Russia Buys Deliverable Gold and the Madness of Bankers

Here's an odd little story we have come across. Russia has purchased gold for its reserves directly from the gold producers, not from the interbank market, the central bank boys' club. This is the first time they have had to do this.

Significant?

Perhaps, if Russia found that there was not enough deliverable gold on the central interbank market to fill its needs, and had to find fresher sources of the physical metal at today's prices, rather than interbank IOU's.

As you recall, the G7 central banks have been selling their gold slowly but surely for quite a few years now, with some having sold most of their reserves. Apparently they do this to raise cash when their printing presses are trés fatigué.

Sometimes they have done it quite noisily and a little stupidly, as in the case of the Bank of England. A seller generally does not crush the price with clumsy announcements before they intend to sell. At least not the seller who seeks a fair price and a reasonable profit, especially when selling on consignment.

The IMF has pledged to sell the same 400 tonnes of gold about twenty times if memory serves. If they were paid for announcements of sale rather than actual sales, they would be simply rolling.

But some central banks have been buying, and building up their reserves, and strengthening their currencies for the future.

Perhaps this is nothing, and not even close to a significant development.

But it strikes a chord. The US has sold off its entire official store of silver which was enormous, and now must scramble in the open markets to buy actual silver for the Mint.

Spain has sold off its gold reserves entirely we hear. They are content to have a claim on Germany's gold. Even the frugal Swiss have been releasing their national savings of the barbarous relic. Einer für alle, alle für nichts.

Such are the changing fashions in the haute couture of bank reserves and monetary taste. Most of the banks in the US are already fashionably insolvent, with paper claims on paper claims, although we hear London is also vying for title to the financial grande dame (pun intended as 'grand lady' or 'big hurt') for the world.

La moneta è mobile, qual piuma al vento, muta d'accento — e di pensiero.

Its an interesting theme, the world of financial speculation diverging from the natural world, into a realm of self-absorbed arbitrariness. Almost like a form of collective madness among the bankers, with their mountains of derivatives and paper bets and claims on the same set of things over and over, coming up short in fits and starts, shakes and shudders, slips and the occasional stumbles.

Nearly had a nasty spill the other week when the dice came up unfavorably for one of the largest banks at the table. Some think this will frighten them into more conservative behaviour, eliminating the need for reform. We predict they will be back at the tables as though nothing had happened.

Sempre un'amabile, furtivo banca, in pianto o in riso, — è menzognero.

Who is mad, the savers and builders or those who gamble and consume into hopeless indebtedness? Who is mad, conservative banks or the massively-leveraged English-speaking banks? As Churchill would say, "KBO." For none dare call the Emperor naked.

Russia. The new hard money currency. Possible candidate for the world's reserve currency? Oh the irony!

Russia & CIS
11:23 GMT, Apr 18, 2008 Latest Headlines...

For first time, Central Bank buys gold from producers - source

MOSCOW. April 18 (Interfax) - For the first time, the Central Bank
of Russia purchased gold for its international reserves from gold
producers, a source in banking circles told Interfax.

Previously the Central Bank had always purchased gold on the
interbank market.

jh (Our editorial staff can be reached at eng.editors@interfax.ru)

Interfax - Russia Goes to the Producers to Buy Its Gold

Libretto
Rigoletto, Verdi

La donna è mobile
Qual piuma al vento,
Muta d'accento — e di pensiero.
Sempre un amabile,
Leggiadro viso,
In pianto o in riso, — è menzognero.

Woman is variable
Like a feather in the wind,
Changing her tone — and her mind.
Always sweet,
Pretty face,
In tears or in laughter, — always lying

US Dollar (DX) Commitments of Traders as of April 15

Demystifying the TED Spread

TED is an acronym for Treasury and EuroDollar.

A Spread is just the difference or 'distance' between one thing and another.

Eurodollars are bank deposits denominated in U.S. dollars but held at locations outside of the U.S. Initially, the term only referred to dollar deposits in London but has been expanded to include dollar deposits at any offshore location. The deposits may be held by the foreign branches of U.S. banks or by non-U.S. banks. Eurodollar deposits may be Eurodollar certificates of deposit or simply Eurodollar time deposits.

T bills are US Treasury debt of short duration are considered to be risk free.

TED Spread = Yield on Eurodollar deposits - Yield on T Bills

The TED Spread is the difference between U.S. Treasury bill yields and yields for Euro dollar deposit contracts of the same maturity, generally three months, from the London Interbank Overnight Rate (LIBOR) market.

The theory is that US dollars held in offshore accounts are not subject to short term market activity and regulations by the Fed. They are a slightly better measure of the short term risk associated with holding dollars that are not US Treasuries.

The TED spread is used as a measure of investor confidence. Remember, for the individual components (T bills and Eurodollar deposits) the higher the yield the higher the perceived risk, the lower the yield the lower the perceived risk.

When the spread is small, investors are not requiring a large amount of additional compensation for the additional risk of deposits. This means the Eurodollar yield is lower, and closer to that of the T Bills.

When the spread is large, investors are demanding a higher yield on Eurodollars as compared to the higher quality of U.S. Treasury bills.

