Derivatives Crisis: More Bailouts On Deck?

The derivatives market is about as ugly as it gets, and puts a new edge on 'too big to fail, to big to exist."

The banks want to keep the game going because it suits their current model of taking risks, making huge bonuses, and writing off the losses to the public.

It remains to be seen if the Obama Administration has what it takes to regulate and rein in the banks. While Larry Summers and Tim Geithner are on the team the answer is probably 'no.'

One thing which strikes us as odd in this Bloomberg article is the emphasizing of stimulus as a source of future crisis. All things considered two trillion in stimulus across the globe is a relative drop in the buck-et compared to what the bank bailouts are costing in direct and indirect taxation on the real economy. Bloomberg seems to be crusading against anyone but the bigh banks getting public money, so perhaps it is not surprising.

As you know, CIT is deeply troubled, and most likely heading towards some sort of managed bankruptcy. The company is said to be holding counter party risk with many banks including Goldman Sachs. The rally may be based on strong rumours of an imminent bailout for CIT. The word on the Street is that Geithner and Summers caved again after a few key phone calls.

Let's see how the Obama Administration handles yet another financial institution brought low by bad risk management in pursuit of outsized profit.

Wall Street and their demimonde in the government and the media hate stimulus packages designed to assist the ordinary Joe, even if all it does is ease the pain during a steep downtrend (which was caused by the financial sector). They hate it, unless there is a way to charge fees in its distribution, and turn it into a profit-making venture for them where they derive most if not all of the benefits.

The dollar and the US bond are taking it repeatedly on the chin. As are most of the US public and the holders of its debt.

The timeframe Mr. Mobius has for the next major crisis is way out on the far edge of any projection we think is probable by quite some distance. Its not clear that it really matters, given the significant hurdles facing the economy this year.

Let's see how the Boys handle the burgeoning Commercial Real Estate, Pension, and Stage Government crises. I think they may very well precede the derivatives coup de grace, and several of them are big enough to be show-stoppers, if not triggers for a larger systemic meltdown.

Until the banks are restrained, and the financial system is reformed, and balanced is restored to the economy, there will be no sustained recovery.

The Obama team is incompetent, and probably worse. Its a great disappointment. They are showing all the wrong moves on the economy.

All the charts included here are from our friends at ContraryInvestor.

Bloomberg
Mobius Says Derivatives, Stimulus to Spark New Crisis
By Kevin Hamlin (Beijing)

July 15 (Bloomberg) -- A new financial crisis will develop from the failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management Ltd.’s Mark Mobius said.

“Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,” he said in a phone interview from Istanbul on July 13.

Derivatives contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Global share markets lost almost half their value last year, shedding $28.7 trillion as investors became risk averse amid a global recession.

The U.S. Justice Department is investigating the market for credit-default swaps, Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, said July 13.

Mobius didn’t explain what he thought was needed for effective regulation of derivatives, which are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product.

Looming Crisis

“Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.

A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.

The Justice Department’s antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter.

Treasury Secretary Timothy Geithner last week urged Congress to rein in the derivatives market with new U.S. laws that are “difficult to evade.” He said strong capital requirements were the key.

Geithner repeated President Barack Obama’s call to force “standardized” contracts onto exchanges or regulated trading platforms, and regulate all dealers.

Credit Freeze

The plan to regulate the derivatives market is part of a wider overhaul of financial industry rules meant to prevent any possibility of a repeat of last year, when the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. froze credit markets and worsened the global recession.

In the Senate, Agriculture Committee Chairman Tom Harkin, an Iowa Democrat, is pushing for legislation that would require all over-the-counter derivatives trades be traded on regulated exchanges, not just standardized ones as the Obama administration is seeking.

U.K. banks will be forced to curb trading activity that helped cause the global financial crisis, Britain’s top financial regulator said last month, while stopping short of seeking to separate their lending and securities units.

“Banks have lobbied hard against any changes that would make them unable to take the kind of risks they took some time ago,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore. “Regulators are not winning the battle yet and I’m not sure if they are making a strong case yet for such changes.”

Mobius also predicted a number of short, “dramatic” corrections in stock markets in the short term, saying that “a 15 to 20 percent correction is nothing when people are nervous.”

Emerging-market stocks “aren’t expensive” and will continue to climb, Mobius said. He said he favors commodities and companies such as London-based Anglo American Plc, which has interests in platinum, gold, diamonds, coal and base metals.

In China and India, Mobius sees value in consumer-oriented stocks and banks, he said.

Spitzer Agonistes Redux

It is too bad Eliot could not have exercised better judgement, knowing that he would be targeted by the powers on Wall Street and Washington when he took them on. See the quote at the top of this blog for the most likely reason.

That he was exposed in his scandal by an intense Federal investigation speaks to the depth of the corruption of Washington under Bush, and even now, by the financial powers.

He is right of course, and everything that the Obama Administration is doing on the economic front is a sham.

There is a 'new regulatory spirit' and the Democrats under the skillful hand of Larry Summers and Barney Frank seek to channel it into irrelevancy.

Spitzer Says Banks Made ‘Bloody Fortune’ on U.S. Aid
By Laura Marcinek

July 14 (Bloomberg) -- Eliot Spitzer, the former New York governor and attorney general, said U.S. banks made a “bloody fortune” while receiving taxpayer money without a proven benefit to the wider economy.

Politicians understand the “populist rage” with excesses in the financial industry and in this case the “public is right,” said Spitzer in a Bloomberg Television interview today. “We have saved financial services, we have not created a single job. We are still bleeding jobs.”

As New York attorney general, Spitzer was known as “the sheriff of Wall Street.” He changed business practices and collected billions of dollars in settlements from financial corporations such as Merrill Lynch & Co., American International Group Inc. and Marsh & McLennan Cos. He later became governor, resigning in March 2008 after he was identified as a client of the Emperors Club VIP, a high-priced prostitution ring.

Spitzer said new rules proposed by President Barack Obama’s administration are irrelevant because regulators failed to enforce existing regulations.

“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”

“You don’t need new regs to do it, you just need the will to do what they were supposed to do,” he said.

‘Hands Off’

Former Federal Reserve chairman Alan Greenspan had “avowed a theory of hands off” while he oversaw the financial markets and didn’t consider himself a regulator, Spitzer said.

“What we’re seeing now is a new regulatory spirit,” he said.

Spitzer said the lessons of the financial crisis will only be remembered over a short period of time.

“Over and over we fall into the same trap,” he said. “Ten years from now we will have forgotten.”

Weekly Gold Chart

Stocks Rally With Wall Street Banks as King of the Hill

Meredith Whitney made a bull call on Goldman, and the stock market rallied as a result.

There are some important qualifiers in this that the markets seem to be ignoring.

Goldman is positioned as more of a 'one-off' in her forecast, which remains decidedly gloomy for the overall economy, with unemployment as it is under reported by the BLS rising to 13%.

She believes that Goldman will benefit from being in the position to take fees and profits from the heavy government debt issuance to come in the US, especially since it was able to eliminate some long term rivals in Bear Stearns and Lehman Brothers.

Ironically, a richer Goldman does little or nothing for the overall economy since the company pays out about half its profits in bonuses to employees. There is some trickle down to the real economy as they buy their luxury cars, place their children in the finest private schools, and make huge contributions to key politicians, but not much else.

Goldman is not a commercial bank. It has taken on that name to tap into the Government funds, and despite their noises about paying back their TARP, they are huge beneficiaries of the ongoing bailout of AIG with their 100% payouts on Credit Default Swaps.

