Blog on global economic & market happenings

Germany's bad bank model - Taking shape?

2009-02-03T23:56:00.000-08:00

You will by now heard about the BAD BANK or the AGGREGATOR BANK of US that would take the bad illiquid toxic assets on to its own balance sheets to bring in much needed confidence in the financial system in the country.
Now Business week carries an article where they mention the silent developments taking place in the strongest of European economies - Germany.

DB which lost $5.2bn in 2008, is supposedly leading the developments shaping the BAD BANK model for the nation. Last Monday Hugo Bänziger, the chief risk officer at Deutsche Bank, appeared before members of the conservative Christian Democratic Union's (CDU's) finance committee to promote the potential benefits of a "bad bank."

But this bad bank may not be a single outpost of all the financial toxic assets/ liabilities like that in US but might be a series a privately held banks in Germany. Another critical difference is the risks taking would be that of the shareholders in these institutions and not that of the government. But where ever the need of liquidity will be felt - government would suply that into the system.
Thus increasingly, we are seeing an era come into being where we have the governments having greater control over our lives and through the corporations that run the economy and thus us.

In the meantime, German government is discreetly planning to nationalize Hypo real estate, a measure which would be raised a lot of outcry few months back.
And mind you folks this is something that would occur in future as a common occurence....

SOCIALISTS ARE BACK INTO THE DRIVING SEAT .... HOLD ON TIGHT

Britain on the brink of collapse?

2009-02-03T21:37:00.000-08:00

Off-lately, the voices on the collapse of the British Sterling's future impending doom have gone through the roof.... Since, currency strenght represents the strenght of the economy, hence a doomed Sterling is representative of the doomed UK economy which produces few tangibles apart from limited crude production in the coming times of inflationary (Not now, but in coming times HYPER INFLATIONARY HOLOCAUST) is not far away....

Britain came very close to collapse recently as revealed by one of the government ministers ---- Have a look at the article below ----
A Rabbit In Every Hat
I’d like everyone to take note of this revelation published in the UK’s Daily Mail one week ago:
Revealed: Day the banks were just three hours from collapse
By Glen OwenLast updated at 11:21 PM on 24th January 2009
Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.
City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse.
The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.
Only frantic behind-the-scenes efforts averted financial meltdown.
If the moves had failed, Mr Brown would have been forced to announce that the Government was nationalising the entire financial system and guaranteeing all deposits.
But 60-year-old Lord Myners was accused last night of being 'completely irresponsible' for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure.
The build-up to 'Black Friday' started on Monday, October 6, when the FTSE 100 dropped by nearly eight per cent as bad news on the economy started to multiply.
The following day, Chancellor Alistair Darling began all-night talks ahead of an announcement on the Wednesday that billions of pounds of taxpayers' money would be used to pour liquidity into the system.
Source: Rob Kirby
If this is the situation in Britain, then I would ask how is US placed right now?

Till then cheers

Deflation Vs Inflation debate

2009-02-03T00:33:00.000-08:00

For a well versed or well read person, these days and the investors all around the world - one question might be rendering their nights sleepless till the d-day arrives.

For the issue right now with the major developed economies is the debt deflation occuring, enabling the Fed and other major central banks to inflate the economy through various fiscal and monetary tools in their arsenal. The activity would go as along as the deflationary concerns are abound in the market - also giving Fed and other central banks an excuse to let their printing binge go on.

Let us see the events unfolding in the Fiat currency economies.

Your monetary theory states that the inflation/ deflation depends on the following three factors

Money supply into the economy

Money velocity into the economy

Output of the economy

Thus, right now the velocity surely has reduced, due to the risk aversion entering the system, people hoarding money onto their Dollars and UST bills. In addition with all the unprecedented losses having taken place in the past year, Fed is providing money to the banking and financial industry to TRY to make them solvent. The estimates range from $3.6 trillion (Nouriel Roubini) to Goldman Sachs coming out with $4 trillion

Currency devaluations !

2009-01-12T19:21:00.000-08:00

This post would just be a short one offering some insights about coming booms !

