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Saturday, November 1, 2008

Politics Before and After a Crash, Depression

What are the odds of a repeat EXACTLY like this 1929 - 1932 flip?

Obama for the win! Landslide?

Friday, October 31, 2008

ZIRP, Zero, Nada, Free Money and a Big Mess

Sticking with the ZIRP, zero, nada, free money theme of the last few posts Yellen’s comments are more evidence that the Fed plans to go that route in an attempt to get out of this big mess.

It didn’t work for Japan, so I don’t see it working here…

Yellen Says Fed May Cut Benchmark Rate Close to Zero (Update1): “Federal Reserve Bank of San Francisco President Janet Yellen said the central bank may cut the benchmark interest rate close to zero percent from the current 1 percent level should the economy remain weak.

“We would do it because we are concerned about weakness in the economy,” Yellen said today after a speech, responding to an audience question about the impact on the economy should the Fed reduce the main rate to as low as zero. “I think we could, potentially, go a little bit lower than” 1 percent, she said in Berkeley, California.

Recent data on the U.S. economy is “deeply worrisome” and the government should consider new ways to help homeowners and stem foreclosures, Yellen said in the speech.

The central bank cut the benchmark interest rate yesterday for the sixth time this year, seeking to avert what may be the worst recession in a quarter century. U.S. consumer confidence fell this month to a record low and the government reported today that the economy shrank at a 0.3 percent annual pace in the third quarter for its biggest decline since 2001.

“Clearly, we have a long way to go before the credit crunch shows significant healing,” she said. “We are in the grip of an adverse feedback loop,” in which tighter credit conditions are exacerbating economic weakness.

In the current quarter, “it appears likely that the economy is contracting significantly” and “inflation risks have diminished greatly,” she said.

First Fed Official

Yellen is the first Fed official to speak since the decision by the central bank to reduce the main rate by half a percentage point to 1 percent, matching a half-century low. Fed Chairman Ben S. Bernanke is set to speak, via satellite, to the same group tomorrow.

“The reason to lower rates, and to lower them promptly and aggressively, as I think the Fed has done, is to get ahead of the curve” and support the economy “against the kind of weakness that Japan has experienced for over a decade,” she said in response to an audience question.

The Conference Board's confidence index decreased in October to 38, the lowest reading since monthly records began in 1967, the New York-based research group said two days ago.

“The effects of the growing credit crunch have outpaced the easing of policy, and, indeed, every major sector in the economy has been adversely affected by it,” Yellen said.

Home prices in 20 U.S. cities fell 16.6 percent in August from a year earlier, and have dropped every month since January 2007, the S&P/Case-Shiller home-price index also showed this week.

`Direct Assistance'

“Unfortunately, this is another case where the bottom is not yet in sight,” Yellen said of home prices, adding that “direct assistance to homeowners and the housing market are worthy of serious consideration.”

With the dollar appreciating against other currencies, “exports will not provide as much of an impetus to growth as they did earlier in the year,” the bank president said.

Yellen, who has been the San Francisco Fed's president since June 2004, is a former Fed governor and ex-chairman of President Bill Clinton's Council of Economic Advisers. She votes on rates again next year.

Japan Stuck, Quantitative Easing in the US

Yesterday’s post Closer to ZIRP, Liquidity Trap, Deflation was all about the US.

Consider this:

The Japanese are still stuck in ZIRP… in the same liquidity trap… and still alternating between mild inflation and mild deflation.

Bank of Japan Cuts Rate to 0.3% to Fend Off Prolonged Recession: “The Bank of Japan cut its benchmark interest rate to 0.3 percent to help stave off a prolonged recession.

Governor Masaaki Shirakawa cast the deciding vote to lower the key overnight lending rate from 0.5 percent after four of the eight board members dissented, the central bank said in Tokyo today. Three wanted to cut the rate to 0.25 percent, and one voted to leave it unchanged, Shirakawa said.

