Pictures from an Exhibition of Reckless Financial Speculation

Five Banks have taken on the leverage normally reserved for hedge funds, placing the US dollar and the entire financial system at risk, and essentially holding it hostage to carry their losses while they take their profits.

They are JP Morgan Chase, Bank of America, Citibank, Wachovia, and HSBC.

JP Morgan alone is holding derivatives with a value of $84.8 Trillion. Yes they have netted that down, provided there are no significant counterparty failures in which case that netting goes to hell in a handbasket. Their credit exposure to capital ratio is 418.7. This gearing is priced to the perfection of a lossless countertrade with nothing even reasonably expected on the tails. They make LTCM almost look like grannies when to comes to being a risk-loving beta monster.

This is why their counterparty Bear Stearns had to be bailed out with public money. There are a few others to keep a close eye on including Merrill and Lehman with their derivatives exposures although they are not in the top five.

This is why its not over yet.

There are two classes of financial institutions in trouble. Those that are 'too big to fail' and those that are 'too big to mention the word failure in the same sentence.' The top five derivatives speculators are in the latter category.

This debate among deflation, stagflation, hyperinflation and disinflation ought to be expanded to include financial obliteration.

The source for these graphs is the latest report from the Office of the Comptroller of the Currency OCC Dec. 07 Report

If the Federal Reserve had taken over supervision from the OCC as Secretary Paulson recommended, do you think we would be seeing such detailed reports on the concentration of risk in five financial market players? Or would they be skulking to the Discount Window to try and hold their books together with public money without any disclosure?

Japan's Hunger: the Dark Side of Globalization and Central Planning

Food shortages in Japan?

File this one under the divergence between the world of paper and the world of reality. And perhaps under moral hazard and unintended consequences of distorted markets and the failure of markets when they are free in name only, being over-adjusted in the grasp of the central planning of bureaucrats for sustained periods of time. Japan has not had a free market in decades, being the shining example of industrial policy focused on exports of manufactured goods, to the detriment of the rest of the economy. Let them eat Toyotas.

The Age - Australia
Business, Finance and Market News
Japan's hunger becomes a dire warning for other nations
Justin Norrie, Tokyo
April 21, 2008

MARIKO Watanabe admits she could have chosen a better time to take up baking. This week, when the Tokyo housewife visited her local Ito-Yokado supermarket to buy butter to make a cake, she found the shelves bare.

"I went to another supermarket, and then another, and there was no butter at those either. Everywhere I went there were notices saying Japan has run out of butter. I couldn't believe it — this is the first time in my life I've wanted to try baking cakes and I can't get any butter," said the frustrated cook.

Japan's acute butter shortage, which has confounded bakeries, restaurants and now families across the country, is the latest unforeseen result of the global agricultural commodities crisis.

A sharp increase in the cost of imported cattle feed and a decline in milk imports, both of which are typically provided in large part by Australia, have prevented dairy farmers from keeping pace with demand.

While soaring food prices have triggered rioting among the starving millions of the third world, in wealthy Japan they have forced a pampered population to contemplate the shocking possibility of a long-term — perhaps permanent — reduction in the quality and quantity of its food.

A 130% rise in the global cost of wheat in the past year, caused partly by surging demand from China and India and a huge injection of speculative funds into wheat futures, has forced the Government to hit flour millers with three rounds of stiff mark-ups. The latest — a 30% increase this month — has given rise to speculation that Japan, which relies on imports for 90% of its annual wheat consumption, is no longer on the brink of a food crisis, but has fallen off the cliff.

According to one government poll, 80% of Japanese are frightened about what the future holds for their food supply.

Last week, as the prices of wheat and barley continued their relentless climb, the Japanese Government discovered it had exhausted its ¥230 billion ($A2.37 billion) budget for the grains with two months remaining. It was forced to call on an emergency ¥55 billion reserve to ensure it could continue feeding the nation.

"This was the first time the Government has had to take such drastic action since the war," said Akio Shibata, an expert on food imports, who warned the Agriculture Ministry two years ago that Japan would have to cut back drastically on its sophisticated diet if it did not become more self-sufficient.

In the wake of the decision this week by Kazakhstan, the world's fifth biggest wheat exporter, to join Russia, Ukraine and Argentina in stopping exports to satisfy domestic demand, the situation in Japan is expected to worsen.