So, the people give their tax money to Goldman, and in turn a little of it trickles back to those working in the luxury industries, perhaps as servants to great households, and certainly as politicians managing the outlays of public monies to Wall Street.

The debasement of the currency is going to hit the middle class particularly hard, since the monetary inflation is being so heavily targeted to the wealthy few, while little or no quality jobs creation is stimulated. And it is the middle class that is paying for this, in more ways than one.

And economists call gold a barbarous relic.

WSJ
Meredith Whitney Bullish On Goldman,Sees 2Q Above Views
By Ed Welsch

NEW YORK (Dow Jones)--Goldman Sachs Group Inc. (GS) will benefit from being a key player in a "tsunami of debt issuance" by governments as they try to fill gaps in underfunded budgets, financial analyst Meredith Whitney said Monday in an upgrade of Goldman to "buy."

Whitney predicted Goldman Sachs would post second-quarter results Tuesday above Street estimates - she expects earnings of $4.65 a share, compared with the average analyst estimate of $3.48, according to a survey of analysts by Thomson Reuters. She set her 12-month price target on Goldman shares at $186.

Shares of Goldman Sachs rose 2.7% in recent trading to $145.75.

A bullish call from Whitney is rare; she gained renown during the financial crisis for initially unpopular bearish calls on the stocks of large banks that ultimately proved to be correct.

However, Whitney said her bullish view of Goldman is rooted in her overall bearish outlook for the U.S. economy and other U.S. financial companies. While Goldman has made most of its money in the past through a focus on equity markets, Whitney said during the next two years the firm will shift focus to the government debt markets, facilitating new issuance from local, state, federal and sovereign governments as they try to raise money to fill budget gaps.

Whitney raised her earnings estimates for Goldman in 2010 to $19.65, compared to the average analyst expectation of $14.44, and for 2011 to $22.10, compared to the average expectation of $16.75.

She predicted that sovereign and municipal debt markets will grow more than 20% over the next 18 months, and that the state and local municipal debt market could eventually grow more than 50%.

While Whitney predicted U.S. corporate debt will reach about 60% of the levels of the last three years, she said Goldman will get a larger share of that market as well, due to the absence of formerly key players, including Lehman Brothers Holding Inc. (LEH) and Bear Stearns Cos.

Whitney also expects Goldman to take advantage of relatively high capital levels to buy back stock, and by late 2010 could reach the share count level it had before raising capital this year and last.

There Will Be No Recovery...

"The banks must be restrained, and the financial system reformed, and balance
restored to the economy, before there can be any sustained recovery."

Often a closing comment from our blog, essentially this is what Robert Reich is saying in his recent essay on the economy.

The median wage must increase for consumption to resume, and for this to happen the heavy taxes of the financial sector and the oligarchs on the real economy must be lowered significantly.

There is reason for pessimism that this can happen voluntarily. I have come to the conclusion that there is a pathological drive in some small portion of the population to acquire and control and devour rather than consume, even to their own destruction.

The law sets limits on the speed on highways to protect the many from the reckless and willful behaviour of the few. That we ought not to set limits on the banking system is a remarkable bit of speciousness.

There are obvious questions of how best and how far to limit, and how to detect and prevent and prosecute violations, but the comparison is more valid than obtuse. But it is a poor argument to say that we ought not to do it at all because it is difficult, and perpetrators are always trying to find ways to circumvent the system, especially when it is the aspiring criminal element and their demimonde that is making the argument.

The comparison of this latest epidemic of bad economic behaviour is strikingly reminiscent of the Gilded Age at the end of the 19th century and the Roaring 20's. As you may recall both periods were followed by economic dislocation and a world in flames.

Why we allow this sort of bestial behaviour to ravage the many, in the mistaken support of 'free markets,' where nothing these people touch can remain free and effective and efficient for long, is truly an accomplishment of propaganda and those blinded by ideology.

Robert Reich
When Will The Recovery Begin? Never.
Thursday, July 09, 2009

The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.

Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually.

That's where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market.

Personally, I don't buy into either camp. In a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water -- owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.

Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can't be built on replacements. Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting.

My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.

The Net Asset Values of Certain Precious Metals Funds and ETFs

The China Bubble and the Convergence of Oligarchies

This is an interesting story from a source that we will be consulting regularly for their news items and insightful analysis.

Regular readers of this blog will notice that we strike the same recurrent themes.

Some years ago Mr. Bill Gates traveled to China, and liked what he saw. This was the model of capitalism which he favored: a small but powerful elite centrally planning an economy peopled by semi-feudal serfs, and living large on the backs of the many.

With all deference to Jimmy Rogers, China is a bubble. The central government will grow increasingly repressive and manipulative as the people improve in education, health and material means. Propaganda will grow more sophisticated and remain as pervasive as it is today.

When the bubble bursts, the iron fist will be unveiled and there will be popular uprisings, and those who believe they are in elite positions now may then find themselves on the docks piled on their baggage waiting for the next ship to take them to safer destinations.

This is certainly nothing new. After the collapse of the first Federal Reserve credit bubble in the late 1920's, the West turned to Soviet Russia and the fascist countries of Italy and Germany for the answer to the 'failure' of Western free market capitalism. Hitler and Mussolini were heavily favored by Wall Street, having a firm hand to rein in the mob.

On the optimistic side, freedom wanes, but still and in remarkable ways, never seems to die.

The Daily Bell
Chinese bank announces bombshell
Issue 343 • Friday, July 10, 2009

Yesterday on their website, the People's Bank of China announced a shocker. New Chinese bank lending for June was 1.53 trillion yuan ($224 billion), double the lending in May. The total already for the year is an astounding 7.4 trillion yuan when the target for the entire year was 5 trillion.

Putting this in context, total lending this year so far has amounted to 25% of 2008 GDP. As I wrote earlier this week, Chinese regulators are getting concerned that this lending is going towards poor credit and bleeding into commodity market speculation.

As most know, bank lending is high powered monetary stimulus due to its high velocity. This is the key difference between fiscal stimulus vs. monetary stimulus. Actually, monetary stimulus will only work well if the banks receiving the funds lend them out. In the US, this is clearly not happening due to banks loan losses and caution over new lending (expanding balance sheet.) In China, this is not the case and new loans are flowing. - CNBC

Dominant Social Theme: China is heating up.

Free-Market Analysis: We've written about this before. China backed into "capitalism" about 30 years ago and the impetus for where it is now was increased by the problems with Tiananmen Square. The Chinese leaders are not interested in political theory at this point (if they ever were). Their currency is power and the way to maintain power is to create an apolitical system where citizens "can grow rich." Western systems work a good deal better than communist systems in this regard. And thus China has built a facade of a Western system.

Yes, it is really only an imitation of a Western system (from a political and big business perspective anyway) in our opinion, just as its banks are only imitations of Western banks and its stock markets are only imitations as well. In fact, to grow rich by investing in the Chinese stock market one apparently simply has to listen intently to the noises coming from the government as to what companies will grow and what companies will not. (And this is different from the US now in what way? - Jesse)

As far as the banks go, the system is probably even more basic than in the West. The central bank prints as much money as it can, and the commercial banks disseminate it. These banks may act as independent entities, but they still have a foot in state government as do many large companies in China.