Shirakawa, 59, came under pressure to lower borrowing costs for the first time in seven years after the Nikkei 225 Stock Average slumped to the lowest level since 1982 on concern that the global financial rout would deepen Japan's downturn. Until today, the bank had kept rates unchanged in the face of cuts by counterparts worldwide, arguing they were already “very low.”

A rate cut will probably do little to prop up the economy; nevertheless the bank was probably fearful they'd be viewed as clinging to an overly rigid stance in the middle of a global crisis” if they didn't move, said Teizo Taya, a former Bank of Japan board member who now advises the Daiwa Institute of Research.””

Those of you that mistakenly think the ‘liquidity’ the central banks are injecting will result in a hyper inflationary explosion, think again. The Bank of Japan (BOJ) employed everything including quantitative easing in a desperate attempt to re-flate and got NOTHING.

“Inflation will evaporate next fiscal year, the bank said. Core consumer prices will rise 1.6 percent in the current fiscal year and fail to increase in the following 12 months, it said. Prices will gain 0.3 percent in the year starting April 2010.”

Ben Bernanke is already employing the exact same strategies. The various liquidity facilities are the very mechanisms that implement quantitative easing. The interview below sheds light on how the BOJ did it. Already the similarities are clear.

Tomoya Masanao Discusses the End of Japan's Quantitative Easing:

In March 2001, the Bank of Japan (BoJ) began an historic new monetary policy known as “quantitative easing” in an effort to revive Japan’s economy and end the deflationary decline in consumer prices. Five years later, on March 9, the BoJ ended the quantitative easing policy, satisfied that the Japanese economy was on the path to stable, reflationary growth. In the interview below, Tomoya Masanao, PIMCO’s head of portfolio management in Tokyo, discusses why the BoJ ended quantitative easing and what he expects for the future.

Q: What did the Bank of Japan’s “quantitative easing” policy entail?

Masanao: In setting monetary policy, central banks normally target a specific short-term interest rate, such as the Fed funds rate in the U.S or the uncollateralized overnight call rate in Japan. The central bank sets a target level for the interest rate and then controls it on a daily basis, injecting money into the financial system or withdrawing money from the system as needed to keep the interest rate at the targeted level.

Under quantitative easing, the BoJ stopped targeting the level of the overnight call rate, which had already been lowered to zero in an effort to end deflation and stimulate the Japanese economy. Instead, the BoJ set the level of its current account as the operating target and raised the target level of its current account to $250 to $300 billion, which was far in excess of the roughly $40 billion level needed when the operating target was the overnight call rate at zero percent.

Operationally, the quantitative easing policy required the BoJ to purchase trillions of yen of financial securities, including about $120 billion per year of Japanese government bonds in an operation known as “Rinban.” The BoJ also purchased asset-backed securities and equities, and extended the terms of its commercial bill purchasing operation up to 12 months. The combined effect of these operations was to effectively flood the Japanese financial system with excess liquidity.

The BoJ also explicitly pre-committed to maintain the quantitative easing regime at least until year-on-year changes in the consumer price index excluding fresh foods (the core CPI) became positive in a stable manner. With quantitative easing tied to the core CPI, the BoJ’s explicit commitment to its policy regime was much stronger than the Fed’s commitment to maintain easy monetary policy for a “considerable period” or its commitment to being “patient” in raising rates.

Q: Why did the BoJ decide at the March 8-9 meeting to end the quantitative easing policy?

Masanao: Quantitative easing worked; the Japanese economy is recovering and core consumer prices are rising. Before the BoJ’s March meeting, the year-on-year change in Japan’s core CPI had been positive for three consecutive months, and the core CPI has now increased for four consecutive months. Most importantly, BoJ policymakers expect a sustained recovery and continued increases in core consumer prices, fulfilling the conditions laid out in the commitment to maintain quantitative easing.

Q: How did the quantitative easing policy help to revive Japan’s economy?

