2010-05-28

日本に問題がある

Japan Economic Data Worsens
The nation's core consumer price index, which excludes volatile fresh food prices, fell 1.5% from a year earlier in April, compared with a 1.2% slide in March, the Ministry of Internal Affairs and Communications said.

One factor in the fall in consumer prices was the elimination of public high school tuition in the month, one of the ruling Democratic Party of Japan's measures to free up cash for consumers to spend elsewhere.

But the drop in the core CPI was still the 14th in a row and missed the median forecast for a 1.4% decline forecast by private economists, adding to evidence that the current economic recovery has yet to help boost domestic demand and prevent prices from decreasing further.

The jobless rate increased for the second straight month to 5.1% in April from 5.0% a month earlier. Overall household spending slipped 0.7% on year in real terms during the same period with income conditions worsening, posting the first decline in two months, the internal ministry said.
Japan's jobless rate peaked at 5.6% during the deep recession of 2008-2009. Deflation is very bad for Japan because of their debt. While the economy is growing on a per capita basis (see this article for a different look at Japan's economy), their nominal GDP is declining and this means their debt burden is increasing. On an individual level, imagine you earn $100,000 per year and have $100,000 in debt and your costs of living are $80,000 before a big deflation. After, your salary drops to $10,000 a year and your cost of living drops to $6,000 per year, leaving you much better off...but you still owe $100,000.

2010-05-25

ETF Death & Golden Cross List for May 25

Europe, commodities and international funds, especially real estate, have seen their 50-day moving averages slide below their 200-day moving averages. The drop in Belgium (EWK) is worth noting because it has a heavy consumer staples component that's helped it hold up better than the rest of Europe, in addition to being in the relatively financially stronger northern Europe. Netherlands (EWN) will have its own death cross within the next few days.

Death crosses:
VGK Vanguard European ETF
DJP iPath DJ-UBS Commodity Index TR ETN
EFV iShares MSCI EAFE Value Index
GSG iShares S&P GSCI Commodity-Indexed Trust
DWM WisdomTree DEFA
DOO WisdomTree International Div ex-Finncls
DOL WisdomTree International LargeCap Div
EWK iShares MSCI Belgium Investable Mkt Idx
PXF PowerShares FTSE RAFI Dev Mkts ex-US
EFO ProShares Ultra MSCI EAFE
DRW WisdomTree International Real Estate
FCHI iShares FTSE China (HK Listed) Index
ADRD BLDRS Developed Markets 100 ADR Index
GII SPDR FTSE/Macquarie Global Infra 100
ADRU BLDRS Europe 100 ADR Index

Golden Cross:
TLO SPDR Barclays Capital Long Term Treasury

What does this mean? It means that we either see a brief head fake here, and these positions reverse over the next few weeks or so, or we are in for an extended bear market. One bullish factor, or less bearish, is that TLO and TLT's coming cross are based on dividend adjusted prices. They have weeks to go based on unadjusted closing prices.

Euro is the key

At different times, there's a dominant theme that is either responsible for or a result of the major economic forces in play. Right now, the issue is deflation and how European nations deal with the "euro standard", which functions in some ways similarly to the gold standard, in that the nations cannot individually choose to print money. In the early 1930s, it was European sovereign defaults that triggered the second leg of the global decline, a move that made the depression Great. Once again, European sovereign debt is at the center of attention...

Still holding EUO...

2010-05-24

Weaker yuan argument reaching wider audience

Here's CNN Money: Chinese yuan: overvalued or undervalued currency?
"I think it's pretty clear that [Chinese leaders] are backing away from it," said John Makin, a principal at Caxton Associates and an expert in international finance. "They're very nervous about what's happening in Europe."

Makin questions the assumption that the yuan would float higher if allowed to trade more freely, given the turmoil in global financial and currency markets.

"If they let the yuan trade freely, a month from now it might be down rather than up. The world situation is changing pretty rapidly," he said. "It's no longer clear there's an unambiguous case for the yuan to appreciate."

Ashraf Laidi, chief market strategist for CMC Markets, said he believes the yuan is still probably 7% to 10% overvalued versus the dollar, but agreed that if it were freely traded, it would be difficult to predict which direction it would move.

"We don't know how much speculative interest there would be in the yuan," he said. "There might be some dynamics out there that would cause the yuan to go down, behaving like other high-yielding currencies, because people would be fleeing it."
If Chinese wanted to weaken the renminbi, they could increase their reserves of euros, which are likely to remain weak and decline further in the coming weeks and months. This would have the effect of the renminbi absorbing some of the slide in the euro, reducing the slide relative to RMB and reducing the value of RMB relative to the U.S. dollar.

Socionomics in the advice column

Dear Margo answers the call of socionomics:
Normally, I wouldn't be writing about something like this, but lately it's really affected me. I'm losing faith in the goodness of people, and it's depressing me. I was never like this before. I was an optimistic person and tried to see the good qualities in people, even if I found them less than appealing. Now I find myself closed off more often, and my optimism is faltering. It's much harder for me to trust people or even try to find their good qualities. I'm often preoccupied with sadness and worry that the future of humans is in doubt. I no longer want children because I fear for their futures. Logic says I'm being ridiculous, but I can't stop how I feel, and it's affecting my daily life. I need some advice.