Bakeries, forced to increase prices by up to 30% in the past year, are warning that the trend will continue. Manufacturers of miso, a culinary staple, are preparing to pass on the bump in costs caused by the rising price of soybeans and cooking oil. And the nation's largest brewer, Kirin, is lifting beer prices for the first time in almost two decades to account for the soaring cost of barley.

"In the past, Japan was a rich country with a powerful yen that could easily buy cheap imports such as wheat, corn and soybeans," said Mr Shibata, who directs the Marubeni Research Institute in Tokyo. "But with enormous competition from the booming Chinese and Indian economies, that's changed forever. You also need to take into account recent developments, including the damage to crops caused by drought and other disasters in exporting countries like Australia," where the value of wheat exports has tumbled from $3.49 billion to $2.77 billion in the past three years.

The situation has been compounded by a surge in demand for bio-fuels such as ethanol, made from maize, encouraging farmers around the world to divert their efforts away from wheat and barley and into maize, further driving up prices.

Arguably Japan's biggest concern, however, is its weakening ability to sustain its population with domestic produce. In 2006 the country's self-sufficiency rate fell to 39%, according to the Agriculture Ministry. It was only the second time since the ministry began keeping records in 1960 that the population derived less than 40% of its daily calorie intake from domestically grown food.

Shinichi Shogenji, dean of the University of Tokyo's graduate school of agricultural and life sciences, said Japan's meat consumption had increased by 900% since 1955, in part because expanding incomes had enabled families to supplement the sparse national diet of rice, fish and miso soup with more Western-style food.

This trend, combined with rapid ageing and declining rural populations, had placed the country's self-sufficiency at a perilously low level, Professor Shogenji said.

In view of recent predictions by Goldman Sachs analysts that commodities could experience "explosive rallies" in the next two years, many are wondering if Japan could become an example to other rich nations that have relied too much on foreign supplies to put food on their tables.

Japan's Hunger Becomes a Dire Warning

Why Gold is Not in a Bubble

A nicely done analysis by Paul Krugman, economist of Princeton, in The New York Times.

What Paul does fail to mention is the significant decline of the dollar tends to inflate the prices of all commodities and products not produced in domestic US or sold openly in world markets, and that commodities are significantly and increasingly the case, a triumph of the service economy. Further, the inputs to costs of extracting/producing those commodities are soaring because of the general inflation of energy products.

So even if the price had increased while the supply remained steady, or even increased, a case could be made for commodities priced in dollars that they are still not in a bubble because the US dollar is in a bubble of supply.

However, this brings us to the interesting anomaly. Why is metals production not increasing with the dramatic increases in prices?

Some say that gold and silver were actively priced suppressed by the paper markets in NY and Chicago for many years, with huge short positions keeping the benefits of adding sources of supply artificially low. So now we are paying the price, since it takes years to bring new supply, new mines, into production.

But that's Moral Hazard and Unintended Consequences, and we are told to ignore them, as Josef Goebbels told the German people to disregard the bombs falling on Berlin. And for now, we listen, and go forward into the night.

Moral Hazard: A dilemma that arises when government officials take steps to bail out countries or businesses that are in serious financial trouble. Although the action may help prevent widespread financial turmoil, thereby protecting innocent parties, it creates an expectation that governments will always come to the aid of failing countries and companies, potentially increasing risky behavior because there is no penalty. Webster's Dictionary

Since free markets and capitalism are based on the principle of discovering price and managing risk, the greatest hazard ultimately is that we will lose our free markets, and essentially lose that which we think we have based our market economy upon, until of course we hit the wall and collapse, in our markets or as a republic.

Commodities and speculation: metallic (and other) evidence
by Paul Krugman
April 20, 2008, 9:49 am
The NY Times

We’ve had a huge runup in commodity prices — fuels, food, metals. But why? Broadly, the debate is between those who see it as a speculative phenomenon, driven by some combination of low interest rates and irrational exuberance, and those who see it as a collision of rapidly growing demand with constrained supply.

My problem with the speculative stories is that they all depend on something that holds production — or at least potential production — off the market. The key point is that the spot price equalizes the demand and supply of a commodity; speculation can drive up the futures price, but the spot price will only follow if the higher futures prices somehow reduces the quantity available for final consumers. The usual channel for this is an increase in inventories, as investors hoard the stuff in expectation of a higher price down the road. If this doesn’t happen — if the spot price doesn’t follow the futures price — then futures will presumably come down, as it turns out that buying futures produces losses.

Which brings me to this chart, from the IMF’s World Economic Outlook:



Bubble, bubble, where’ the bubble?