It is all fairly well jury rigged. China has incorporated a façade of Westernism but to cast China as the world's financial engine is to understand how desperate the West has become. China's economy grows by 10 and 15 percent a year, and now appears be heating up even more. This is not normal growth but central banking generated growth. The same clique still runs China, but the economy has been supercharged by additional printing.

China is said to be turning inward now, as Western countries cannot afford to buy its products. But whether China will be able to maintain its growth by using its own huge population as a purchasing pool remains to be seen. What will certainly happen sooner or later is that the supercharged money being used by the Chinese will create the same boom-bust cycle as has happened elsewhere. Only when it ends in China after so many years, it will be the mother-of-all blow-offs.

Conclusion: It is difficult to see what Chinese leaders expect to happen once the bubble busts. Maybe they are gambling that they can control the unrest that will come in its wake. Maybe they assume the bubble will not bust for many years. (And this is different from the US now in what way? - Jesse)

But articles like the one excerpted above show us that sooner or later China's overheated and pseudo-Western economy will implode, and likely even more violently than Western economies ever have. And here's a thought: The Chinese in the meantime are said to be big buyers of gold on a government level and also personally. Perhaps what is going to eventually happen is better known in China than the West.

SP Futures Hourly Chart

I think that most would agree that the US equity futures have put in some kind of a top, both in the short and intermediate term which is not shown here.

The question now is, 'Are they in the process of putting in some kind of bottom, or is the trend of the decline merely moderating?'

I have highlighted with horizontal lines a few levels of support and resistance that most traders are watching carefully.

It was not bullish that Alcoa was unable to hold its gains today from its 'good news.'

Goldman Sachs reports next week. That may give some spark to the financial sector, but Goldman is really a 'one-off.' One off what I am not quite sure, but whatever it is I think it says much more about them and their secret trading software and access to information than the economy or anything else.

SP Weekly Chart Updated and Some General Thoughts on Trading and Markets

Today we will take a look at the longer term SP 500 weekly price chart, updating the weekly chart which we published on March 23, 2009.

The rally, although sharp, is well within the bounds of expectations for a rally from a major market bottom off a steep decline. It was more than a technical bounce, but has not yet signalled a 'new bull market' despite the optimism of the Wall Street salespeople. Insiders are still diversifying from equities in record numbers, and the "investment banks" (if we can still speak of such an animal in their traditional commercial bank halloween costume) are spending more time 'gaming' the market than investing in the real economy for the longer term.

The target we set for the rally to the neckline around 960 'worked' which tends to validate it, for now, as a proper neckline.

If in fact this neckline holds, and the SP breaks down through key support, the chart formation sets up an objective of 360 on the weekly SP cash chart.

Here is the SP weekly chart update:



Keep in mind that the chart formation is long term, not immediate, and it must be validated further by a breakdown through key support. If, for example, the Federal Reserve decided to monetize even more aggressively than it has been doing, then it would be likely that the neckline would be broken to the upside, and we have a target showing where we think that will go.

Think of these charts as a 'map' to help us see where we have been, the most likely path, and the terrain, the lay of the land. Charts are not firmly predictive, only probabilistic. Those who make contrary claims for their system have always been shown to be exaggerated and highly selective in their result recording and reporting.

Too often "successful" traders merely exploit weaknesses and minor informational or systemic advantages or inefficiencies in the market and in essence place a 'tax' on the other market participants, usually the naive and inexperienced.

Sorry, but that is the way that it is. This even includes some of the 'too big to fail' boys who have no business exploiting the markets which need to function as efficient capital allocation mechanisms.

There is a tendency to seek to gain unfair advantage. The notion of good and rational markets that can self-regulate with participants who voluntarily obey the rules should be an obvious howler to anyone who has recently driven on a major highway. It is a fallen world, and regulation and enforcement are a sine qua non, and always in need of refreshment and improvement as are all things temporal.

Here is the original March chart.



Some traders are better than others, and some much better. The vast majority of people are in no position to trade, and have no temperament for it, and should leave it alone. They are investors, and enjoy a diversity of lifestyle. Trading is a profession, and needs to be respected as such.

The average person who is even in decent physical condition would hardly think to step into the boxing ring with the world heavyweight champion. And yet this same person thinks nothing of placing leveraged wagers in markets dominated by professionals who do little else for a living, heavily influenced even own the rules boards and help to pick the referees and pay their salaries.
So, what next?

The outlook is rather gloomy for the SP 500 in real terms, decidedly. There is no recovery in the real economy, merely fakes and the push and pull of 'flation. The Federal Reserve and the Obama Economic team are not even beginning to address the issues that will create a sustainable recovery, and are just doing the same thing that has failed before. The recovery from the 2003 market lows was nothing more than a monetary credit bubble, glossed up with statistical and accounting frauds. This is just more of the same, to a more extreme, even more cynically corrupt, degree.

So what next?

Gold still looks like a winning place as a store of value in times of corruption, decline and deception, although nothing is certain.



When the time comes and the economy appears to improve it is likely that silver will decidedly outperform gold on a percentage basis. Silver as well as gold are being heavily manipulated by a few banks who have enormous short positions. If they are ever forced to cover these there will be stretchers taking them out of the pits. But do not hold your breath, remembering who owns the casino, and the casino management. Still, all financial frauds and ponzi schemes come to their inevitable messy end. Bernie Madoff may merely not have as much company in prison as he deserves.

Yes, if you were able to time the market and buy the bottom in stocks, and pick the right ones, and hold on until the top, and then take your profits, and not been caught in the plunging decline of 2007, you have some remarkable gains and I wish you well. You are also gambling. As long as you realize this, and manage your money accordingly, you may keep some or even a good portion of your gain.

Reminder: Reverse Splits in the Triple Leverered Financial ETFs After the Close Today

For all you big money playas.

DIREXION SHARES ETF TRUST

Direxion Daily Financial Bull 3X Shares
Direxion Daily Financial Bear 3X Shares

Supplement dated June 26, 2009

The Board of Trustees of Direxion Shares ETF Trust has approved reverse splits of the issued and outstanding shares of both the Direxion Daily Financial Bull 3X Shares (FAS)(“Financial Bull Fund”) and Direxion Daily Financial Bear 3X Shares (FAZ) (“Financial Bear Fund”).

After the close of the markets on July 8, 2009 (the “Record Date”), the Financial Bull Fund will effect a one for five reverse split of its issued and outstanding shares and the Financial Bear Fund will effect a one for ten reverse split of its issued and outstanding shares. As a result of these reverse splits, every five shares of the Financial Bull Fund will be exchanged for one share and every ten shares of the Financial Bear Fund will be exchanged for one share.

Accordingly, the number of the Financial Bull Fund and Financial Bear Fund’s issued and outstanding shares will decrease by approximately 80% and 90%, respectively. In addition, the per share net asset value (“NAV”) and next day’s opening market price of each the Financial Bull Fund and the Financial Bear Fund will be approximately five-times higher and ten-times higher, respectively. Shareholders of record on the Record Date will participate in the reverse splits. Shares of the Financial Bull and Financial Bear Funds will begin trading on NYSE Arca, Inc. (“NYSE Arca”) on a split-adjusted basis on Thursday, July 9, 2009 (the “Effective Date”).

The next day’s opening market value of the Financial Bull and Financial Bear Funds’ issued and outstanding shares, and thus a shareholder’s investment value, will not be affected by the reverse splits.

John Merriwether to Close Hedge Fund After Heavy Losses

The markets are brutal indeed for speculation, with a few predatory institutions, well supplied with freshly minted central bank liquidity, preying the markets with high frequency programs designed to manipulate prices, squeezing the leverage out of funds and speculators.