Our sources tell us that some kind of devaluation of Yen is in the offing in near time in the future.
Also this week is going to be extremely dreadful for gold may be going down by 10%, already it has fallen about that extent.
J.P. Morgan is in increasing trouble with the stock price being bamboozeled in last couple of days. Watch out there is someting serious brewing there, we already know their derivatives book may be the reason for their impending troubles. (JPM $24.91, down $1.6)
Today morning in Closing bell CNBC US, news was Morgan Stanley entering into JV business with investing into the Smith Barney of Citigroup. Mind you this is another of the ways Morgan through the US government is pumping money into the already failed Citigroup by our reckoning.
US could lose 2mn jobs in 2009 - a news report by a research group

Keep up the spirits

Cheers

US Debt:New Sources

2009-01-12T06:35:00.000-08:00

As of today, US is not having bit of problem generating debt for its expenses at extremly trivial costs compared to what the emerging markets might be giving. Just go and check the returns on 1yr, 3yr, 10yr and 30yr UST bills.
Considering the balance sheet of US, pundits have started the raga of announcing that the UST is a grand bubble so start shorting it. In a way they are right, but what is the right moment to short the Treasury bubble?
What happens, when countries like China and Japan stop financing the US debt? It may be of importance if we just look at the strong winds of change in the baby boomers generation in US. There are enough indicators by the investment gurus well versed with the situation, that now baby boomers might turn to a savings oriented community rather than consumption oriented. So the savings rate are going to provide US government a sizeable proportion of the reserves making their life bit not much easier, but still it would help.

Another Madoff?

2009-01-07T04:39:00.000-08:00

Did India and this world needed another of the PONZI scheme, well no one could have thought that IT sector in India and that too a top tiered company Like Satyam would be put under the cirumstances that Mr. Raju has put it in.
More so it is seemingly a combination of Enron and Madoff combined with books cooked and assets being shown when none were there.
It is certainly a big blow for Indian industry reputation but to the experts it would not be a surprise considering, such events are more likely to happen when the things are tough and thus it becomes all the more difficult to keep all the skelotons in your cupboard.
What is clear, that increasingly examples are coming to light in this era of greed where promoters even after having taken their companies public, have treated them as personal fiefdom not caring about the other stakeholder interests.
May be Mr. Raju you can go and apply at the Federal Reserve since you have excellent credentials now or team up with Bernie Madoff after he is released from house arrest.

Here comes another Madoff...

Inflation or Deflation going forward

2009-01-06T04:59:00.000-08:00

Hi there
Welcome to the new year. Going back and looking at 2008, it was a tough year for most of the investors. Well, I what our think tank says: 2009 might turn out to be equally if not more volatile because of the interventions by the Central banks and governments around the world. After all Interventions dont let the market funtion the natural way.
Alot my reads these days have the mention of the debate going on about if Inflation or Deflation will have taken hold going forward and thus what are the implications for investments for the year 2009 and beyond.
Well, I like to bring to light a definition of inflation in terms of two major theories, given by two major school of thoughts.
According to the Austrian school of thought: Inflation is a monetary event and not an economic one, thus the relative increase in the money supply compared to the economic activity will lead to more money compared to assets, thus would lead to an increase in the asset prices.
Thus increase in money supply relatively, leads you to inflation.
Whereas, Keynesian school of thought says that inflation is an economic event, wherein the event itself leads to a general increase in the prices of assets. That means economic advancement leads to increase in the prices of goods over a period of time.
Going into the details of the definition is not the aim of this post, but let me state that Keynesian school has always used by the ruling elite to obfuscate and mislead the masses to retain their grip over the scheme of things and as usual general public content being safe with status quo does not dwell and study history has no inkling of what is right way.
So, going by the Austrian school of thought, second half of 2008 has been a pure deflation because of the evaporating money and money supply in critical markets: be they debt or credit or commodity markets.
But would it remain so going forward?
Make your own conclusions: Considering the capital infusions Central banks all over the world have made into the system and the lower interest rate regimes they all are embarking upon thus making the availability of the money cheaper + punishing the savings of people, money supply and velocity will have to increase over time.
Thus one factor that one would have to watch out for would be the money velocity which right now in US is below 1, meaning that the capital infused into the system has not trickled down into the veins of the economy. If the people all over the world, decide not spending whatever money has been infused, thus keeping the money velocity down, then Central banks would have to create an 'expectation of inflation', so that in anticipation of prices increasing in the near term, people start spending and thus the cycle tends to feed itself leading to what is generally being termed by the experts right now as INFLATION HOLOCAUST.