A sudden widening of the TED spread is indicative of a flight to quality and a perception of risk in corporate credit markets.

A rising TED spread at the extreme is thought to foretell a downturn in the U.S. stock market as liquidity is withdrawn from the equity markets. We think this is more of a confirming indication than a bellwether since analysis of the SP after extreme readings using TED alone is mixed. In that sense we would use it much as we would use VIX to indicate a period of high or low volatility and elevated or quiescent risk. Spreads by definition are indicators of risk.

TED Spread Chart on Bloomberg

US Crackdown on Credit Card Fees Coming

Good news in general although our skeptical sense is that the Fed is trying to stall the Democrats' effort in this area which is likely to be a little more rigorous.

No wonder the Wall Street Banks were so anxious to get that Visa IPO out the door come hell or high water or another wave of credit defaults.

The tide seems to be receding for the credit vultures.


US crackdown on credit card fees seen by year-end
18 Apr, 2008, 0016 hrs
The Economic Times

WASHINGTON: The Federal Reserve will soon unveil a broader plan to protect consumers from abusive credit card practices than a proposal it issued last year, a Fed official told lawmakers on Thursday.

The Fed's new plan, which it hopes to finalize by December, would restrict retroactive rate increases and other fees that consumer groups and lawmakers have criticized as exorbitant. In February, U.S. House of Representatives Democrats introduced a bill to stop arbitrary interest rate increases, penalties for consumers who pay only a portion of their balances on time, and excessive fees charged by credit card issuers.

Sandra Braunstein, director of consumer affairs at the Fed, acknowledged that a Fed proposal last June did not go far enough to help consumers. (How unusual. Let's give the Fed more power to do nothing effectual. - Jesse)

That plan would have required plain-English disclosures by credit card issuers to help consumers understand fees and rates. (What a draconian reform! The industry proposal was for the disclosures to be in an obscure dialect of the Anasazi Indians. PLAIN English! Wait! The Fed didn't specify what kind of English. How about plain MIDDLE English? The language of Chaucer. Ah! - Jesse)

"Careful measures that would restrict credit card terms or practices may, in some instances, be more effective than disclosure to prevent particular consumer injuries," Braunstein told a House Financial Services subcommittee hearing. (No shit Sandy, really? I've heard the State Police are going to stand on the edge of the highway and chastise reckless drivers with stern glares as they speed by. Did you design that reform too? - Jesse)

Chairing the hearing was Rep.Carolyn Maloney, a New York Democrat who wants Congress to adopt a credit card holder's bill of rights. Some lawmakers expressed concern that the regulators' efforts could conflict with congressional efforts to revamp credit card rules. "I'm very concerned about how we are doing this," said Rep. Mike Castle, a Republican from Delaware. (I am sure Mike is primarily concerned about the large contributions he receives from credit card companies operating out of his state. - Jesse)

Banks that offer credit cards, such as Bank of America Corp and Capital One Financial Corp, oppose the legislation. They have warned it could raise fees and reduce the amount of credit available to consumers. John Carey, chief administrative officer of Citigroup Inc unit Citi Cards, said new restrictions would penalize responsible customers. (How about a national usury law? We'll know its good if the CEOs of Capital One, BAC, and Citi blow chunks when they read it. - Jesse)

"The financial burdens associated with the higher-risk customers will be spread across all customers," Carey said in testimony prepared for the subcommittee. The Fed is aware that proposed restrictions could have unintended negative consequences, such as reduced credit availability and raised costs, Braunstein said. (Oh yeah but when it comes to bubbles the Fed can't find its own ass with both hands. - Jesse)

Also working on the proposed regulations to crack down on abusive practices are the U.S. Office of Thrift Supervision (OTS) and National Credit Union Administration, she said. (Oh great idea. If they ever write reforms for organized labor abuses can we conjure the ghost of Jimmy Hoffa to help? - Jesse)

OTS Deputy Director John Bowman said his agency shared lawmakers' concerns about the practice of increasing the annual percentage rate on an outstanding balance for reasons other than cardholder behavior directly related to the account.

"In our ... proposal we expect to place restrictions on some of these types of practices," Bowman said. Bowman called the practice of computing finance charges based on account balances in billing cycles preceding the most recent billing cycle "troubling." (Criminal and obscene were the ones that first came to mind. - Jesse)

For example, when a consumer makes a payment on a portion of his bill, the credit card company may still charge interest on the full amount, even though part has been repaid. (Gee, how could anyone object to that? I think we should start doing the same thing with corporate income tax payments, retroactive to the beginning of the Bush Administration. - Jesse)

"It is very difficult for consumers to avoid the increased costs associated with double-cycle billing because most consumers simply can't understand it," Bowman said. "This is another area that we address in our proposal." (I think they understand it all right. Its just that they can't do anything about it. - Jesse)

The OTS supervises credit card activities of thrift institutions. The agency is "at the beginning "stage of crafting tougher rules and will soon issue a notice of proposed rule making, Bowman said. But Braunstein said the Fed may use its unique authority to impose stricter regulations on the credit card industry. (These guys make FEMA look like Delta Force - Jesse)