Masanao: The BoJ’s pre-commitment to quantitative easing was an important element of the policy’s success. The market was able to expect that the BoJ’s zero interest rate policy would continue for months or even years by just looking at core CPI prints, allowing not only money market rates but also two-year and even longer rates to stay close to zero. The effect of the BoJ’s pre-commitment strategy was also evident in stabilizing the banking system and tightening credit market spreads in general. The availability of term financing at a level close to overnight financing rates enhanced borrowers’ credit. In other words, the quantitative easing policy made easy money available for many borrowers in Japan.

Excess liquidity in the financial system was another key element of the quantitative easing policy. The BoJ officially downplays the role of excess liquidity, concluding that excess liquidity only helped to stabilize the banking system and did not stimulate the economy. I doubt this conclusion.

It is true that bank lending did not improve until recently despite the excess liquidity provided by the BoJ. But bank lending did finally improve. It just took a long time for excess liquidity to work because the banking system was weak and the corporate sector was busy cleaning up its balance sheet. The BoJ just needed to wait for the banking sector to become healthier before the liquidity started to work.

I also believe that assets that the BoJ purchased in large size, i.e., money market instruments and JGBs, benefited by reducing their risk premium. Simply put, when the central bank becomes a large buyer of specific assets as a non-economic agent, supply of those assets to the private sector is smaller than it otherwise would be.

Altogether, the recovery in the banking system, the sustained low rates and the reduction in risk premiums have led to rising business activity and investment. In turn, the expansion in the corporate sector is driving real wages higher, supporting the consumer sector. External demand from the U.S. and China also aided Japan’s recovery, but the BoJ’s quantitative easing policy played a large role in helping to stimulate internal demand.

Q: What do you expect from the BoJ now that the central bank has ended quantitative easing?

Masanao: With the end of quantitative easing, the BoJ’s policy framework will be less transparent but more flexible. The BoJ shifted gears back to targeting the overnight call rate and will need to substantially reduce excess liquidity in its current account to around $40 billion before starting to hike policy rates from the current zero percent. The outright purchase of Japanese government bonds under the Rinban program will also have to be scaled back at some stage in the future.

Future policy decisions will now be based on two perspectives the BoJ recently outlined. The first perspective is the outlook for prices and economic activity one to two years into the future, with an “understanding” that medium- to long-term price stability means an inflation rate of 0% to 2%. The second perspective is an examination of longer-term risks that are most relevant to monetary policy aimed at generating sustainable growth with price stability.

This two-perspective framework is both good news and bad news. The good news is that the new framework will give the BoJ flexibility in monetary policy that is based on an “understanding,” not a “target,” of price stability, while still ensuring some degree of transparency. The bad news is that the BoJ may end up tightening monetary policy too early, and by too much, under the new framework.

Q: Why do you worry the BoJ might tighten too much and too soon?

Masanao: I have three concerns. First, I think the 0% to 2% range for the inflation rate is too low. The lower the level of price stability is, the faster the BoJ is likely to hike rates to prevent inflation risks.

Second, when addressing a forward-looking approach, the BoJ already seems too concerned about an asset price bubble at this stage. Right after the end of quantitative easing, the BoJ released a document titled, “The Bank’s Thinking on Price Stability,” that explained the lagged effect monetary policy has on general prices and detailed the Bank’s own experience during Japan’s asset price bubble in the late 1980s. I think this illustrates that the asset bubble that arose during the 1980s and then popped, leading to the long period of stagnation in Japan’s economy, remains a traumatic experience for the BoJ. It is true that land prices have already seen double-digit growth in primary areas of the large cities in Japan. But I think it is way too early to worry about an asset price bubble and its future negative impact on the real economy.

And third, the BoJ does not believe that its outright purchase of Japanese government bonds under the Rinban operation had an impact in reducing risk premiums in long-term bonds, which suggests that the Rinban operation may be scaled back sooner than later. I worry that the BoJ might be overconfident in downplaying the role of the Rinban. The Japanese government bond market, unfortunately, is much too spoiled to properly function without the BoJ’s kindness as the “buyer of last resort.”