Oil is not well - 2

2008-12-30T22:03:00.000-08:00

The brave have fallen, and they have fallen hard in the times. Oil was one of the best performing commodities in 2008 till it started falling, and fell it did hard.

Now literally on its knees, people have shunned it like a pariah.

Just to give you a relative perspective let us see the following commodities which are off from their 52wk highs

Commodities % drop from their 52wk highs
Oil 75%
Copper 70%
Nat Gas 57%
Silver 50%
Gold 15%

So, in 2008 - commodities have fallen hard and the related stocks in many cases have performed worst. Thus, naturally - the majority have gone foul on commodities many proclaiming, 'the bust of commodity super cycle'.

But we dont think so. The argument that demand destruction is greater does not hold good when it is seen in the light of the fact that the new resources of commodities are being increasingly getting more expensive to get into production. Eg. shale oil in Canada needs atleast $80 a barrel of oil price to make the project viable or roughly 70% of the new exploration in gold mining is done by juniors and by the way HUI index fell to 150 levels, has raised serious questions about the ability of the juniors to get capital to carry out the existing projects or start new ones and coupled with low gold prices, it is definitely impacting the ability of new production to come above the ground in time.

Moreover, China which now has a much greater role to play in commodity markets as it is one of the rice setters due to its consumption binge, is now gearing up to increase its GOLD AND OIL RESERVES which is being increasingly seen as strategic commodities by its top policy makers.

Like: Zhang Guobao, head of the National Energy Administration, said:

The severity of the economic downturn has brought a marked decline in demand for oil and unprecedented pressure on prices. The amount of crude oil on the international market still far exceeds global demand.

China will push ahead with building the second phase of its strategic oil reserves, having largely completed the first, Zhang said.

One of my friends working in Cairn India, is worried these days about the price of oil going down. But I see his worry not lasting too long, due to the supply issues rearing up their heads soon enough.

For future, prices estimated by the experts are the following and on the upper side of the $38 a barrel it is trading at today.

For 2009
Deutsche Bank is estimating average price of oil @ 47.50 in 2009
Merill Lynch @ 50
Moodys @50
Goldman @45 but drop to $30 in first quarter
Marc faber is buying oil at these prices
Jim Rogers says oil will reach @200 in 2013

Now I would go by the last two experts as over the years they have been proved right again and again.
So gear up for the next up leg in oil which is not going to be pretty until and unless you are invested in it.

Cheers

Oil is not well

2008-12-25T21:47:00.000-08:00

Layman out there across the world is rejoicing as oil prices come around $35/ barrel. The conventional thinking goes 'see we told you the fundamental did not justify oil @
$100'. But nothing can be far from the truth at this point in time. Like a rubberband - the more the prices will contract, the more the projects of oil exploration will get delayed and thus lesser the supply will be when it is called .

The drop of oil price by 67% in less than 6 months is unprecendented. Never before we have witnessed such as crash this fast.
The price right now oil is hovering is breaking the camel's back in the economies which pre-dominantly depend on petro dollars for the budget surpluses.

Countries like Russia, Venezuela and Iran are vehement supporters of Oil prices around $75-90 per barrel. Otherwise this is going to be disastrous for the budgets and thus stability of the regimes in these countries. Eg. "Initially, Russia was hit with a huge exogenous shock when its terms of trade deteriorated sharply because of the sudden fall of oil, gas, metals, and other global commodity prices. With current commodity prices, the country's exports next year could plummet by some 40 percent in current dollars, or by $200 billion. Budget and current account surpluses will quickly turn into deficits." - source- http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=1086

Where are all the talks of speculation right now, I heard them a lot when oil was at $147 a barrel. The contango right now in the oil futures market gives you an instant profit of $10-12 a barrel instantly and that smacks of someone trying to short oil in huge quantities in the markets.
And hence the smart oil producers are buying oil in the spot market, and selling them in futures.

