Archive for April, 2008

Oil in 2012: $200 or $50?

Wednesday, April 30th, 2008

Full story here. Trade with ShadowTraders and it won’t matter if the market’s up or down.

“CIBC World Markets analysts recently predicted that oil would sell for US$200 a barrel in 2012, as oil supplies grow ever tighter relative to demand. That would imply a continued global boom for the next four years, which would bring inflation, perhaps validating CIBC’s prophesy as the dollar went the way of the 1923 Reichsmark.

All the same, that’s not the way I’d bet; I think $50 is more likely. We are probably not quite at the end of this unprecedented oil and commodities bubble, but we are surely getting close…

So how likely is this hyperinflationary scenario, and how likely is $200 oil without it?

The hyperinflationary scenario depends on the Fed continuing to increase money supply by around 31% per annum for the next four years. That’s not quite impossible. Consider a world in which Federal Reserve Board chairman Ben Bernanke has little or no fear of inflation, but where house prices are an essential political measure of the Fed’s success. In that case, to prevent house prices from catastrophic decline, Bernanke might continue to indulge in stimulatory policies, lowering interest rates as far as practicable towards zero, buying essentially unlimited quantities of dodgy housing debt from the banking system and assisting in bailouts of any banks that got into trouble.

A sloppy populist administration, were such to be elected in November, might ally with the Fed in devising a series of ever-more expansionary “stimulus packages” while prevailing on the Fed to support the Treasury bond market to help it fund its trillion dollar deficits. It might assist the process by erecting trade barriers against Third World imports, which would be seen as taking away jobs; such barriers would restore few jobs but might well produce huge increases in import prices. The rest of the world would doubtless go into recession as the US withdrew partially from the world market, so oil and other commodity prices would decline in real terms, but the dollar prices of non-oil imports could be rising so rapidly that the overall price level continued to inflate.

Sound horribly plausible? I’m rather afraid it is. The 2008 campaign has shown that the quality of economic thought among both the US primary electorate and the political class has deteriorated markedly in the past decade, so that there are few barriers today to rampant protectionism, rising inflation and ever-increasing government spending. There are counterproductive policies of the 1930s through the 1970s that would probably be avoided today, but not many of them…”

A further observation: Since oil is now $120 a barrel, CIBC [Canadian Imperial Bank of Commerce] simply took the high end of the A range for oil as $200 a barrel for 2012 that OPEC projected. It might not have to wait that long since OPEC’s president, Algerian energy minister Chakib Khelil, thought that target would be reached in 2009. American lawmakers are pinning the tail of blame on this cartel of oil-producing states for either holding or cutting production levels of oil for historic oil prices by putting pressure on world economies and causing disruptions in the marketplace. Yet, big oil companies are registering record profits. At his press conference in the Rose Garden, President Bush called for drilling in wildlife preserves and for building more refineries. Oil industry watchers point out that America’s refineries are operating at 85% of capacity, which may account for the higher prices at the pump. But the last word remains with Chakib Khelil. He simply stated that “high prices are due to the recession in the US” and the weakness in the American dollar. Moreover, he noted that “each time the dollar falls a percent, the price of a barrel rises by $4″, and if the value rises, the reverse happens. Conclusion: the weak dollar has to go. But no one should count on that in the short term.

Irredeemable debt

Monday, April 28th, 2008

Full story here.


Perhaps the worst aspect of the regime of irredeemable debt is the lowest level of morals followed by governments in modern history. It is epitomized by an elaborate check-kiting conspiracy between the U.S: Treasury and the Federal Reserve. Treasury bonds, contrary to appearances, are no more redeemable than Federal Reserve notes. It’s all very neat: the notes are backed by the bonds, and the bonds are redeemable by the notes. Therefore each is valued in terms of itself, rather than by an independent outside asset. Each is an irredeemable liability of the U.S: government. The whole scheme boils down to a farce. It is check-kiting at the highest level. At maturity the bonds are replaced by another with a more distant maturity date, or they are ostensibly paid in the form of irredeemable currency. The issuer of either type of debt is usurping a privilege without accepting the countervailing duty. They issue obligations without taking any further responsibility for their fate or for the effect they have on the economy. Moreover, a double standard of justice is involved. Check-kiting is a crime under the Criminal Code. That is, provided that it is perpetrated by private individuals. Practiced at the highest level, check-kiting is the corner-stone of the monetary system.

But our world is still one of crime and punishment, tolerating no double standard. The twilight of irredeemable debt is upon us. The sign is that banks are reluctant to take the promissory notes of one another. Significantly, this also includes overnight drafts. The banks know there is bad debt at large, and they don’t want to be victimized by taking in some inadvertently. What the banks don’t yet know, but will soon learn, is that all irredeemable debt is bad debt, and there is no way to rid the system of poison through administering more.