The marvel is not that a professional like John Merriwether has failed again, although less spectacularly this time as compared to the great flameout that was LTCM.

The marvel is that people, including the wealthy and presumably sophisticated, continue to give their funds to gamblers and ponzi dealers.

Even more amazing how the people continue to allow their economies to be so thoroughly distorted and perverted by the corrupting influence of a relatively few but powerful market participants from the financial sector.

"While boasting of our noble deeds we're careful to conceal the ugly fact that by an iniquitous money system we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery." Horace Greeley

The banks must be restrained, and the markets reformed, and balance restored to the economy before a sustained recovery can be achieved.

A good first step would be an independent audit of the Federal Reserve. And a second would be aggregate position limits on all commodities and traded financial instruments with disclosure. A third would be the aggressive abolition of naked shorting.


Bloomberg
Meriwether Said to Shut Hedge Fund; London Chief Plans Startup
By Katherine Burton and Saijel Kishan
July 7, 2009 21:41 EDT

July 8 (Bloomberg) -- John Meriwether plans to shut the hedge fund he started after the collapse of his Long-Term Capital Management LP in 1998 roiled global markets, according to a person familiar with the matter.

Long-Term Capital lost more than 90 percent of its $4.8 billion of assets in the weeks following Russia’s currency devaluation and bond default. The Federal Reserve orchestrated a $3.6 billion bailout by the fund’s 14 banks to calm fears that the firm’s lenders and trading partners would be dragged down.

The decline of Meriwether’s current firm, JWM Partners LLC, played out over months, with its main fund losing 44 percent from September 2007 to February 2009. The Relative Value Opportunity II fund, which sought to profit from price differences among related bonds, returned an average of 1.46 percent a year since it began trading Nov. 30, 1999. The Credit Suisse/Tremont Hedge Fixed-Income Arbitrage Index gained 2.4 percent a year in the same period.

“For many investors, John Meriwether is by now just another hedge-fund manager,” said Tammer Kamel, president of Toronto-based Iluka Consulting Group Ltd., which advises clients on investments in the private pools of capital. “LTCM’s infamy was a big story in 1998, but the events of 2008 might finally relegate LTCM and 1998 to footnote status.”

JWM Partners, based in Greenwich, Connecticut, managed about $1 billion at the beginning of 2008. Meriwether, 61, joins hedge-fund veterans Art Samberg, James Pallotta and William von Mueffling in closing funds this year. He didn’t return a telephone call and an e-mail seeking comment.

London Chief Departs

Adrian Eterovic, who ran the JWM Partners’ London office, plans to start his own fund, according to the person, who asked not to be named because the information is private.

Eterovic, 46, ran the quantitative strategies within JWM’s funds, according to the person. Eterovic registered Episteme Capital Partners (U.K.) LLP with the U.K.’s Financial Services Authority, according to the market regulator’s Web site. Calls to Episteme’s offices after business hours weren’t answered.

Long-Term Capital relied on borrowed money to enhance returns. The average leverage at the beginning of 1998 was about $28 for every $1 of net assets. JWM Partners was more conservative, aiming to produce returns of 15 percent a year and borrowing $15 or less for every dollar of net assets.

Before Long-Term Capital, Meriwether worked at Salomon Brothers, where he was vice chairman and built its proprietary trading desk. His team, with at least a half-dozen Ph.D’s, used computer models to make money from small price differences in related bonds. His group was responsible for as much as 60 percent of Salomon’s revenue in some years.

He lost his job at the firm following the 1991 government bond scandal. Regulators ruled that he’d failed to supervise traders who violated bond-auction rules.

India Puts Its Weight Behind Alternatives to the Dollar Reserve Currency

When an alternative to the dollar as reserve currency does occur will this be the most widely telegraphed "black swan surprise" in history?

We would agree that it appears to be an almost classic Prisoner's Dilemma

The exits are likely to be rather crowded when this one finally comes home to roost, unless the nations can agree to a longer term phased in approach. But even then, once the announcement is made, it is beyond all doubt the endgame for the dollar bubble.

The system has not crashed, it is crashing.


Bloomberg
India Joins Russia, China in Questioning U.S. Dollar Dominance
By Mark Deen and Isabelle Mas

July 3 (Bloomberg) -- Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said he is urging the government to diversify its $264.6 billion foreign-exchange reserves and hold fewer dollars.

“The major part of Indian reserves are in dollars -- that is something that’s a problem for us,” Tendulkar, chairman of the Prime Minister’s Economic Advisory Council, said in an interview today in Aix-en-Provence, France, where he was attending an economic conference.

Singh is preparing to join leaders from the Group of Eight industrialized nations -- the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia -- at a summit in Italy next week which is due to tackle the global economy. China and Brazil will also send representative to the G-8 summit.

As the talks have neared, China and Russia have stepped up calls for a rethink of how global currency reserves are composed and managed, underlining a power shift to emerging markets from the developed nations that spawned the financial crisis.

“There should be a system to maintain the stability of the major reserve currencies,” Former Chinese Vice Premier Zeng Peiyan said in a speech in Beijing today, highlighting the nation’s concerns about a global financial system dominated by the dollar.

Fiscal and current-account deficits must be supervised as “your currency is likely to become my problem,” said Zeng, who is now the head of a research center under the government’s top economic planning agency. The People’s Bank of China said June 26 that the International Monetary Fund should manage more of members’ reserves.

Russian Proposals

Russian President Dmitry Medvedev has repeatedly called for creating a mix of regional reserve currencies as part of the drive to address the global financial crisis, while questioning the dollar’s future as a global reserve currency. Russia’s proposals for the Group of 20 major developed and developing nations summit in London in April included the creation of a supranational currency.

“We will resume” talks on the supranational currency proposal at the G-8 summit in L’Aquila on July 8-10, Medvedev aide Sergei Prikhodko told reporters in Moscow today.

Singh adviser Tendulkar said that big dollar holders face a “prisoner’s dilemma” in terms of managing their holdings. “That’s why I’m telling them to do this,” he said.

He also said that world currencies need to adjust to help unwind trade imbalances that have contributed to the global financial crisis.

“The major imbalances which led to the current situation, the current account surpluses and deficits, have to be addressed,” he said. “Currency adjustment is one thing that suggests itself.”

Emerging-Market Dependence

For all the complaints about the dollar, emerging markets such as India remain dependent on the currency of the U.S., the world’s largest economy and a $2.5 trillion export market. The IMF said June 30 that the share of dollars in global foreign- exchange reserves increased to 65 percent in the first three months of this year, the highest since 2007.

Tendulkar said that the matter needs to be taken up in international talks, and that it emphasizes the need for those talks to go beyond the traditional G-8.

“They can meet if they want to,” he said. “The G-20 has a wider role, has representation of the countries that are likely to lead the recovery process.”

More Banks Fail in "Deepening Financial Crisis"

More green shoots for the fungus collection.

What if they gave a Great Depression but systematically rigged the statistics, manipulated the markets, inflated the currency, and were able to convince the majority that it was not all that bad?

Would it still be a Great Depression? Or a Great Delusion?

How angry would people be when they realized they had been fooled into making very destructive personal financial decisions based on this deception?