Markets as efficient as they might claim to be are not working as they are supposed to. If you have seen prison break season 4, you might relate the happenings in these markets being manipulated by a COMPANY for their own gains. Slowly but steadily - POWER is being concentrated in few hands and corruption is running rampant, and to give ourselves a false sense of optimism and security - WE CRY: SEE I TOLD YOU SO.

New investment themes for 2009 (1 of 4)

2008-12-10T04:10:00.000-08:00

The times are extremely volative right now. No geograhical region, no asset class world over worth investing in with enough liquidity has been spared due to the crisis we are in right now.

As Marc faber pointed out in the latest of his reports, whenever volatility has been more than the average of past recoreded period, say a decade, returns on investments in equities have not been good. Only the saviest of investors are able to wade through all the noise, called volatility.

So, going ahead into 2009, one of the primary questions in front of every investor, trader, speculator is what theme to get into, what to invest into.

Also, I should remind a cliched statement, that in every bull run a new sector has taken the lead to suggest the change in leadership.

So, i intend to write a three part blog, covering the investment themes that can be looked into and invested for the next upsurge in equities, when it starts here in India and abroad.

To cite these themes, I believe

Agriculture
Energy
Precious metals

are the places where fortunes of the next century will be made.

So, see you in next post.

Cheers

ECB rate cut release - 4th December 2008

2008-12-04T05:54:00.000-08:00

PRESS RELEASE
4 December 2008 - Monetary policy decisions
At today’s meeting, which was held in Brussels, the Governing Council of the ECB took the following monetary policy decisions:
1. The interest rate on the main refinancing operations of the Eurosystem will be decreased by 75 basis points to 2.50%, starting from the operation to be settled on 10 December 2008.
2. The interest rate on the marginal lending facility will be decreased by 75 basis points to 3.00%, with effect from 10 December 2008.
3. The interest rate on the deposit facility will be decreased by 75 basis points to 2.00%, with effect from 10 December 2008.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.
European Central BankDirectorate CommunicationsPress and Information DivisionKaiserstrasse 29, D-60311 Frankfurt am MainTel.: +49 69 1344 7455, Fax: +49 69 1344 7404Internet: http://www.ecb.europa.eu
Reproduction is permitted provided that the source is acknowledged.

US government default risk grows

2008-12-03T05:10:00.000-08:00

Derivatives are still the Neutron bomb waiting to explode. Despite all the stupid things that Bernanke and Paulson are doing in order to 'supposedly bailout' the US economy, I still admire their ability to have averted the meltdown so far, along with the supression of key asset classes in order to incur profit only to the US government.

CDS, one of the many soldiers of PONZI finance, is supposedly a financial instrument which is an indicator of the 'probability of default' of an entity. CDS when the times were good made a lot of money for a lot of people, a lot of time. But, now the tables are turning. Why is this the case? Let us look at the history....

The graph below is that of Iceland, when market sensed that there was a growing probability of Iceland defaulting on soverign debt, CDS exploded skywards.

And the implosing was so suddent & voilent that participants did not have the time to get out and were caught with tails between their legs.

Similar fate happened to AIG. Again we see a lone standing skyscraper before the mighty went tumbling down.

Bear Sterns met the same girl down the road.

Now let us see the graph below. The CDS on the 10 Yr treasury notes has jumped 4 times in value from January 2008.

That means the market - pack of Wolves sense that US government is 4 times more likely to default on its soverign debt today, compared to start of the year.

And with the latest pleadge of backstoping the industry with $7.76 trillion 'unprinted money' uptil now, I am sure we are going to see rise in premiums. The thought of US defaulting on its debt may be unthinkable to all of us, but so were the siutations that have developed over the past 1 year.

Keep tight because, pack of wolves would run wild the day US defaults on its debt, and considering the imploding CDS spreads, that day does not seem to be far.

Chinese conundrum - Currency revaluation?

2008-11-29T18:04:00.000-08:00

Chinese are a harried lot these days. With the US export pit having been filled, leading to a slowdown in the demand for the Chinese export, China is looking to several different ways to kick back its economy into higher gear again.