Redeemability of debt is not a superfluous embellishment. It has a function of fundamental importance: the proper allocation of resources to the different channels of their utilization. The obligation to redeem debt hangs as the sword of Damocles over the government, just as it does over the head of every economic participant. It compels economy and foresight. It forces balancing of income and expenditures. It adjusts claims and commitments. It limits expansion by shifting resources away from the incompetent, and away from unhealthy projects. The regime of irredeemable debt creates an escape route from commitments by the promise of eliminating the pressure of solvency. Whether it promises eternal prosperity, or it promises eternal subsidies, it does not matter. The results are the same. They consist in misleading people, enticing them to skate on thin ice, and luring them into financial adventures, private or public, which are not warranted by the ability to pay. The logical consequence is wholesale bankruptcy of individuals as well as that of the political setup. Losses breed more losses, until they become an avalanche. The present crisis is just the first sign of that denouement. More is on the way. ”

I hate to be a party pooper, but the fact that it is irredeemable money makes it monopoly money by default. The global ponzi scheme is coming to a head. Make sure you have tangible assets and stop playing the eternal debt game. Those pieces of paper with dead presidents aren’t it.

Credit Bubble – Stage II

Monday, April 28th, 2008

Full story here. Get ahead using ShadowTraders. Don’t wait to ride bubbles.

“…I have referred to these policy measures as the supplanting – or underpinning – of Wall Street-backed finance with federal government-backed finance. Or, perhaps somewhat less analytically ambiguous, to avoid implosion Washington had no alternative but to explicitly and implicitly nationalize both system credit and liquidity risk.

It was desperate policymaking in the extreme; it was bold and it was historic. It reworked the rules of our credit apparatus, and the markets have for more than a month now grappled with the ramifications of these changes. To be sure, each week of relative credit system stability has provided various troubled players the opportunity to raise new capital, others to pare problem positions, and many to adjust various risk exposures. Importantly, the unwinding of “bearish” speculations and hedges is now playing an instrumental role in the resurgence in marketplace liquidity.

According to Bloomberg data, last week saw an all-time record US$43.3 billion of US corporate debt issuance (compared with a year-to-date weekly average of $18 billion). Issuers included Citigroup, Merrill Lynch, Bank of America, Wachovia and Goldman Sachs – and much of their issuance was in the form of new hybrid “equity capital”. Investment-grade bond spreads narrowed last week to the lowest level since mid-January; junk bond spreads to early-March levels; and leverage loan prices recovered this week all the way back to December levels.

Many people, including seasoned strategists, are today arguing that the worst of the financial crisis is now behind us. I disagree, of course. Yet from an analytical perspective it is imperative to appreciate that (the bust of Wall Street-backed finance notwithstanding) we still very much operate in a unique period of market-based credit. The ebb and flow of market perceptions (of greed and fear) continue to have an outsized impact on credit availability and marketplace liquidity, hence economic performance.”

PPT–not so secret anymore

Monday, April 28th, 2008

Full story here. ShadowTrade so you won’t be at the mercy of other shadowy figures.

“…The Working Group, or PPT, is much-pondered but reclusive group that has declined to submit to the federal Freedom of Information Act or to testify in detail before Congress about its activities. This is true even though its current chief, Treasury Secretary Henry M. Paulson Jr. â?? Federal Reserve Board Chairman Ben Bernanke is another prominent member — made no secret of revving up its operations after he took took over at Treasury in 2006.

The curious reader will wonder: Just what does the PPT do?

Right now, Congress ought to able to pursue this basic question: Is the PPT a kind of committee for the extra-legal coordination, manipulation and subsidization of financial institutions and markets? Has it been stepping in when free-market forces have become too perilous to profits and asset values — in financial crisis years like 1998, 2001 and 2007. Has Washington decided to protect the financial sector more than any other element of the U.S. economy?”

My bit: The answer to that last questions is a resounding “YES”, to the detriment of all else.

Over the last decade or so, the Treasury Dept. and the Fed have both developed something of a scofflaw attitude toward strict interpretation of federal statutes and regulations. For example, both winked in the late 1990s, as federal regulators allowed Citibank to merge with Travelers Insurance, despite contrary law still on the books. Both winked in more recent years, as major banks set up huge multi-billion-dollar structured investment vehicles, or SIVs, to do on an off-the-books basis what they were not allowed under banking law. Now we have the federally funded J.P Morgan Chase takeover of Bear Stearns. The PPT may well have had a quiet role in some of these actions.