Would the perpetrators be able to claim immunity because they were performing a service to the government? This is one defense that Barrick Gold (and JP Morgan) used when they were initially sued for manipulating the price of gold in the New Orleans court case. Barrick Corp Drops Bombshell

"The conscious and intelligent manipulation of the organized habits and opinions of the [public] is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country." Edward Bernays

“It is the absolute right of the State to supervise the formation of public opinion...If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and military consequences of the lie.” Joseph Goebbels

Bloomberg
Seven U.S. Banks Seized in Busiest Year for Closures Since 1992
By Ari Levy and Flynn McRoberts

July 3 (Bloomberg) -- Six banks in Illinois and one in Texas were seized by regulators as the deepening financial crisis pushed the toll of failed U.S. lenders this year to 52, the most since 1992.

Twelve banks have failed this year in Illinois, the most of any state. The seven lenders seized yesterday, with total assets of $1.49 billion and deposits of $1.34 billion, were closed by state or federal regulators and the Federal Deposit Insurance Corp. was named receiver, according to statements from the FDIC. Buyers were named for each of the closed institutions.

The Illinois banks are affiliates of Peotone Bank & Trust Co., in Peotone, Illinois, about 45 miles (72 kilometers) south of Chicago. The failures resulted primarily because of soured loans and losses on investments in collateralized debt obligations, the FDIC said. Illinois, with an unemployment rate above the national average, was one of seven states to begin the fiscal year without a spending plan.

"The six failed Illinois banks are all controlled by one family and followed a similar business model that created concentrated exposure in each institution," the FDIC said. CDOs, which packaged bonds and loans into notes of varying risk and yield, lost money as real estate defaults soared.

Regulators this year have closed the most banks since the savings-and-loan crisis of the 1990s as lenders struggle with mounting losses on mortgages and commercial loans. The total for 2009 is more than double the 25 banks shuttered in 2008 and surpasses the 50 that were closed in 1993. The prior year there were 181 failures or government-assisted transactions.

FDIC Fund

The FDIC estimates yesterday's seizures will cost its insurance fund $314.3 million. The regulator imposed an emergency fee in May to raise $5.6 billion to rebuild the fund, which has deteriorated in the past 18 months. More assessments are possible, the FDIC said.

Illinois Governor Pat Quinn, a Democrat, refused to sign a budget because lawmakers failed to approve raising the income tax. In his original $53 billion budget proposal in March, the governor sought personal and corporate tax increases to help eliminate an $11.6 billion deficit and maintain state services.

Chicago is 280 miles from Detroit, home to General Motors Corp. and Chrysler LLC, which were forced into bankruptcy. Lear Corp., the Southfield, Michigan-based maker of automotive seats, announced plans yesterday to enter bankruptcy. The unemployment rate in Illinois was 10.1 percent in May, compared with 9.4 percent nationally.

A Mess

"This is a mess," said Jack Ablin, who oversees $60 billion as chief investment officer at Harris Private Bank in Chicago. "We're a manufacturing state and in the Midwest, so we're influenced by the autos."

In addition to CDOs, the failed banks were plagued by losses on commercial real estate loans. Founders Bank of Worth, the biggest of the Illinois banks seized yesterday, had $374 million in construction and commercial real estate loans as of March, accounting for 63 percent of the bank's net loans and leases, according to a regulatory report.

Millennium State Bank of Texas, the Dallas-based bank taken over yesterday, had $67.5 million in such loans, or 81 percent of its total loans.

"The common denominator for most of the bank failures so far has been troubled construction loans," said Matthew Anderson of Foresight Analytics, an Oakland, California-based real estate research firm. "There's no easy way out with defaulted construction loans in today's environment..."

Japan Calling: A Little More Local Color on the Japanese System

A friend in Japan is updating me on how things are going there.

Its been about ten years since I have worked in Tokyo personally, but everything he is saying is a logical extension of how things were at that time. I am very familiar with the NTT communication system, which was the basis of some of our early work here in the US. Its convenient sometimes to have a determined bureaucracy with plenty of money and power at your back when its time to get a strategic initiative achieved.

This is useful because people like to make facile comparisons between Japan and the US without really understanding some important differences in the markets, public policy, demographics, and culture.

"There are many things here that make life difficult, but on the other hand, make life much easier, some planned, some dictated by circumstances and by accident. It seems very socialist. Makes it very difficult to compare Japan and the US.

There is national health care here. Due to a focus on disease prevention (they have started to take waist measurements and warn you if your waist is say more than 34 inches), not eating too much meat, getting enough vitamin D from sunlight and getting a little exercise because you have to walk 10 minutes to the train station, you can expect, on average, to be fully functional until about 75 and live into your 80s.

Almost everyone is reimbursed for commute to work, by least expensive route, say bus and train, even if you work in a convenience store. Japanese people have told me that the idea is that everyone who wants to work should be able to work where they want without being deterred by the cost of the commute. At one firm I worked at, the limit for the reimbursement was 800 dollars per month, so a very few people commuted by bullet train from quite a distance away. More exactly, if you go to work 5 days a week, the company will reimburse you for the bus/train pass, which allows unlimited travel, so you can use the train pass to go shopping or do other things on weekends for free.

My pass for a half hour commute each way, about 40 miles round trip, is 120 dollars per month. This is why the public transportation systems work well and have continued to improve. All the trains are continuing in improve, and for example, the bullet train now uses one half the energy it did when it debuted 45 years ago. JR East, beginning with the Yamanote Line, is replacing all its trains with new regenerative braking trains that are lighter and roomier and use half the energy of the earlier models. Advertisements on the trains say it takes 1/10 the energy to go by train than by car, but I think that is for older models.

Which brings us to the biggest advantage: most people do not need a car here, and if they do need one, a household can get by with just one car.

I have long thought of cars as vampires sucking the economic life out of every household in the US. And the risk of death and serious injury from car accidents is about half what it is in the US (although the statistics may not be directly comparable).

In 45 years, only one rider has been killed on the bullet train, and that was because he tried to stick his hand in the door too late and got the sleeve of his jacket caught in the door. While there are commuter train accidents from time to time, they are rare, and I think in Tokyo, the last passenger deaths were about a decade ago when a train derailed. Since the auto fatalities in Japan are about 7,000 per year, whereas in the US they are around 40,000 per year with about double the population, I guess that if the Japanese drove as much as people in the US, there would be about another 10,000 auto fatalities per year here, so over the 20 years I have lived here, there are say 200,000 people walking around who wouldn't otherwise be here. That trumps absolutely all other considerations.

I think it is telling that during the oil price spike last year, the US cut its gasoline consumption by about 5%, whereas in Japan, gasoline consumption was cut by 14%. I said, the Japanese cut their gasoline consumption by 14%... BECAUSE THEY CAN.

Broadband, subsidized and incentivized, has been here for a decade. Around 1999, I picked up a Yahoo Broadband modem, filled out a form, brought it home, and plugged it in. 6 M/sec, 15 dollars a month. Although I didn't understand it at the time, the modem was converting my telephone calls into internet telephony, so calls to the US that were a dollar a minute by NTT were suddenly a flat 3 cents a minute. Around new year, I made a lot of phone calls, and was bracing for a thousand dollar phone bill... and then I realized that I hadn't gotten an NTT bill in months... it was instead a 20 dollar charge tacked on to my credit card.

The Japanese government has been panicking about the oil running out for more than a decade. I noticed Koizumi saying "global warming, global warming" over and over again, and mention of peak oil was conspicuous by its absence. That's when I realized that when he was addressing the captains of industry, what he was really saying was "You idiots, the oil is running out! Get the energy use of everything down!"