But I still trust that the BoJ took as the most significant lesson of the last decade that the risk for the central banks is extremely asymmetric when the economy is only at mild inflation or disinflation. More than any other central bank, the BoJ understands the lack of policy tools that are immediately effective when the economy slips into deflation. Japan’s economy is no doubt recovering. But it is only just emerging from deflation. Let’s not forget it.

Q: Thank you, Tomoya, we look forward to speaking with you again as the BoJ’s new policy regime develops.

Thursday, October 30, 2008

Peter Schiff vs. Art Laffer for One Dollar and Honor

A very interesting clip of Peter Schiff arguing that a massive, multi-year recession is just around the corner. Art Laffer does his best to ridicule and insult Peter, offering to bet him a dollar and his honor that there can't possibly be a recession coming.

Who's your daddy now Art? Put one dollar and your honor in an envelope and send it to Peter.

Date: August, 28th 2006.

Goldigger Meets Hedgie, Hilarious

[ Hat Tip: Shallowman ]

What happens when a goldigger meets a hedgie? You're about to find out...

This was picked up by the New York Times: Acquisitive Craigslist Post Reddens Faces All Around. Original post below:


What am I doing wrong?

Okay, I'm tired of beating around the bush. I'm a beautiful (spectacularly beautiful) 25 year old girl. I'm articulate and classy. I'm not from New York . I'm looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don't think I'm overreaching at all.

Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a business man who makes average around 200 -250. But that's where I seem to hit a roadblock. 250,000 won't get me to central park west. I know a woman in my yoga class who was married to an investment banker and lives in Tribeca, and she's not as pretty as I am, nor is she a great genius. So what is she doing right? How do I get to her level?

Here are my questions specifically:

- Where do you single rich men hang out? Give me specifics- bars, restaurants, gyms
- What are you looking for in a mate? Be honest guys, you won't hurt my feelings
- Is there an age range I should be targeting (I'm 25)?
- Why are some of the women living lavish lifestyles on the upper east side so plain? I've seen really 'plain jane' boring types who have nothing to offer married to incredibly wealthy guys. I've seen drop dead gorgeous girls in singles bars in the east village. What's the story there?
- Jobs I should look out for? Everyone knows - lawyer, investment banker, doctor. How much do those guys really make? And where do they hang out? Where do the hedge fund guys hang out?
- How you decide marriage vs. just a girlfriend? I am looking for MARRIAGE ONLY

Please hold your insults - I'm putting myself out there in an honest way. Most beautiful women are superficial; at least I'm being up front about it. I wouldn't be searching for these kind of guys if I wasn't able to match them - in looks, culture, sophistication, and keeping a nice home and hearth.

It's NOT ok to contact this poster with services or other commercial interests

PostingID: 432279810


Dear Pers-431649184:

I read your posting with great interest and have thought meaningfully about your dilemma. I offer the following analysis of your predicament. Firstly, I'm not wasting your time, I qualify as a guy who fits your bill; that is I make more than $500K per year. That said here's how I see it.

Your offer, from the prospective of a guy like me, is plain and simple a crappy business deal. Here's why. Cutting through all the B.S., what you suggest is a simple trade: you bring your looks to the party and I bring my money. Fine, simple. But here's the rub, your looks will fade and my money will likely continue into fact, it is very likely that my income increases but it is an absolute certainty that you won't be getting any more beautiful!

So, in economic terms you are a depreciating asset and I am an earning asset. Not only are you a depreciating asset, your depreciation accelerates! Let me explain, you're 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35 stick a fork in you!

So in Wall Street terms, we would call you a trading position, not a buy and hold...hence the rub...marriage. It doesn't make good business sense to "buy you" (which is what you're asking) so I'd rather lease. In case you think I'm being cruel, I would say the following. If my money were to go away, so would you, so when your beauty fades I need an out. It's as simple as that.

So a deal that makes sense is dating, not marriage. Separately, I was taught early in my career about efficient markets. So, I wonder why a girl as "articulate, classy and spectacularly beautiful" as you has been unable to find your sugar daddy. I find it hard to believe that if you are as gorgeous as you say you are that the $500K hasn't found you, if not only for a tryout.