For the bigger picture, look back to the stock market crash of 1987 — the sickening Oct. 19 fall when the Dow-Jones Industrial Average lost 508 points or 23.6 percent of its value in a single trading day. Alan Greenspan had just taken over as the Federal Reserve Bank chairman, and some believe that the Fed intervened to support the market the next day — by either buying Standard & Poors futures or telling several collaborative broker-dealers to do so…”

This article is far too kind. There is merely a facade of a “free market”, since that now excludes so-called big players from actually taking a penalty in terms of loss of funds or ability to operate. Not to mention turning a blind eye to illegal actions.

Bear Stearns: 100% fraud

Wednesday, April 23rd, 2008

Full story here. I knew the real-deal reason would show up sooner or later.

“This article is about how Bear Stearns stock was artificially collapsed so that illegal insider traders would make billions and  J.P. Morgan would be paid $55 billion of US tax payer money to shore up themselves and buy Bear Stearns at bankruptcy prices.

Massive buying of puts and shorting stock in Bear Stearns

On March 10, 2008, the closing price of Bear Stearns was 70. The stock had traded at 70 eight weeks earlier. On or prior to March 10, 2008 requests were made to the options exchanges to open new April series of puts with exercise prices of 20, and 22.5, and a new March series with an exercise price of 25.

Their requests were accommodated and new series were opened for trading March 11, 2008. Since there was very little subsequent trading in the call with exercise prices of 20, 22.5 or 25, it is certain that the requests were made with the intentions of buying substantial amounts of the puts.

There were, in fact, massive volumes of puts purchased in those series which opened on March 11, 2008.

For example: between March 11-14 inclusive, there were 20,000 contracts traded in the April 20s, 3700 contracts traded in the April 22.5s, and 8000 contracts traded in the April 25s. In the March 25s, there were 79,000 contracts traded between March 11-14, 2008.

Question: Why did the options exchanges not open the far “out of the money” puts for trading the first time that Bear Stearns stock hit 70, when the April and March options had far more time to expiration? Certainly if the requesters were legitimate hedgers or speculators, their buying the March and April puts with 2 and 3 months to expiration was more reasonable.

Answer: The insiders were not ready to collapse the stock and did not request the exchanges to open the new series when Bear Stearns first hit 70.
Second Request and Accommodation

On or prior to March 13, 2008, an additional request was made of the options exchanges to open more March and April put series with very low exercise prices. These new March put options would have just five days of trading to expiration. The exchanges accommodated their requests, knowing that the intentions of the requesters were to buy puts. They indeed bought massive amounts of puts. For example the March 20 puts traded nearly 50,000 contracts (i.e. contracts to sell 5 million shares at 20). The March 15s traded 9600, the March 10s traded 13,000 and the March 5s traded 6300 all on March 14 (the first day of trading of the new March series).

The introduction of those far-out-of-the-money put series in the April and March months immediately before the crash provided a vehicle whereby extreme leverage was available to the insiders. In other words if an insider had $100,000 and he knew that Morgan would buy Bear Stearns at 2, he could make 5-10 times more on the $100,000 by buying the newly introduced March puts. This is so because the soon to expire far out-of-the-money puts were far cheaper than the July or October out-of-the-money puts. And that is why the illegal inside traders requested the exchanges to introduce the far out-of-the-moneys just days before the crash.

But this scenario has serious implications. This means that the deal was already arranged on March 10 or before. That contradicts the scenario that is promoted by SEC Chairman Cox, Fed Boss Bernanke, Bear CEO Schwartz, Jamie Dimon of J.P. Morgan (who sits on the board of directors for the New York Federal Reserve Bank) and others that false rumors undermined the confidence in Bear Stearns making the company crash, notwithstanding their adequate liquiduty days before. I would say that the deal was arranged months before but the final terms and times were not determined until maybe March 7-8, 2008.
On March 14, 2008, the April 17.5s, the 15s, the 12.5s and the 10s traded 15,000 contracts combined. Each put gives the right to sell 100 shares. So for example, these 15,000 April puts gave the purchaser(s) the right to sell 1.5 million shares at prices between 10 and 17.5. Those purchasers expected to make profits on 1.5 million shares because they knew the deal was coming at $2.00.

That is the only plausible explanation for anyone to buy puts with five days of life remaining with strike prices far below the maket price. So there were requests, during the period of March 10-13, to the exchanges to open the March and April series for buying massive amounts of extremely out-of-the-money puts, which were accommodated by the options exchanges. Did the Exchanges aid and abet the insider trading scheme? We [are] not able to have a strong opinion on that idea.
Media statements of adequate liquidity.