Because broadband is widely available, the Japanese government went from wanting 10% of workers to telecommute at least some of the time, to wanting 20% to telecommute by next year, as a means of reducing energy consumption.

Mitsubishi is advertising a split system heat pump air conditioner/heater that runs at about 6 cents per hour (and the electricity rate here is high, about 20 cents a kilowatt hour). My Sharp heat pump is 16 years old and runs for about 10 cents an hour. My total heating/cooling expense for a year is about 300 dollars.

There is a huge panic going on in the US about how bad the electricity grid is. I think there are estimates that unreliable electricity is costing the US 100 billion per year. In Tokyo, there has been only one major blackout in 20 years, and that affected only about a quarter of the city for half a day due to a crane snagging high tension wires. The only outages I have seen myself were when a construction crew accidentally severed a line (one hour) and when a fighter jet crashed into high tension wires (two hours). Quakes do not normally affect electricity, water, or telephone. Gas meters have automatic sensors that turn off gas supply, and then if it seems all clear after an hour, automatically reset. We sometimes have fairly big quakes every day for weeks on end... I'm not joking.

When a quake is detected by sensors, the sensors send signals to a central computer. The computer has models of 100,000 quake scenarios, and it matches the data to a scenario, estimating the surface shaking for each small grid square of Japan. If surface shaking in a particular location is predicted to exceed a certain level, the bullet trains automatically engage emergency braking. All city halls have automatic announcement systems that estimate the shaking and count down to the arrival of the primary wave at their particular location. Nuclear reactors and power generating stations receive advance warnings. Some residential condos also have this. I suppose it will become standard soon.

You can get warnings of a few seconds or minutes depending on how far away the quake is.

(After seeing the Kobe quake first hand, my solution was 1) buy earthquake ground shaking estimate map of Tokyo, 2) see closest station to downtown where risk drops substantially due to granite outcrop getting you off the alluvial plain. Estimates of shaking in downtown Tokyo is 10 times the estimated shaking where I live.)

This is why I think it is so difficult to compare the situations. You cannot walk away from the mortgage. On the other hand, your commute is subsidize and you do not need a car, so it is as if the condo were free."

The Japanese Stagnation

This is interesting, and probably an eye-opener for most Western readers.

Most Japanese mortgages are 'recourse' loans meaning that the borrower still owes the full amount of the loan even in the event of foreclosure. One of the reasons for this is that so many Japanese residential buildings are not intended to outlast the 35 year mortgage and depreciate from the day they are bought.

The Japanese government promoted officially backed mortgage programs to keep the economy going, cutting down payments to zero from the traditional 20 percent. This lured in buyers who really could not afford the houses, and are often the first to have their pay cut in an economic downturn.

Japan uses a semi-annual bonus system as part of its pay structure for employees, the bonus portion of which is more readily sacrificed for the company good.

Please consider these things in the context of the governance of Japan which as we have said is semi-feudal, ruled by a few corporations and the wealthy elite in partnership with essentially a one party government.

This will go a long way in helping to understand the "Japanese disease" of economic stagnation. You start by crippling the middle class through debt indebtedness to a corporate elite.

The Japan Times
The only bonus you'll get this summer is the sun
By Philip Brasor
June 28, 2009

One of the cleverest ideas developed by the Japanese business world is the distribution of semiannual "bonuses" to employees. Usually, a bonus is tied to a company's good fortune or an employee's performance. Japanese workers have always deemed them to be part of their salaries and tend to plan their finances accordingly. Employees and employers look at bonuses differently: The former see them as an entitlement, while the latter use them as a safety valve.

With the onset of the recession, Japanese companies have exercised their option to reduce or even cancel bonuses, and for the past month the media has been buzzing with a new term — June crisis — to describe the situation of workers who may not be able to meet mortgage payments as a result.

June and December are bonus months, and 45 percent of Japanese people with housing loans have contracts that require them to pay larger amounts in these months than they do in other months, in some cases as much as five times.

Publications and TV news shows have been filled with human-interest stories about people suddenly faced with the possibility of losing their homes. The Asahi Shimbun tells of a 40-year-old housewife whose husband did not receive a bonus this month and apparently won't receive one in December either. Even worse, his salary has been cut by 20 percent. They have 20 years left on their 35-year mortgage. They pay only ¥80,000 a month toward the loan, but during each bonus month they pay ¥400,000. With one child in university and another in junior high school, they have saved very little. "When we took out our mortgage," the woman says, "it was unthinkable that my husband's bonus would be zero."

According to the Ministry of Internal Affairs and Communications, homeowners now spend an average of 20.5 percent of their disposable income on housing loans, the highest portion ever. Meanwhile, the Japan Business Federation has reported that total bonus payments this June is 19 percent less than the total for last year, the greatest year-on-year drop since they started compiling statistics in 1959.

In the past, company labor unions would protest to employers when bonuses were cut, calling bonuses "life expenses," but recently they have taken management's side and agreed that bonuses should be tied to company performance. But the roots of the June crisis go deeper. Housing has always been the government's main means of economic stimulation. During the 1990s, when the economy was stagnant, housing was pretty much the only sector keeping the economy going thanks to the Flat 35 scheme, which allowed home buyers to take out loans with only 10 percent down payments instead of the usual 20 percent. The government's new stimulus measures eliminate down payments altogether for Flat 35. These loans are guaranteed by a government entity called the Japan Housing Finance Agency.

A person who wouldn't normally be able to buy a home can more easily buy one, and as we have seen with the subprime loan fiasco in the United States, lowering the bar for home ownership can have disastrous consequences. People who bought homes in the '90s under the Flat 35 scheme with "relaxed" (yutori) interest rates are the ones most affected by the June crisis.

NHK illustrated this tendency on the program "Yudoki Network" with the story of a former taxi driver who received a notice from JHFA saying that since he was delinquent for six months he would have to pay the balance of his loan — more than ¥24 million for a ¥36 million condo he bought in 1998 — or the condo would be auctioned off. The man's situation is worse than it sounds, because if his condo is repossessed, he still has to pay off his loan.

Japanese mortgages are recourse loans, meaning the borrower is still liable even after foreclosure. Depending on the state, most banks in America offer nonrecourse loans, which are secured by collateral, usually the property itself. Once they foreclose, the borrower's debts are gone. If you default on a recourse loan, you're messed up three times: you lose your home, you lose all the money you sunk into it, and you still have debt. Wait, make that four times — your credit rating is garbage.

The taxi driver opted to sell his condo before it went on the block (where it would probably sell for about 80 percent of its market value), but the realtor he hired said she could get, at most, ¥25 million for it. With all the fees involved, he'd still end up ¥3 million in the hole. Fuji TV's "Sakiyomi" profiled an unemployed sushi chef facing foreclosure who still owes ¥9 million on his three-bedroom Chiba Prefecture house. All the realtors he's talked to say his property is worth about ¥5 million but the only offer he's gotten is ¥2.5 million. His family has already left him and he's contemplated suicide. These cases are accompanied by advice from financial planners that boils down to refinancing the loan so that monthly payments are reduced. But that means extending the loan period and, as a result, paying more money in the end for a home that will likely be worth nothing, which they rarely mention. Recourse loans are directly related to Japan's infamous "scrap-and-build" housing policy. Banks can't be expected to lend money for houses that start losing value the moment construction is completed if those houses are used as collateral.