By the way, you could always find a way to make your own money and then we wouldn't need to have this difficult conversation.

With all that said, I must say you're going about it the right way. Classic "pump and dump."

I hope this is helpful, and if you want to enter into some sort of lease, let me know.

Closer to ZIRP, Liquidity Trap, Lost Decade,

“The door is wide open for further rate cuts or anything else that might help the economy. The implication is that we'll see another half-point cut in December, if the prospects for the economy remain poor.'' -Allen Sinai, Decision Economics

Fed Signals Door `Open' for Cutting Rates to Lowest on Record: “Federal Reserve Chairman Ben S. Bernanke signaled he's ready to cut interest rates to the lowest level on record should the central bank's actions fail to stem the deepening economic slump.

Policy makers said yesterday that “downside risks to growth remain” even after their half-point reduction in the main rate to 1 percent. The Fed dropped a reference in its statement to threats from inflation, projecting “levels consistent with price stability'' in coming quarters.”

Yesterday we got one step closer. Already the market is expecting another 50 basis point cut to 0.50% in December. (See: Really Scary Fed Charts, Why Bernanke Will Furiously Cut. This post has become a monthly series.)

“Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression, and yesterday's shift indicates he's prepared to revisit his 2003 commitment as a governor to lower rates to zero percent if necessary. Should lending fail to revive by December, the central bank will probably cut by another half point, said former Fed Governor Lyle Gramley.”

In Japan 2.0 I argued the following:

“We are heading for Japan v2.0.

Think ZERO percent interest rates and think DEFLATION. Think LOST DECADE. Think DEPRESSION. Now make all that GLOBAL.

That is what we have to look forward to.”

We are heading for a Liquidity Trap. Believe it. DEFLATION is Here, inflation is what we had.

This mess will take a long long time to sort itself out. Just like Japan had their Lost Decade, so to will America.

Related Posts:
Japan 2.0
Japan 2.0: Liquidity Trap
The Lost Decade
Stimulus Package: Does it Even Work
Lost Decade

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 Fed Charts: OCT, Now Crazy Scary

Wednesday, October 29, 2008

Tuesday, October 28, 2008

Volkswagen Short Squeeze, Hedgies Hurting

This morning Volkswagen (VOW) was worth more than Exxon Mobile (XOM) as common shares rocketed up as much as 93% on a short squeeze.

Prosche, in an attempt to take over the carmaker has engineered a shortage of common shares by gobbling up as much as 75% of the company via options. The counter parties to these options went long the actual stock to hedge their exposure, leaving the shorts scrambling for shares to buy back.

Volkswagen Overtakes Exxon as Most Valuable Company (Update1): “Volkswagen AG became the world's biggest company by market value after Porsche SE announced plans to raise its stake in the German carmaker to 75 percent, triggering demand from short-sellers.

Volkswagen rose as much as 485.01 euros, or 93 percent, to 1,005.01 euros and was up 55 percent as of 11:10 a.m. in Frankfurt trading. Wolfsburg, Germany-based Volkswagen has risen more than fivefold this year and at its intraday peak was valued at 296 billion euros ($370 billion), more than Exxon Mobil Corp.'s $343 billion market value at yesterday's closing price in New York, according to data compiled by Bloomberg.

Porsche, the maker of the 911 sports car, has accumulated Volkswagen shares since 2005 in an effort to protect ties to its largest supplier. Porsche said Oct. 26 that it aims to increase its holding from 42.6 percent. That prompted some short-sellers to buy from a shrinking pool of stock to end their bets. BaFin, Germany's financial-market regulator, said today that it's monitoring trading in Volkswagen shares following the gains.

“One of the biggest risks with the herd mentality approach to shorting is that a lot of money can be made on the outset,” said Ed Oliver, a senior business consultant at Spitalfields Advisors, a London-based firm specializing in securities lending. “But you can end up losing the whole of it when you try to close the position. There's no limit.”