However, Reuters, on March 10, 2008 was citing Bear Stearns sources that there was no liquidity crisis and that there was no truth to the speculation of liquidity problems. And none other than the Chairman of the Securities and Exchange Commission on March 11, 2008 was stating that “we have a good deal of comfort with the capital cushion that these firms have”. We even had the “mad” Jim Cramer proclaiming on March 11, 2008 that all is well with Bear Stearns and that the viewers should hold on to their Bear Stearns. And on March 12, 2008, Alan Schwartz CEO of Bear Stearns was telling David Faber of CNBC that there was no problem with liquidity and that “We don’t see any pressure on our liquidity, let alone a liquidity crisis”.

The fact that the requests were made on March 10 or earlier that those new series be opened and those requests were accomodated together wth the subsequent massive open positions in those newly opened series is conclusive proof that there were some who knew about the collapse in advance, while Reuters, Cox, Schwartz and Cramer were telling the public that there was no liquidity problem. This was no case of a sudden developement on the 13 or 14th, where things changed dramatically making it such that they needed a bail-out immediately. The collape was anticipated and prepared for, even while the CEO of Bear Stearns and the SEC Chairman of the SEC were making claims of stability.

What was the reason that Cramer, Cox and Schwartz were all promoting Bear Stearns immediately before its collapse? That will be speculated upon for years to come.

Cramer has admitted that “truth” was not his friend and that he manipulated stocks to influence investors behavior. Was this one of his acts? But no apologies from Cramer as he claims now that he was refering to keeping money in Bear Stearns Bank not in Bear Stears stock.
Proof of Insider Trading:

To prove the case of illegal insider trading, all the  Feds have to do is ask a few questions of the persons who bought puts on Bear Stearns or shorted stock during the week before March 17, 2008 and before. All the records are easily available. If they bought puts or shorted stock, just ask them why.

What information did they have access to which the CEO and the SEC did not have? Where did they get the info? Why aren’t Cramer and Cox, Dimon, Bernanke, Geithner, Paulson, Faber and Schwartz subject to a bit of prosecutorial pressure to get to the bottom of this?

Maybe the buyers of puts and short sellers of stock just didn’t believe Reuters, Cox, Schwartz, Cramer and Faber and went massively short anyway, buying puts that required a 70% drop in a weeK. Maybe they had better information than Schwartz or Cox. If they did, then that’s a felony, with the profits made subject to forfeiture.
April 4, 2008 Congressional Hearings on the Bear Stearns Bail-out.

I watched both sessions and drew the following conclusions:

In the first session there were the following witnesses: Bernanke of the Federal Reserve Board, Cox from the SEC, Geithner representing the New York Reserve Bank and an incidental player, Mr. Steel, from the Treasury. The only Senators that seem to be willing to attack these bankers were Bunning, Tester, Menedez and Reed. All the rest were useless and very respectful.

All witnesses did their best to keep their stories consistent but they did slip up a bit. They all agree that the bail-out was necessary without any proof that it was. They all agreed that what caused the cash liquidity to dry up within one day was the rumor mongers. Apparently it is claimed that some people have the ability to start false rumors about Bear Stearns’s and other banks liquidity, which then starts a “run on the bank” . These rumor mongers allegedly were able to influence companies like Goldman Sachs to terminate doing business with Bear Stearns, notwithstanding that Goldman et al. believed that Bear Stearns balance sheet was in good shape. (Goldman between March 11-14 warned their average customers that Bear Stearns stock was “hard to borrow” for shorting due to the fact that other customers had used up all of the stock avaiable for borrowing for short sales). That idea that rumors caused a “run on the bank” at Bear Stearns is 100% riduculous. Perhaps that’s the reason why every witness were so guarded and hesitant and looked so strained in answering questions.
Loans to J.P. Morgan total $55 billion from FED
The Private New York FED lent $25 billion to Bear Stearns (described as the primary facility by James Dimon) and another $30 billion to J.P. Morgan (described as the secondary facility by James Dimon). So the bail-out cost was $55 billion not the $30 billion that is promoted. This was revealed at the second session of the Senate hearings in a James Dimon response to a question from Senator Reed.

Who gets the $55 billion? J.P. Morgan received the money on a loan pleadging Bear Stearns assets valued at $55 billion. $29 billion is non-recourse to Morgan. Effectively the FED received collateral appraised by Bear Stearns at $55 billion for a loan to J.P. Morgan of $55 billion. That’s a loan to value of 100%.

If the value of the secondary facility of $30 billion ($29 billion of which is non recourse) is worth only $15 billion when all is said and done, then J.P. Morgan has to pay back only $1 billion of the $30 billion received and keeps the $14 billion the the Fed loses. If the $25 billion primary facility is worth only $15 billion when all is said and done, J.P. Morgan has to pay $10 billion of the $25 billion received. If J.P Morgan can not pay, then the Fed loses the $10 billion.