There are more than 6 million vacant houses in Japan. Most will never be sold, because they're pieces of crap that were never meant to outlast their 35-year mortgages. Condominiums are no better. On average, Tokyo "mansions" built in 1990, when land values peaked, were selling for half their original prices by 2004.

Interviewed on NHK Radio, economist Akiko Hagiwara said that people who realistically can't afford homes have been suckered into buying them in order to prop up the economy. People in this income bracket are also typically the first to get laid off or have their bonuses cut. "They're victims of the government," she said.

The June Non-farm Payrolls Report

The headline jobs number came out worse than expected, and the paint peeled off the US stocks tape from its recent run into the end of the second quarter.

The trend herd had been looking at the bounce off the bottom and before today's number had some hopes that the leveling off or even a surprise to the upside would confirm a bottom in the economy. The sharp downturn threw cold water on those happy thoughts.



The actuals came in about as expected, a little lower perhaps, and as you can see there was a strong downward seasonal adjustment.



The "Birth-Death" model was in line with the usual swag that the BLS performs at this time of year. As you know this number is added to the "actual jobs number" before seasonal adjustment, so at this time of year it helps to inflate the headline number slightly.

With this regular repetition of the number without regard to the underlying economic activity over the years, and its feed into the actuals, one has to wonder why they don't just roll this number into their seasonal adjustments? Do they feel the need to justify their tinkering with actual number beyond some limit? The Birth-Death model is certainly no viable rationale, but it does serve to employ a few analysts, and is likely some pet project of a past BLS director.



And here is the only chart worth watching, the long term trend. There has been no bottom yet reached in the jobs lost. This is not so much a reflection on the stimulus because of the lag, and the obvious data showing that consumers tended to use the stimulus to pay down their immediate debt which is a worthwhile endeavor, but does not give a quick boost to jobs.

The issue might be a bit of a red herring, because the economic stimulus pales by comparison with the enormous amount of stimulus provided to the banking sector, which is stimulating some operators like Goldman Sachs to pay their employees, on average, a record $700,000 in annual pay. Now THAT is stimulus, but perhaps one that is counterproductive.



We are on the record in the opinion that the Obama economic team is ineffective, backward-thinking, compromised, and possibly corrupt. They are serving the corporate banks and not the people. They should be replaced starting with Larry Summers who is a Greenspan and Rubin crony and the core of failure on the team. Tim Geithner should follow to find better employment for his talents, possibly as a salesman of men's suits.

China Takes A Big Step Forward in Monetary Policy

This news was largely overlooked by the worse than expected US payrolls report, which dampened hopes of a quick economic recovery, a sentiment encouraged by some but certainly not realistic to anyone looking closely at the numbers. I think that little propaganda sound byte served primarily to apply some primer for the end of quarter paint job in US equities.

Despite its strength today as stocks fall and the boys cash in after their most recent pump operation, the dollar is going to be taken down a peg, so to speak. It is a long term trend that is still well in place despite this bear market rally.

How much further? The DX index is increasingly unsatisfying as a measure, and the manipulation of the gold and silver price by a handful of banks who are unbelievably short the metals on paper renders them less reliable.

But another 20% decline from here is where our charts would indicate the dollar is headed overall against the DX.

China Allows Yuan Trade Settlement, Offers Tax Breaks
By Bob Chen and David Yong
July 2, 2009 09:44 EDT

July 2 (Bloomberg) -- China will allow companies to use the yuan to settle cross-border trade and let them keep their entitlement to export tax rebates, seeking to reduce the reliance of importers and exporters on the U.S. dollar.

The People’s Bank of China will encourage banks to offer yuan settlement services from today, the bank said in the regulations published on its Web site. Transactions inside China will take place in Shanghai and four cities in southern Guangdong province, including Guangzhou and Shenzhen, while those outside China will occur in Hong Kong, Macau and the Association of Southeast Asian Nations, it said.

“It’s China’s first step to make the yuan global,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s largest foreign-currency trader. “It will protect exporters from swings in exchange rates and boost the yuan’s role in the world currency system.”

China is promoting greater use of the yuan in international trade and finance after Premier Wen Jiabao in March expressed concern that a weakening dollar will cause losses on the country’s holdings of U.S. assets. A Chinese Foreign Ministry official said today he hoped the U.S. currency would remain stable, while reiterating a call for diversification of the international monetary system.

“Companies in China and neighboring countries are facing relatively huge risks of exchange-rate fluctuations because of big swings in the U.S. dollar, the euro and other major settlement currencies,” today’s central bank statement said.

First Settlement

Asean comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Hong Kong Monetary Authority Chief Executive Joseph Yam said on June 29 he hopes the first yuan settlement transactions will start this month after signing an agreement with People’s Bank Governor Zhou Xiaochuan. Companies currently have to convert yuan into dollars or other currencies to settle international trade.

“Hong Kong will be the natural place for arranging these transactions,” Yam said in a statement today. “This is the key to the maintenance of the status of Hong Kong as an international finance centre.”

Tax authorities are working on the proposed rebates for exports settled in yuan, the central bank said. Bank of China Ltd. will be the clearing bank in Hong Kong and Macau.

Stability, Convenience

About 50 percent of Hong Kong’s trade with China may be settled in yuan after the program starts, Stanley Wong, deputy general manager at Industrial & Commercial Bank of China (Asia) Ltd., the Hong Kong unit of China’s biggest bank, said in an interview on May 5. Hong Kong companies want to use yuan in trade because it will probably appreciate against the U.S. dollar more than 3 percent every year, he said.

“We hope companies will like to use yuan because of its stable value and convenience,” People’s Bank of China Deputy Governor Su Ning said in an interview with state-owned China National Radio today.

The yuan has strengthened 21 percent against the U.S. currency since a dollar peg was scrapped in 2005. China has limited the yuan’s advance in the past year as a stronger currency makes its goods less competitive overseas at a time when economic growth this year could slow to 7.2 percent from 9 percent in 2008, according to World Bank forecasts.

Currency Swaps

The People’s Bank of China has agreed to provide a total of 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency- swaps to expand the yuan’s usage. China and Brazil in May began studying a proposal to move away from the dollar for trade settlement and use yuan and reais instead.

Malaysia’s government has been calling for reduced dependence on the dollar for “some years” and now that China is supporting yuan settlement it is worth considering, said Tan King Tai, an executive director at Pensonic Holdings Bhd., a manufacturer of household electrical appliances in the northern Malaysian state of Penang that sources parts from China.

“The dollar has become quite volatile and speculative in some ways,” he said. “If the yuan can be stable, it will help companies with their financial budgeting.”

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net

The Banking Bubble Began in 1986, Was Like 'the South Sea Bubble' Says Bank of England Official

In retrospect it should become increasingly clear to most that the Federal Reserve and its associated money center banks were responsible for systematically undermining all regulatory restraint and sound judgement for the sake of their private profits, without regard to the resultant destruction visited upon the public and the larger global economy.

To suggest that the regulatory process should now be concentrated in the hands of the Federal Reserve, still opaque and arrogant, is disgraceful and disqualifies the public officials from service who promote such a travesty of common sense and prudence.

Guardian
Banking system like South Sea bubble, says senior Bank of England official
by Ashley Seager
1 July 2009 13.26 BST

'Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison,' says executive director for financial stability, Andy Haldane

A senior Bank of England official today compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely "resorted to the roulette wheel" to keep up with each other.