Stock On Loan

Volkswagen's surge came as 23 of the 29 other stocks in the country's benchmark DAX Index fell on investor concern that a slowdown in the global economy is accelerating. About 12.9 percent of Volkswagen's common stock was on loan as of Oct. 23, mostly for short sales, the highest proportion of any company on the DAX, according to London-based Data Explorers.

Stuttgart, Germany-based Porsche added to an earlier 35 percent stake and said two days ago that it holds options for another 31.5 percent.

“Porsche heads for a domination agreement and triggers a short-squeeze,” Horst Schneider, an HSBC Holdings Plc analyst in Dusseldorf, Germany, wrote in a report yesterday, in which he upgraded Volkswagen's common shares to “neutral” from “underweight.” The stock “will be more driven by covering of short positions rather than by fundamental valuations.”

Carmakers worldwide are struggling with plunging sales as credit markets seize up and economies contract, deterring consumers from making large purchases. U.S. industry-wide auto sales fell 27 percent in September, the steepest monthly slide since 1991, while nine-month deliveries in Europe declined 4.4 percent as September sales dropped 8.2 percent.

Ratings Cut

PSA Peugeot Citroen, Europe's second-biggest carmaker, and smaller French competitor Renault SA both had their credit ratings downgraded by Moody's Investors Service because of the risk that car markets won't recover next year. Standard & Poor's said it may cut the credit rating of Fiat SpA, Italy's largest carmaker, to less than investment grade.

Until yesterday, when the stock more than doubled, Volkswagen's biggest gain in almost two decades was a 27 percent jump on Sept. 18. People familiar with securities lending said at the time that the collapse of Lehman Brothers Holdings Inc. caused the increase by triggering recalls of borrowings. The stock fell 23 percent on Oct. 20, the biggest drop also in almost two decades, as short-sellers predicted the price would decline once Porsche gains control.

Largest Shareholders

There may be little ordinary stock freely trading in Volkswagen because most of the shares are owned by Porsche, the German state of Lower Saxony and the banks that underwrote Porsche's options, Adam Jonas, a London-based analyst at Morgan Stanley, wrote in a research report yesterday. Lower Saxony is Volkswagen's second-biggest owner with a 20.1 percent stake.

Index-tracking funds also hold stakes in Volkswagen, now the DAX's most-weighted stock, and must retain the holdings as long as the carmaker remains a member.

Deutsche Boerse AG, the operator of Germany's main stock markets, said Volkswagen will remain in the DAX unless the carmaker announces the freely traded stock no longer meets requirements.

“We're applying our regulatory framework and, as long as Volkswagen's free float is above 5 percent, the index won't be changed,” said Torsten Baar, a spokesman for Frankfurt-based Deutsche Boerse.

BaFin is analyzing trading in Volkswagen stock, though it hasn't opened a formal inquiry into whether there's any manipulation and “pure cash-settled options do not require disclosure” under the country's laws, said Anja Engelland, a spokeswoman for the Bonn-based agency. Results from any analysis are unlikely this week, she added.

Porsche's Intent

Until Oct. 26, Porsche had said it was aiming only for a stake exceeding 50 percent, and Chief Executive Officer Wendelin Wiedeking said at the Paris Motor Show early this month that a stake of as much as 75 percent would be “not realistic” because of market turmoil.

Short sales have largely been undertaken by investors betting on a decline in Volkswagen's common stock, which hold voting rights, or its underperformance relative to the preferred shares, which carry no votes, according to analysts.

The common shares, which outnumber the preferred equity almost three to one, are the only gainers this year on either the DAX or the nine-member Bloomberg Europe Autos Index. In contrast, Volkswagen's preferred stock has dropped 62 percent, including a 14 percent decline yesterday, to 37.89 euros.

“Volkswagen has been one of the greatest shorts of hedge funds, and it's been an absolute, absolute disaster,” Emmanuel Roman, co-chief executive officer of GLG Partners Inc., said at a conference in London on Oct. 23. “It's been very painful.” GLG didn't participate in short-selling trading of the carmaker's common shares, he said.”