If after all is said and done, the $25 billion primary assets or the $30 billion secondary assets are sold for more that $25 billion or the $30 billion respectively, the difference goes to J.P. No matter how you cut it, J.P. Morgan wins.

If the $55 billion assets turn out to be worth only $20 billion when all is said and done, J.P. Morgan owes $1 billion on the $30 billion and the difference between $25 billion and the value received on the primary facility. The best the FED can do is get their money back with interest and the worse they can do is lose about $25 -$40 billion. The FED would have been far better to just buy the assets at Bear’s and J.P.Morgan’s valuation.


The question arises:

Why didn’t the FED just make the $55 billiom loan to Bear Stearns directly? The FED received Bear Stearns assets valued by Bear Stearns as its only collateral for the 100% loan. I am sure that Bear Stearns would have guaranteed the full $55 billion and would have advanced more collateral and accepted a 90% loan to value. Everything would have been just fine for Bear Stearns and the FED would have had a better deal. But the Bear Stearns stock would have gone up and all short stock sellers and all put buyers would have massive losses instead of massive gains.

The bail-out is a great deal for J.P. Morgan, the illegal insider short sellers got a great deal. Bear Stearns stock holders and employees got a very bad deal and the sellers of puts sustained large losses..

This shows, in my view, that J.P. Morgan and the FED were in collusion with the short sellers and put buyers.

John Olagues”

Dark pools of money

Wednesday, April 23rd, 2008

Full story here. Use ShadowTraders and don’t get caught on the dark side…

“…Dark pools, anonymous off-exchange stock trading venues where traders can match large orders while concealing price and volume, have been rapidly gaining market share. By allowing traders to hide their cards, the pools limit the impact on stock prices before an order is complete, reducing costs for the trader.

But the very anonymity that draws investors to dark pools also gives cover to those seeking to manipulate the system. And that has forced pool operators to fight back and ramp up their spending on tools they claim will stop predators.

Investing in anti-gaming technology makes good business sense for the operators of dark pools as it helps to maintain the trust of clients in both the pool and the other investors frequenting it…”

This is all about manipulation. A lot of people are going to get royally fleeced using this dark pool mechanism. You can google “Project Turquoise” for more info.

Hyperinflationary depression

Tuesday, April 22nd, 2008

Full story here. This is enough to twist your knickers…

“…The limits to the unlimited abuse of the debt standard are particularly evident in the GAAP-based financial statements of the U.S. government, which show the actual federal deficit at $4.0-plus trillion for 2007 alone, with total federal obligations standing at $62.6 trillion. With no ability to honor these obligations, the government effectively is bankrupt.â?

“Although the U.S, government faces ultimate insolvency, it has the same way out taken by most countries faced with bankruptcy. It can print whatever money it needs to create, in order to meet its obligations. The effect of such action is a runaway inflation – a hyperinflation – with a resulting, full debasement of the U.S. dollar, the worldâ??s reserve currency.â?

â??Oil prices are near historic highs, the dollar is near historic lows, and money growth is at an all-time high. The near-term outlook for all three is for new record levels and for extremely strong upside pressure on U.S. inflation. â?¦ gold prices should continue setting new historic highs.â?

â??The difference is in accounting â?¦ for unfunded Social Security and Medicare liabilities.â?

â??Put into perspective, if the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis. In like manner, given current revenues, if it stopped spending every penny (including defense and homeland security) other than Social Security and Medicare obligations, the government still would show an annual deficit.â?

â??U.S. federal obligations are so huge versus the national GDP that the countryâ??s finances look more like those of a banana republic than the worldâ??s premiere financial power and home to the worldâ??s primary reserve currency, the U.S. dollar.â?

â??The effect of this structural change has been that most consumers have been unable to sustain adequate income growth beyond the rate of inflation, unable to maintain their standard of living. The only way personal consumption can grow in such a circumstance is for the consumer to take on new debt or liquidate savings. Both those factors are short-lived and have reached untenable extremes.â?

â??From the Fedâ??s standpoint, it can neither stimulate the economy nor contain inflation. Lowering rates has done little to stimulate the structurally-impaired economy, and raising rates may become necessary in defense of the dollar.â?

â??By the time hyperinflation kicks in, the economy already should be in depression, and the hyperinflation quickly should pull the economy into a great depression. Uncontained inflation is likely to bring normal commercial activity to a halt.â?

Commercial banks head for huge derivatives losses

Tuesday, April 22nd, 2008

Full story here. Use ShadowTraders to get debt-free and at cause.

“…New Evidence of A Credit Crack-Up

Until recently, economists have had only anecdotal evidence of credit troubles.