The constant devaluation against USD coupled with great economic growth, when things were going good, was manageable although it did give rise to hot inflows, which made returns on your investment one of the best in the world. But the 2008 has brought in a new set of challenges for the Renminbi and thus Chinese government is looking at various aspects of relooking at the managing of currency.

Have a look in the article with the link provided by MS on the changes that might be brought about in Renminbi regime.
http://www.morganstanley.com/views/gef/archive/2008/20081125-Tue.html#anchor7231

USD's last gasp - implications for India

2008-11-29T17:13:00.000-08:00

Like a drowning fellow, who is unable to swim against the tide, catching breath of stay alive as long as possible is one of the ways to extend the critical last moments. USD's resurgence after July 15,2008 is somewhat similar.

Historically, after the gold standard was done away with, USD has been the gold standard for the world. The reason was the sheer dominance & impact of US on global trade and the fiscal and monetary aspects of the trading partners. USD was thus de-facto currency to have of you wanted to trade at global scale, thus fueled the demand for the USD.

However, such is the nature of man-he digs his own grave knowingly. US Fed - helicpoter Ben and along with the Treasury secretary Hank Paulson have shown to the world, they are ready to reinflate the system at all costs. It is but natural, that anything thrown into the market more than what the demand is, leads to reduction in the value of that object. The same is going to happen to USD in the coming months. USD is on a precipice waiting to take a dip into the abyss.

There are two options with Fed, ahead.*
1] Because of the huge influx of USD into the system, US Fed will have to accept that down the road; US would have to deal with huge inflationary pressures in the economy.
2] US Fed instead of letting free market system, letting it devalue USD in a cruel, fast & furious way, handles the devaluation systematically to avoid serious consequences of free market reaction.

Thus, what does it mean for a country like India?
Take a look at our RBI annual report 2007-08, released on the web on August 2008.

As of on June 2008, RBI had gold reserves amounting to 9BN USD (valued at market price).
Assuming that the average market price at that point in June was USD900/ ounce, this amounts to a gold holding - 283 tonnes or 10,000,000 ounces.
FOREX assets were USD302Bn, majority of which are in USD. Out of total USD312Bn of total FOREX reserves, having just USD9Bn worth of gold, is sheer madness.

You can go and check the details at http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/86606.pdf

Never, before in the last 100 years has the world faced economic headwinds of such staggering effects as we have seen in the last 1 year, and would keep on seeing ahead for atleast 1 year or so. Currencies globally are in turmoil with only Yen and USD strengthening due to factors out of the scope of discussion of this post.

Now due to the reasons cited above*, USD is going to be devalued either way, drastically in the coming years. So much so that there is a talk of a new currency replacing USD, called Amero by the last years of Obama administration.

Thus having majority of the FOREX reserves in foreign currency, and that too predominantly in USD is harakiri.
The reason, why i cited the gold holdings above is: in this age of high volatility and uncertainty, gold is one of the assets that has surpassed ages preserving its status as safe haven investment in troubled times. Chinese, having surpassed Japan as the biggest holders of UST bonds, have announced that they will start to diversify their FOREX reserves into gold, and want to take their present gold reserves of 600tonnes to 4000 tonnes. Check out one of the several news articles at link
www.english.peopledaily.com.cn/200612/04/eng20061204_328023.html

May be they know something, we dont, because lets accept the fact that they are far more superior businessmen than we are.

As of today, i have not come across any news article stating that RBI intends to increase its gold holding in the near term. Hence, as the USD would go down, Rupee would have serious implications for it, to preserve the trade across the major trading partners, are we going to devalue Re along major currencies. Since no currency has yet emerged as the replacement for USD as global reserve currency, I assume that other world currencies too would have to take the bait.

Incase, Re devalues, then we as citizens of India are going to see a loss of purchasing power over the years. Hard assets will be the investments rising in this scenario going ahead.
Thus as a safe way to retain, even enhance your purchasing power over the next 3-5 years, i would suggest you hold some share of your investments in physical gold only.

And there is a sweatner too.
We are hearing (as mentioned above) from experts a new monetary system. A possibility to returning to gold standard is also being mentioned.