As far as I can see, this creates real problems for any claim that high metal prices are speculatively driven. Food inventories are also historically low. I just don’t see how a low-interest-rate or bubble story works here.

Paul Krugman in the NY Times

US Dollar Crisis Gathers Pace: One Night in Bangkok Makes a Hard Man Humble

Ironic to hear about the worsening global financial crisis triggered by the US dollar from The Nation, Bangkok's business daily.

We're trying to obtain a copy of this "authoritative report" which Thailand's Largest Business Daily reference. Odd they never mention the title or author.

The irony of hearing about the dollar crisis from the home of the Thai baht, the currency that brought low the careers of many a trader including Victor Niederhoffer, is just too ironic. And now is it the dollar's turn? And will the poor unsuspecting US public finally hear about the source of their pricing problems from Thailand? No word in the US media. Its a mystery.

"Oh how are the mighty fallen..." 2 Samuel 1:27

"One night in Bangkok makes a hard man humble
Not much between despair and ecstasy
One night in Bangkok and the tough guys tumble
Can't be too careful with your company
I can feel the devil walking next to me."

FINANCIAL TURMOIL
Breakdown of dollar system ' gathers pace'
Full-blown US balance of payments crisis also looms
April 18, 2008
The Nation - Thailand's Business Daily

The US is experiencing a breakdown of the dollar system that is similar to the 1971 breakdown of the Bretton Woods system of international monetary management, says an authoritative US financial report.

"The breakdown of the US-dollar system has gone from slow to moderate in pace, and there is a significant risk of an acceleration in the coming months," said the report which was released earlier this month.

With extreme provisions of liquidity [by the Fed] investors are now extremely bearish for the dollar, which still has ample room to fall further.

"While the global nature of financial markets means that financial problems are affecting every major developed economy, the US consumer is at the centre of this current crisis," it said.

"The change from having extremely easy access to credit to almost none has been most extreme in the US. All the entities that rely on the US consumer, from smaller US businesses to US commercial real estate to municipalities, are under significant strain. In aggregate, the amount of US-dollar-denominated debt that is trading at historically high spreads is huge, and it is likely that the Fed (and the US government) will have a lot more heavy lifting to do to keep the financial system and the economy from a severe contraction.

"The implications for the balance of payments are very negative as well, and the US is at the edge of a full-blown balance-of-payments crisis."

Despite the magnitude of the financial crisis, the US faces the daunting prospect of attracting foreign capital with its economy contracting.

Last year, foreign and sovereign funds were quick to snap up distressed US assets at bargain value, but they may have moved in too quickly.

"Ultimately, the US balance-of-payments situation means that either a combination of a deep contraction in US consumption and a much larger decline in the dollar will occur or American households will keep going deeper into debt. But American households can't keep going into debt, because they can't handle the debts they [already] have, and lenders don't want to continue to aggressively lend to them," the report said.

It concluded that either an intolerable economic contraction or a deep decline in the dollar would have to occur and speculated that the economic contraction could be 6-8 per cent. The dollar's decline would have to be mostly against the currencies of emerging markets.

The report said the gap in incomes between workers in the US (and other mature industrialised countries) and those in emerging countries, now about 15 to 1, would have to narrow.

The nominal value of the dollar has declined about 27 per cent since 2002, and those who save their money in dollars have lost their savings.

"It is not hard to question the US dollar as a [means of storing] wealth when you have lost 25 per cent or more of that wealth in as little as six years," it said.

An implication of the US dollar breakdown is that there are opportunities in emerging market currencies. Thailand and other emerging-market countries have been maintaining relatively weak currencies in order to boost export competitiveness. But the US conditions are forcing these countries to readjust their currencies toward the upside.

As for the baht, the Bank of Thailand has been intervening in the foreign-exchange market to keep the nominal effective exchange rate (NEER) of the currency stable. The NEER is calculated from a trade-weighted exchange rate between the baht and 25 major currencies, mainly those of Thailand's export markets and its export competitors.

Supavud Saicheua of Phatra Securities wrote in a report last Friday that Thailand's NEER was relatively stable.

"The baht is nominally 21 per cent weaker today than it was prior to the economic crisis in 1997. "However, the real effective exchange rate (REER) is drifting upwards and now only 13 per cent below the precrisis level (the REER is the same as the NEER, except it incorporates inflation differences between Thailand and the other 25 trading partners)," he wrote.

"In short, the REER suggests the Thai economy has been inflating at a faster rate than these countries over the past several years," Supavud added.

US Dollar Crisis Gather's Pace