They knew that individual banks were taking losses. They knew that many banks were tightening their lending standards. And they realized that there were hiccups in the credit markets.

So they called it the â??credit crunchâ? â?? essentially a slowdown in the pace of new credit growth.

But we didn’t buy that. Earlier this year, we warned that America’s credit woes involved much more than just a slowdown. We wrote that it was actually a credit crack-up â?? an outright contraction of credit the likes of which had never been witnessed in our lifetime.

Wall Street scoffed. No one had seen anything like this happen before, and almost everyone assumed that it would not happen now.

They were wrong.

Indeed, three new official reports are now telling us, point blank, that the credit crack-up is already beginning!

First, the Federal Reserve is reporting a big contraction in short-term debts.

The specifics: Based on its Flow of Funds Report (pdf page 18), we can clearly see that …

  • Just in the third quarter of last year, â??open market paperâ? (mostly short-term commercial loans) was slashed at the annual rate of $682 billion …
  • In the fourth quarter, it shrunk again â?? at the rate of $337 billion per year, and …
  • This shrinkage doesn’t even begin to reflect the impact of the Bear Stearns failure or the huge additional bank losses announced so far this year.

I repeat: This is not a mere â??slowdownâ? in new lending, which would be relatively routine. This is an actual reduction in the short-term loans outstanding, which is anything but routine … which implies a rupture in the nation’s credit spigots … and which could deliver a new shock to the U.S. economy.

If this represented a planned and voluntary effort by lenders to begin trimming America’s debt excesses, it might actually be a good thing.

But that’s not the case here, not even close. Rather, this debt reduction is almost exclusively forced on lenders by the pressure of events â?? the plunging value of mortgages, the surging defaults by debtors, and the huge losses that have caught both banks and regulators off guard.

Second, the Comptroller of the Currency (OCC) is reporting havoc in the derivatives market.

Derivatives are bets and debts placed by banks and others.

In recent decades, derivatives have grown far beyond any semblance of reason. But in its latest report , the OCC reveals that in the fourth quarter of 2007 …

  • For the first time in history, the notional value of derivatives held by U.S. commercial banks plunged dramatically â?? by $8 trillion …
  • For the first time in history, U.S. banks suffered a massive overall loss on their derivatives â?? $9.97 billion, and, again …
  • These numbers do not yet reflect this year’s disasters at Bear Sterns and other institutions.

The chart shows that, until the third quarter of last year, U.S. commercial banks had been making consistent profits from their derivatives quarter after quarter.

Their total revenue from these and related transactions (red line) never dipped into negative territory … rarely suffered a significant decline … and was even making brand new highs through the first half of 2007.

Then, suddenly, in the fourth quarter of last year, we witnessed a landmark game-changing event: For the first time ever, U.S. commercial banks lost big money in derivatives in the aggregate ( as you can plainly see by the sharp nosedive of the red line).

Again, if this were part of a planned retreat by the banks to more prudent trading approaches, it would be a positive. But it’s anything but!

Indeed, the OCC specifically states in its report that the sudden and unusual reduction in derivatives was due entirely to the turmoil in the credit markets.

And ironically, nearly all of that turmoil was concentrated in â??credit swapsâ? (blue line in the chart) â?? the one sector that was designed to protect investors from this precise situation.

These credit swaps were supposed to act as insurance policies that big banks and others bought to help cover their risk in the event of defaults and failures. But they’re not working out as planned: Just in the fourth quarter, U.S. banks had a net loss (after all profitable trades) of $11.8 billion on credit swaps alone, according to the OCC.

Those losses helped wipe out all the profits they made in other derivatives, leaving a net overall loss of $9.97 billion.

Third, the International Monetary Fund (IMF) predicts that this crisis is barely ONE-THIRD over!

In its Global Financial Stability Report(see Executive Summary ), the IMF predicts that the total losses from the subprime and related credit crises could reach $945 billion, or more than triple the already-huge losses that have been announced so far.

The IMF further warns that …

  • â??There has been a collective failure to appreciate the extent of the leverage taken on by a wide range of institutions â?? including banks, monoline insurers, government-sponsored entities, and hedge funds â?? and the associated risks of a disorderly unwinding.â? Now, both the OCC and the Fed reports confirm that this â??disorderly unwindingâ? is already beginning.
  • â??The transfer of risks off bank balance sheets was overestimated. As risks have materialized, this has placed enormous pressures back on the balance sheets of banks.â? Now, the OCC report confirms that â??the transfer of riskâ? (with credit swaps) has often failed.
  • â??Notwithstanding unprecedented intervention by major central banks, financial markets remain under considerable strain, now compounded by a more worrisome macroeconomic environment, weakly capitalized institutions, and broad-based deleveraging.â? This is precisely what we have been warning you about. Now, it’s happening!