Iceland: What Happens After Imploding?

Recently Iceland imploded. See the post Iceland Melts, 77% Single Day Drop for some charts that point straight to hell. So what happens afterwards?

The simple answer: Nothing pleasant…

Iceland Central Bank Raises Key Interest Rate to 18% (Update2): “Iceland's central bank unexpectedly raised the benchmark interest rate to 18 percent, the highest in at least seven years, after the island reached an aid agreement with the International Monetary Fund.

Policy makers raised the key rate by 6 percentage points, the Reykjavik-based bank said in a statement on its Web site today, taking the rate to the highest since the bank began targeting inflation in 2001. It will publish the reasons for today's move at 11 a.m. local time.

The central bank is raising rates as Iceland, the first western nation to seek aid from the IMF since the U.K. in 1976, faces a prolonged contraction, coupled with possible hyperinflation and rising joblessness. The economy will shrink as much as 10 percent next year, the IMF forecasts. Iceland will receive about $2.1 billion in aid from the Washington-based fund, according to a deal struck on Oct. 24.”

A sudden 6% overnight increase by the central bank has got to mess with local mortgage rates. Inflation in Iceland is expected to hit 75% because the economy is heavily import dependant and the currency has collapsed. This has instnatly tripled the costs of everything entering the country.

History shows that attempts to save currencies from plunges by raising interest rates are prone to failure. The U.K. on Sept. 16, 1992, boosted its benchmark rate by 5 percentage points in two moves to 15 percent in a doomed effort to keep the pound in a European exchange-rate system. Britain gave up the attempt the same day and canceled the second rate rise; the pound lost 22 percent against the dollar in the final two months of the year.

During the 1997-98 Asian financial crisis, the International Monetary Fund advocated high rates to help restore confidence in sliding currencies. Central banks from Indonesia and Thailand to South Korea and Singapore lifted borrowing costs. South Korea took its main rate to 30 percent in December 1997.

The strategy failed to prevent exchange-rate collapses across the region. South Korea's won lost 47 percent against the dollar in 1997, the Thai baht fell 45 percent and Indonesia's rupiah plummeted 56 percent.”

Clearly, nobody ever learns anything. Looks like more of the same all around.

Monday, October 27, 2008

Close Call for Obama: Skin Head Assassins

These neo-nazi freaks were going to drop Obama wearing tuxedoes and top hats…

The news may also have dropped the market suddenly into the close.

ATF Says It Broke Up Tennessee Plot to Kill Obama, Other Blacks: “Federal agents in Tennessee broke up what they called a plot by two men identifying themselves as white supremacists to assassinate Democratic presidential candidate Barack Obama as part of a “killing spree” of black people.

The two suspects, Daniel Cowart, 20, of Bells, Tennessee, and Paul Schlesselman, 18, of West Helena, Arkansas, were accused of discussing a plan to rob a gun dealer of weapons and ammunition and commit murders at a predominantly black school, Lawrence J. Laurenzi, the U.S. attorney for western Tennessee, said in a statement.

The suspects' “final act of violence” would be an attempt to kill Obama during which they both expressed a willingness to die, the statement said. The two men told authorities they planned to wear white tuxedos and top hats while carrying out the assassination, according to court papers.”

I’m not sure how this accomplishes anything or why the numbers are so particular, but hey… maybe they’re just plain crazy.

“The two talked of killing 88 black people and voiced a desire to decapitate 14, Roland said.”

Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats

“Forget about inflation. There has never been in the history of the world an inflationary run while land prices were declining. The amount of debt being destroyed as the monster of a debt bubbles implodes will suck down all asset prices and just absolutely collapse the velocity of money.” -TheFinancialNinja, 09/10/08

It would appear the institutions AND individuals are hoarding cash and cash equivalents. The percent change for M1 over the last 3 months (June 2008 to Sep 2008) has spiked to 19.5%. The six and twelve month percentage change is 11.4% and 6.4% respectively. Clearly this hoarding behavior is quite sudden and recent. M2 for example isn’t increasing nearly as fast at 6.8%, 4.0% and 6.2% over the last three, six and twelve months. (Data: Money Stock Measures)

I mentioned recent hoarding behavior in the post Bernanke Bailouts Not Working, Banks Hoarding.

