the point where a dead donkey would probably qualify.

Federal Reserve Discount Window:
Collateral Margin Table

Term Auction Credit (TERMAUC) is just one of the many facilities desperately created by Bernanke. Borrowings went from $149.814 billion in September to $244.778 billion in October. That is a 63.39% increase in just one month or a 760.66% annualized increase. That is also 1.8% of GDP (2007).

Term Auction Facility:
Terms and Conditions fro Term Auction Facility
Term Auction Facility Schedule

Excess Reserves of Depository Institutions (EXCRESNS) went from $60.051 billion in September to $267.902 billion in October. That is a 346.13% increase in just one month or a 4153.49% annualized increase. That is also 1.9% of GDP (2007). From June up to September, Excess Reserves hovered around the $2 billion mark. This rather large and sudden jump can signify only one thing: BANK HOARDING. Having completely ‘done their asses’ by extending cheap and easy credit to anybody and anything that could fog a mirror, these super-star banksters are now sitting on their cash, paralyzed by fear. They also know that their sham accounting can only postpone the inevitable and they are clearly gearing up to take further significant losses on their balance sheets. Eventually that CDO made up of dead MBS’s, made up of dead condo loans now sitting in a Level 3 Asset Bucket is going to be marked to market. The banksters must hoard desperately…

The Board of Governors Monetary Base (BOGAMBNS) went from $900.672 billion in September to $1126.244 billion in October. That is 25.04% increase in just one month or a 300.54% annualized increase. For all you gold-bug hyper inflationistas that are drooling over this chart: This is NOT, I repeat, NOT inflationary. This is in fact EVIDENCE of DEFLATION! (Ha! They don’t teach that in school.) First, see the EXCRESNS chart for evidence of bank hoarding behavior. Second, debts AND assets are being liquidated. This results in a massive increase of cash and cash equivalents. However, this process destroys both debt and assets values. Simplified, money is being destroyed on a grand scale. What BOGAMBNS is measuring is but a small component of what qualifies as ‘money’ that HAPPENS to wildly increase as ‘money’ in the broader sense is annihilated.

Reserve Balances with Federal Reserve Banks (WRESBAL) jumped from $260.924 billion in September to $493.633 in October. That is a 89.19% increase in just one month or a 1070.24% annualized increase. That is also 3.6% of GDP (2007). This is the result of a fancy new rule that Bernanke stuck into the TARP rescue package legislation. The Federal Reserve now pays interest on deposits. Since the banksters don’t trust each other anymore they take that hoarded cash and dump it on the Fed. The Fed then turns around and dumps it back on them thru the various facilities. The entire circle jerk is paid for by the US taxpayer. By paying interest on the reserve balances, the Fed is effectively recapitalizing the banks by stealth. The money for the interest of course comes straight out of your pocket. (To pay the interest, the Treasury issues more debt which you pay for thru increased taxes… later. Don’t worry though; a re-run of American Idol is probably on tonight. So everything will be just fine. Just don’t get off the couch you complacent fat bastards. Don’t you dare rock the boat; especially now that it’s sinking.)

Reserve Bank Credit (RSBKCRNS) has jumped from $1054.506 billion in September to $1740.17 in October. That is a 65.02 % increase in just one month or a 780.27% annualized increase. That is also 12.6% of GDP (2007). To pay for all these fun facilities and to create these ‘zombie’ banks, the reserve bank credit now sits at $1.7 trillion. Don’t worry though, wards of the state such as Fannie Mae (FNM) and AIG (AIG) are doing just fine…

Fannie Mae Reports Record Loss After Asset Writedowns (Update3): “Fannie Mae posted a record quarterly loss as new Chief Executive Officer Herbert Allison slashed the value of the mortgage-finance provider's assets by at least $21.4 billion and said it may need to tap federal funds next year.

In its first report since being seized by the U.S. government in September, Washington-based Fannie said its third- quarter net loss widened to $29 billion, or $13 a share, the largest for any U.S. company this year.
[ snip ]

[ snip ]
Treasury Secretary Henry Paulson pledged to invest as much as $100 billion in each company as needed to keep their net worth positive.
[ snip ]

[ snip ]
Fannie's financing agreement with the Treasury constrains its ability to issue debt, capping the total outstanding amount at 110 percent of the balance as of June 30. Fannie estimates that limit as $892 billion. As of Oct. 31, Fannie had $880 billion in total debt outstanding.”

Worried yet? You should be. Weep for the shortest lived super power ever. Weep for your country, for it has quickly and quietly imploded. The United States of America is bankrupt.

Don’t believe me? Read the paper title Is the United States Bankrupt? by Laurence J. Kotlikoff of the FEDERAL RESERVE BANK OF ST. LOUIS. (The paper may be somewhat complex for the laymen. I will post a simplification of the arguments and math in another post.)

The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same
8) Really Scary Fed Charts About to Get Crazy Scary
9) Really Scary Fad Charts: OCT, Now Crazy Scary

Monday, November 10, 2008

Strategists Expect RECORD Year End Rally

Not bloody likely…

Believing in Estimates Means 20% Advance for S&P 500 (Update1): “Even after cutting estimates at the fastest rate ever, Wall Street strategists still need the biggest year-end rally in the Standard & Poor's 500 Index for their forecasts to come true.

David Kostin of Goldman Sachs Group Inc. predicts an advance because U.S. companies are cheap relative to earnings. Strategas Research Partners' Jason Trennert is counting on a resumption in bank lending to lift equities. Thomas Lee at JPMorgan Chase & Co. says stocks are swinging so much that a 25 percent jump by Dec. 31 isn't out of the question.

Strategists were also calling for a record gain at this time last year, after the first quarterly decline in corporate profits dragged the S&P 500 down from its high of 1,565.15 on Oct. 9. It never materialized and stocks have dropped 41 percent since.”

Despite a terrible non-farm print (especially the revision) and scary news out of GM, the market rallied off support around 900. Apparently the market was expecting far worse, had priced that in and was then relieved.

There is resistance around 962 and then again around 985 before that psychologically important barrier of 1000.

For this ‘record’ gain that the so called strategists are calling for, the S&P 500 (SPX) must first clear that 1000 level. Volatility is certainly high enough for moves of that magnitude. But under no circumstance would that kind of rally be in any way sustainable or long lasting.

AIG Losses Increase, Bailout Expands

AIG losses increase…
AIG bailout expands…

Taxpayers are likely to lose more.

Any automotive bailout is likely to follow a similar path. That is to say, the orginal bailout will be for some obscene amount and continued losses will then result in the expansion of those bailouts.

AIG Gets Expanded Bailout, Posts $24.5 Billion Loss (Update1): “American International Group Inc., the insurer bailed out by the U.S., got an expanded government rescue package valued at more than $150 billion after posting a fourth straight quarterly loss.

The U.S. will reduce the original $85 billion loan that saved New York-based AIG in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, according to the Federal Reserve. The insurer lost a record $24.5 billion, or $9.05 a share in the period ended Sept. 30, compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a regulatory filing today.

The changes in the loan may give Chief Executive Officer Edward Liddy more time to salvage AIG, which needed U.S. help to escape bankruptcy after losses tied to home loans. Liddy's plan to repay the original loan by selling units stalled as plunging financial markets cut into their value and forced potential buyers to shore up their own balance sheets.

“It makes a lot of sense to renegotiate the terms,” said Andrew Kligerman, a New York-based analyst at UBS AG, in an interview before the disclosure. By giving AIG more time to sell units, the government “has a better opportunity to recover its capital,” he said.”