Looking ahead, the IMF also warns about…

  • â??Deep-seated balance-sheet fragilities and weak capital bases, which mean the effects [of the crisis] are likely to be broader, deeper and more protracted.â?
  • â??A serious funding and confidence crisis that threatens to continue for a significant period.â?

The U.S. Government’s Response

You’ve seen what the Fed has already done â?? six rate cuts since August of last year … unprecedented broker bailouts … and massive new amounts of liquidity pumped into the banking system.

You’ve seen where a lot of that money has gone â?? into foreign currencies, gold and oil.

And you’ve seen the dramatic market surges which that money can generate. Case in point: The latest jump in crude oil to $117 per barrel.

Now, get ready for more of the same:

  • More rate cuts, with the next expected as soon as April 30 …
  • More Fed bailouts …
  • Even wilder money printing, and …
  • Larger surges in foreign currencies and commodities, despite intermediate setbacks.

But also start preparing for the day when the credit crack-up temporarily overwhelms the Fed, driving the U.S. economy into a far deeper recession than most people expect…”

Feh, such news. Weirder and weirder solutions may be down the pipe. Common folk will eventually catch on to the fact that even if the Fed lowers rates to zero, it won’t do them a bit of good. Though I do love to entertain the thought of jobless bankers and a zero interest world. There may again be a call to “stamp out speculation” by making owning precious metals illegal–or even keeping 50 gallons of gas in your garage as dangerous hoarding. I don’t think we can extricate the banking sector’s greed, except for nationalization, which I’m not thrilled about either. We had our chance to regulate the industry, and Sir Greenspan did just the opposite. Now we reap the whirlwind. If we were truly radical, there would be a Jubilee announced, cancelling all debts, we start all over again. Don’t laugh, it’s happened before. Honestly, if a large number of people stopped agreeing to the whole debt-based indentured servitude, the banking cartel behind it would simply buckle. It’s almost like the couch potato revolution.

My own 2 cents is to not buy a house if you haven’t. Or at least buy it mega cheap with all cash. Don’t make any new long-term financial commitments. I look upon 410(k)s or any other long-term investment as becoming less and less likely to retain their value and/or even continue to exist in the longer term, so don’t count on them to save your butt in the future. You should decide whether to continue to ride that bet in hopes of a future payout, or take your wins (and taxes) now. Obviously, keep expanding your trading expertise. Drill the Tips and Tricks, know them cold. Trim the “fat” in your life.  If you can’t pay for the BMW with left over pocket change, forget it. Invest in things that really last and enhance your survival. Do an administrative scale for your life. Sit down with your family and figure out what the big things are in life that you want to do, and prioritize your actions accordingly.

Authorities lose patience with collapsing dollar

Monday, April 21st, 2008

Full story here. If you don’t have a central banker on your side, you’d better use ShadowTraders.

“…Mr Juncker, who doubles as Luxembourg premier and chair of eurozone financiers, told the Luxembourg press that he had been invited to the White House last week just before the G7 at the urgent request of President George Bush. The two leaders discussed the dangers of rising “protectionism” in Europe. Mr Juncker warned that matters could get out of hand unless America took steps to halt the slide in the dollar.

World central banks last intervened eight years ago – with mixed success – buying euros in September 2000 to support the fledgling currency through its worst crisis.

David Woo, currency chief at Barclays Capital, said the Europeans and Americans are talking past each other. Whatever the G7 wording, Washington is happy to watch the dollar slide. “They are not going to worry unless there is a knock-on effect on US equity or bond prices. So far that hasn’t happened. There are no signs that the dollar decline has turned disorderly,” he said.

European industry has managed to live with the high euro so far, but the damage of major currency shifts can take years to surface. “The moment will come where the exchange rate level will start to cause serious harm to the European economy,” said Mr Juncker.

Louis Gallois, head of the Airbus group EADS, said his company is already taking dramatic steps to shift plant to the dollar-zone. “The euro at its current level is asphyxiating a large part of European industry by shaving export margins,” he said.

The European Central Bank revealed in its monthly report that foreign direct investment (FDI) into the euro zone has contracted by â?¬269bn over the last two years. Foreigners are gradually winding down operations. This will have powerful long-term effects.

George Soros, the hedge fund baron who “broke” Europe’s exchange system in the early 1990s, said yesterday that the euro could never anchor of the global system. “I don’t think the euro can replace the dollar as the main world currency. The euro is not a truly attractive alternative,” he said. Mr Soros said the dollar would reclaim its crown eventually, but for now the financial crisis is leading to a flight from all paper currencies, causing a dash for gold, silver, and oil futures…”

My remarks:

1. I’m trying to picture Bush actually being able to comprehend multi-syllabic finance words without sticking out his tongue or forgetting to go to the bathroom in a timely manner. Nope, not getting it.