The Bank's executive director for financial stability, Andy Haldane, said in a speech in Chicago that having been stable over much of the 20th century, returns in the banking system relative to the wider stockmarket shot up after 1986 until 2006.

"Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison," he said.

He said bankers and policymakers became seduced by the excess returns available: "Banks appeared to have discovered a money machine, albeit one whose workings were sometimes impossible to understand.

"One of the South Sea stocks was memorably 'a company for carrying out an undertaking of great advantage, but nobody to know what it is'. Banking became the 21st-century equivalent."

He said banking returns over the period were magnified by leverage as banks borrowed excessively, he said.

During the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this crossfire, higher leverage became banks' only means of keeping up with the Jones's. Management resorted to the roulette wheel."

He noted that the 80% slump in bank shares since the credit crunch hit meant that returns from the sector were now back in line with their longer-run average (see graphic above). The market capitalisation of global banks has fallen by $3tn (£1.8bn) since the crisis began, he said.

"We should aspire to a financial system where there is greater market and regulatory scrutiny of future such money machines. In achieving this, there is a role for some body – a systemic overseer – which is able to detect incipient bubbles and fads and, as importantly, act to correct them. This role is about removing the punchbowl from future financial sector parties." (We had a group that were responsible for doing this. They were called The Federal Reserve under Alan Greenspan. And Greenspan became the whoremaster of ceremonies for perversion of finance in the bubble economy. - Jesse)

He said that in future there would have to be a greater distinction between management skill, which improves return on assets, and luck, when return on equity can be magnified by leverage.

"Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole."

A second lesson, he added, was that there would have to be much stricter system-wide limits on leverage, particularly among big banks whose stability is crucial to the whole financial system. (Perhaps some prohibition of the types of activity that banks can engage in like Glass - Steagall? Oh yes, we had that as well and the banks repealed it with the help of the Federal Reserve. Perhaps we should have regulatory reform and place all the oversight responsibility with one group. Like the Federal Reserve? - Jesse)

"For a number of diseases, 20% of the population account for around 80% of the disease spread. The present financial epidemic has broadly mirrored those dynamics," he said, adding that the failure of a core set of large, interconnected institutions such as Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG contributed disproportionately to the spread of financial panic. (In this case there are a few Typhoid Mary's with names like JP Morgan and Goldman Sachs and Morgan Stanley, and they are still hard at work - Jesse)

"Epidemiology provides a second key lesson for financial policymakers – the importance of targeted vaccination of these 'super-spreaders' of financial contagion. Historically, financial regulation has tended not to heed that message." (Vaccination is one approach. Wall Street and the City of London really need a dilation & curretage - Jesse)

He welcomed a recent move by US authorities to bring the trading of credit derivatives, which were at the heart of the crisis, on to exchanges so they could be better understood and controlled. "This is a bold measure and one which deserves international support."

Haldane's speech was part of a growing debate among global policymakers to try to build a better system of regulation and control of the financial system to prevent such crises as the current one from occurring again.

Gold - Weekly Chart

Hasta La Vista Baby

Here's a green shoot for you to chew on in your happy place...

This news item merited a thirty second mention on Bloomberg Television with an immediate resumption of rally jubilation and feel good news. And on the personal interest side, poor Karl Malden has died at age 91.

I wonder if there are credit default swaps on California? Woo hoo. Bring on those records bonuses for the boys in the back room.

Bloomberg Wire.... Governor Arnold Schwarzenegger declares "a state of emergency" for the State of California in its budget crisis.

As of 2007, the gross state product (GSP) is about $1.812 trillion, the largest in the United States. California is responsible for 13 percent of the United States gross domestic product (GDP). As of 2006, California's GDP is larger than all but eight countries in the world.

China Requests Debate on Reserve Currency at G14 Summit

China is proposing a new reserve currency regime less dependent on the dollar, along with other BRIC countries, and the US and its financial allies in the status quo will resist change because it is in their short term interest to do so.

China can take 'pre-emptive' action by diversifying its holdings ahead of any change, and there are some indications that it is doing so already. But while the dollar is the prime medium of international trade, China must buy dollars to support its mercantilist industrial policy. Its own alternative is to boost its domestic consumption and 'grow a middle class' which in some minds erodes the power of the narrow political elite which rules the country.

The US needs to stand firm in some areas, and acquiesce in others. Standing firm with regard to the yuan being free of a peg and currency controls is one area that ought to have been sine qua non when first Clinton and then Bush gave China its openings as a preferred trading partner even while maintaining de facto industrial subsidies through its currency and markets.

The first line of negotiation will be to agree on a dollar substitute, which will probably be the SDR. The US will resist and delay this as long as is possible.

The fallback position then will be the composition of the SDR, and a long phasing of the change in the primacy of the dollar and a few G7 currencies. China will seek more diversity and the inclusion of gold and silver, which is anathema to the Wall Street banking cartel.

The US must change or face more seismic, involuntary dislocations. As Britain surrendered its far flung colonial Empire, so the US must downsize its financial sector, restore balance to its own economy and its place in the world economy, and relinquish the primary reserve currency status which has become a powerful instrument of manipulation by the Wall Street banking cartel.

The dollar is the last, the mother of bubbles. Few understand this even now.

The epic US credit expansion was enabled by the preferred position of US debt instruments as the reserve currency of the world. The bond and the dollar are the absolute foundation of that debt pyramid.

Those days are undeniably over. What comes next and in what order and timing remains open to question for sure, but that substantial change is occurring is not.

The difficulty is that the financial institutions are a powerful influence over many key politicians in Washington and London and thought leaders and media outlets around the country, and in some parts of the world.

The military-industrial complex of which Eisenhower warned has become a real impediment to freedom in the US, but ironically it is not the manufacturing sector but the service, or FIRE sector, which has its grip on US political decision-making.

Obama could have changed this and there was hope that he would, but all that he has does so far appears to demonstrate that he and his advisors are fully compromised by the potent financial interests controlling their country.

What comes next, no one can say. But change is in the wind, and with that change comes the rise and fall of powerful but all too human institutions which many still believe can last for a thousand years, even as they are on the brink of der untergang, their downfall.

Reuters
China requests reserve currency debate at G8
Wed Jul 1, 2009 11:58am EDT

July 1 (Reuters) - China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said on Wednesday.

One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L'Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt.

This forum, the so-called "G14", meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement.

A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: "Any country at the meeting can raise issues they see fit." (China is not just 'any country' these days - Jesse)

"But whether there is a specific mention in the communique remains open," said the European source, adding that sherpas would discuss this further in preparatory talks on Friday.

The debate centres on proposals by some emerging powers that an alternative should be found to the U.S. dollar as the global reserve currency, to reflect the shifting balance of power in the globalised economy.

China's central bank governor said in March the world should consider using the International Monetary Fund's Special Drawing Rights (SDRs) as a super-sovereign currency. The SDR is an international reserve asset allocated to IMF members and its exchange rate is determined by a basket of dollars, euros, sterling and yen. (China also wishes to modify its composition - Jesse)

But the Chinese proposal failed to gain ground after several world leaders, and officials from the IMF, backed the dollar as the global reserve currency. (Reporting by Reuters bureaux)

End of Quarter

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,

That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed.

But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security..."

The US markets will be closed on Friday July 3 in holiday observance of the anniversary of the American Declaration of Independence from the rule of England.

The rest of the world will somehow manage to muddle through on its own as best it can, and continue to consider its options and alternatives to the US Dollar as the prime measure of international trade and sovereign wealth.

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