For the hyperinflationists out there, a massive increase in money supply IF IT IS HOARDED would still result in deflation.

Recent world equity market declines have wiped $10 trillion of wealth clean off the planet. That amount alone, without factoring in the secondary and tertiary effects, is so deflationary as to make the inflationary and hyperinflationary arguments a hilarious little joke.

In the post Inflation, Deflation, Money Velocity and Gold I argued that we cannot avoid deflation. Regular readers know that I’m firmly in the deflationist camp.

I repeat: “As soon as the fear and panic subsides, the easy money will be made SMASHING gold short as people finally realize that inflation is what we HAD and that deflation is what we will HAVE.”

$1000 was the high. Since then the last to major 'lifts' failed, with each successive lift failing to meet or exceed the previous high... and that is despite some of the greatest panic EVER. De-leveraging forces or not, if Gold was meant to go, surely it should have gone now of all times...

Over at Afraid To Trade Corey acknowledges the technical damage to the daily and weekly charts for Gold but is more constructive on the monthly chart in A Monthly View of Gold Prices.

The Tinfoil Hat crowd can't figure this out of course and turns to 'it must be a giant global consipracy theory' arguement. My personal favorite are the clowns over at GATA, where they postulate the greatest, most complex manipulation theory and cover up ever as the only explanation for the failure of gold to go to infinity and beyond.

Money Stock Measures Definitions:

Federal Reserve Statistical Release:
Money Stock Measures

1. M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

2. M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

Equity New Lows, Treasury Yields: Better?

Even as equities continued their plunge (NYA, grey area) into the Abyss, yields on the 10 year US Treasury (UST10Y, red, black line) did not break the lows made in May. From the September low, yields have been making a series of higher lows. Although a giant increase in treasury supply is definitely being priced in, it can also be argued that the bulk of the flight to quality trade has already taken place. In fact, some brave souls may now be reversing out of Treasuries and nibbling at equities.

Support for this theory can be found in the fact that despite new price lows in the NYSE Composite (NYA, grey area), the number of new lows (NYLOW, greay bar) have not spiked over 1000. Market internals are improving from hysterical levels. It would appear that bargains are being picked up and that fewer and fewer stocks are falling to new lows...

'Big-Time' Economic Erosion, More Rate Cuts

Looks like rates will be dropping below 1% sooner rather than later…

Bernanke Battles `Big-Time' Economic Erosion With New Rate Cuts: “Less than three weeks after the Federal Reserve's emergency interest-rate reduction was, in the words of its vice chairman, “overwhelmed” by the collapse of financial markets, Ben S. Bernanke is about to try again.

The outlook has worsened since the Fed last acted on Oct. 8, and analysts now say the economy may shrink more than 2 percent in the final quarter of 2008, its steepest decline in at least 18 years. “We're heading south big-time,” says Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Group Co. in Washington.

As a result, Fed Chairman Bernanke and his colleagues may eventually have to drive the benchmark overnight rate close to zero to resuscitate the economy. The next installment comes Oct. 29 when, says Gramley, “the Fed is going to cut rates a half percentage point.”

That would reduce the central bank's target for the federal funds rate, which commercial banks charge each other for overnight loans, to 1 percent. The official rate hasn't been that low since 2004, and has never been lower since the Fed began trying to control it in the late 1980s. More cuts may follow if the economy doesn't recover.

Bernanke, 54, and his colleagues are carrying out what Vincent Reinhart, former Fed director of monetary affairs, calls a “great monetary experiment” in attacking the financial crisis -- and the credit crunch it spawned -- on three fronts: lower rates, increased liquidity and purchases of assets that banks and investors don't want.”