2. Did you catch the 2nd to last paragraph– a Euro 269 billion contraction in foreign investment in the last two years?! All of western europe’s going to look like the depression-laden Rust Belt of the US shortly.

3. Last paragraph, Soros is changing his tune, sort of. His rather loud denouncement of the dollar last month showed he didn’t have confidence in US currency (or was talking his short contracts into the money). Now, he says the euro sucks too. Not saying he’s wrong. His statement that the dollar would regain its premier position eventually rang hollow with me. Or perhaps that no fiat currency was worth it anymore. He’s not going to make any pronouncements for our own collective good. He has a position (or positions) in the market, and those appear to need the dollar and the euro down, at least for now.

4. My but these are “interesting times”. A bit of a rollercoaster thrill, sometimes exciting, other times utterly gut-wrenching.

Payback’s a bitch

Monday, April 21st, 2008

Full article here. Indeed, all that easy credit has come back to be paid at a much higher rate. Any lowering of fed rates is only another loop in the noose, since you’ll notice that the average consumer has no way to get a credit card for the fed rate (without that nasty default clause added), or even to have that mortgage down around 3%. Nope, not happening.

“…The United States of America has rich farmland, from sea to shining sea. Still, it is a net importer of food. In fact, it is a net importer of practically everything that can be moved. Every day that goes by it receives about $2 billion more of these moveable objects than it sends out in exports.

Prior to the Nixon administration, such an imbalance could not persist for very long; but however much God blessed America – with her purple mountains majesty and her fields of golden grain – was nothing compared to the way she was favored by the post-1971 monetary system.

“As ye plant, so shall ye reap,” it saith in the Bible. But in the period from 1997-2007, Americans could reap without planting. They could consume without earning. They could invest without saving, and spend as much as they wanted without running out of money. They were the world’s luckiest people – they had the world’s reserve currencyâ?¦and access to the whole world’s credit.

The miracle that fundamentally altered the world monetary system happened on August 15, 1971, when Richard Nixon “closed the gold window,” at the U.S. Treasury. Before then, every nation’s currency was anchored to gold. Governments settled their imbalances in yellow metal; since each unit of paper currency represented an option on the treasury’s gold, it forced officials to be wary of issuing too many. But after August, 1971, the world’s monetary system upped anchor and sailed with the tide. Now, it all floats on a sea of paper money – and no one knows what’s beneath the dark ocean surface.

The Chinese merchant who sold widgets and geegaws to spendthrift Americans could not use dollars to pay his wages. He needed local currency. So he traded his dollars for yuan. And where did the Central Bank of China get enough yuan to buy up trillions of dollars? It had to create them. All over the planet, as the world’s stock of dollars roseâ?¦so did its inventories of local currencies. And then, what could it do with its dollars? Before 1971, it would have presented them to the U.S. Treasury and received one ounce of gold for every 41 paper dollars. In order to protect the nation’s gold, central bankers would have taken away the punch bowl and turned out the lights. Rates would have gone up; foreigners would have been encouraged to hold dollars (rather than exchange them for gold); Americans would have been discouraged from spending dollars – effectively stifling U.S. consumer spending and bringing the current account back into balance.

Then, in 2001, the U.S. financial authorities, led by Alan Greenspan, thought they faced a crisis. They panicked – giving Americans even more credit rope. With nothing to stop it, the supply of cash and credit rose at an even faster rate. And thus it was that Americans wrapped their good fortune around their necks like a noose. Instead of practicing the virtues that had made them rich – saving money, building new factories and learning new skills – they borrowed even more heavily than before.

And now their houses are being foreclosed and their bills are coming due. Worse, the value of their most important asset – their time – is being marked down with the dollar. According to our source, the typical American workingman in the late 19th century was already earning considerably more than an Englishman – 25 ounces of gold per year, rather than 14. He, too, became much richer as the industrial revolution progressed. By 1971, he was earning the equivalent of 82 ounces of gold, worth $76,000 today. But then he forgot his lessons. He stopped savingâ?¦his income fellâ?¦and his dollar dropped. Adjusting the average hourly wage for consumer price inflation, he earns slightly less today than he did during the Carter administration. Adjusting his wages to the fall of the euro, we find the average American earns less than the average Frenchman. And adjusting his wages to gold and we see he has lost a half century of wage progress. Today, he earns only the equivalent of 40 ounces of gold – or only about $38,000.”