US right now has official gold reserves 8100 tonnes.
Fed balance sheet size is USD2trillion.

Thus if the world would go to the gold standard, all the balance sheet of Fed would have to be backed by the gold holdings they have, thus valuing gold @ a staggering $7000/ ounce.

Against this, in India the gold prices would shoot up to Rs 12lakh for an ounce with the balance sheet at Rs 14.6 trillion and gold holdings of roughly 283 tonnes.

Now the balance sheet size of RBI in 2007-08, rose by a staggering 46% to Rs14.6 trillion. http://www.blogger.com/post-create.g?blogID=5517697057834512009

Going ahead, for you as citizens living in India, buying physical gold might be the way to new found riches in a new age that lies ahead of us.

With that I am finished for the day.
Cheers

Nothing much in terms of fireworks today-as of now

2008-11-28T03:40:00.000-08:00

Not much of activity on gold commodity markets as per KITCO chart. So lets us see if any thing boombastic happens when US opens today.

Cheers

Golden moment might be today - 28 November 2008

2008-11-27T18:41:00.000-08:00

Today might be the day for what GATA and gold bugs have been waiting for. Today on 28 November 2008 is the report period for the December contract at COMEX.

In normal times, this day might have passed as any other day, but in this era of interventions and manipulations, the contracts on the short side of the trade are much more of what can be delivered.

Thus shorts would look to get out of the trade in case the normal percentage of 2% of people asking for the phyiscal delivery rises dramatically and leads to a spectacular rally in the gold prices.

It has long been known and accepted that COMEX is no longer insync with the phyiscal gold prices in the market, thus GATA and other gold bugs have long been on the crusade to prove the interventions by the PPT - plunge protection team. Today might turn out to be their salvation day, a momenet when people would know - THERE ARE NO FREE MARKETS!

Look out for probable fireworks tonight (IST) at COMEX.

US Fed: Greatest scam of mankind history

2008-11-26T21:10:00.000-08:00

Very few people in this world know that US Fed is a private entity controlled and owned by a cartel of central banks, many of them headquartered in Europe.

More surprising is the role of US Fed in the economy of United States. Just for records, since the origin of Fed, USD has depreciated by around 95% (since 1913), primarily due to the monetary expansionary and inflationary policies persued by Fed.

Now I must tell you what Fed does. It must be the greatest scams around in the history of mankind. When US government needs money, it can issue its own US notes backed by the faith and promise of US government. But wait, this is not how the things work- US government issues treasury bonds to US Fed, Fed buys the bonds by 'CREATING MONEY OUT OF THIN AIR'. Fed has the electronic printing presses in this modern age and prints money out of thin air. Then gives the money to US government and to add to the shame, US government pays out interest on the very bonds US government issues - where were the forefathers of US when this bill was passed.

One of the acts that runied the United States, and the climax is yet to come in 2009 and 2010.

Fed motor on full throttle

2008-11-26T05:10:00.000-08:00

There was never a doubt on Mr. Ben Bernanke's objectives to pump as many US dollars into teh system to prop up the sinking economy. Although the measures were late, as always the Fed was behind the curve; no there is no dearth of will and enthusiasm (pun intended) to get as many dollars into the economy.

Contrary to the current scenario and the popular opinion at present - that deflation is the evil that has to be tackled, down the road around soemwhere begining of 2010, inflationary environment would be the reason for Fed loosing its sleep.

The link in the post has the pdf to the latest on the FOMC meet and their opinion of tackling the current mess the US economy is in. Have a look.
http://danskeresearch.danskebank.com/link/FOMC251108flash/$file/FOMC_251108_flash.pdf

2008-11-26T03:18:00.000-08:00

As one of my first posts on this blog, I would not be going much deeper into this topic.

This is analysis by Liz Ann Sonders, Senior VP, Chief Investment strategist, Charles SchwabLiz is vehemently claiming that US entered recession in 2007 and it may be time to look out for signs of reovery. Enjoy the analysis. The link for the same is given below.

http://http://www.schwab.com/public/schwab/research_strategies/market_insight/todays_market/recent_commentary/recovery_watch_2009.html