Germany-U.S. Comparison

Check out a comparison of Germany's DAX Index to the S&P 500 Index. Notice that in local currency, the DAX has performed almost exactly the same as the S&P 500, the price ratio of the two has been quite steady. However, the Germany ETF (EWG) has badly lagged the S&P 500 ETF (SPY). The last chart is the euro ETF (FXE), the pattern of which shows from whence the weakness in EWG comes.


Deflation warning sign?



Look at the head & shoulders patters on these agricultural commodity ETF (DBA) & ETN (JJG) charts. A breakdown from current levels suggests a decline on the order of 30% or more.

Socionomics Watch—Cannes

Headline says it all:
Death and loss dominate dour Cannes fest

2010-05-23

Perfect time for RMB to depreciate

Perfect Time for RMB/USD Rearrangement: Devaluation
Three misunderstandings need to be clarified.

The first is that the RMB exchange rate has been stable since July 2008. In fact, the RMB/euro exchange rate has changed dramatically since July 2008 due to the USD volatility against the euro.

Second is that "RMB appreciation" means "RMB appreciation against USD." The fact is that since the end of 2009, the RMB/USD rate has remained stable because of the sharp rise in the dollar index, while RMB against a basket of currencies has appreciated substantially. The euro, for example, is currently at 1/8.3 yuan, the highest level for the past eight years.

Third is that keeping the RMB exchange rate at a reasonable and balanced level means to maintain the stability of the RMB/ USD rate. What it really means is to maintain the stability of RMB against the basket of currencies, and the basic stability of an effective exchange rate.

After we clarify such misunderstandings, we must redefine the objectives of RMB reform, i.e. to promote the formation of a mechanism for a more market-oriented RMB exchange rate. The conception that RMB/USD appreciation is the same as RMB exchange rate formation mechanism reform is wrong and misleading.

Against the strong rise of dollar index, and following a basket of currencies mechanism, RMB may have to depreciate against the US dollar to ease its appreciation against other currencies.

Deutschmark love crosses into British press

And not just any press, but the pro-EU Guardian, rather than the EU-skeptic press.
Berliners dream of return to deutschmark
On the pavement outside the bar, drawing on a cigarette, Pamela Schreiber pauses in contemplation. "Do I consider myself European? Well, of course, but first and foremost I'm a German," says the 33-year-old set designer with conviction.

The answer is not one that you would have expected a few years ago from a young person in Germany. This is the country where European enthusiasm has been easiest to find and where, since the war, European interests have taken precedence over nationalist ones. But, according to Schreiber, Germans feel increasingly torn over Europe.

"We always knew in our heart of hearts that the euro would never be as solid as our deutschmark, but we gave up our beloved currency, which was actually central to our identity, because we believed in the European project so fervently," she says.

Now there is talk, albeit based on blog gossip and a tabloid desire to whip up a good tale, of a return of the mark. Some even claim that secret supplies of the defunct currency – the strength of which was seen as a legacy of the sweat and tears that Germans spent to build up their ruined economy after the war – are being printed in secret underground locations.

Cabaret artists have been making jokes about wheelbarrows of notes, or telling the one about the German and the Greek who go out to eat, the German choosing the cheapest item on the menu, the Greek gorging on a range of dishes, before the waiter brings the German the bill at the end. The audience doubles over. But the reality is stomach-churning.

"We are building up an almighty bubble of debt which is going to burst in one great bang," says Hans-Werner Sinn, chief of Ifo, one of the country's leading economic thinktanks.
When the artists and economists are in agreement, there's a serious movement afoot.

2010-05-20

2010-05-19

中国人购买黄金


H/T FOFOA

China still buying euros

Traders thought the Chinese were propping up the euro the other day, but it may have just been bargain hunting.

Euro's Fall Leaves Beijing Unmoved
The euro's plunge on Europe's sovereign-debt crisis won't deter China from diversifying its massive foreign-exchange reserves, an adviser to China's central bank said Tuesday.

"Diversification is a long-term trend," Xia Bin, an adviser to the People's Bank of China, said in a telephone interview.

2010-05-18

Socionomics Watch—Burka Rage

Apparently the Arizona immigration law is having a worse affect on French people.
France has first 'burka rage' incident

When social mood is high, people are open to new experiences and cultures. When the mood is low, the opposite is true. Considering there was quite a bit of anti-immigration sentiment building in Europe and the United States before the turn in social mood (in the same way that stocks and housing went into a bubble, in a sense so did immigration), so too will the reaction against immigration go much further than people expect.

France is working on a law to ban burkas, and if the elections continue to move in the current direction in the U.S., the Arizona immigration law may be proposed as national law by a new Congress next January.

Euro in a Coma? Give us back the D-Mark!

Euro im Koma? Gebt uns die D-Mark zurück!

Prof. Dr. Stefan Homburg is talking about setting up a parallel EU with Holland and Belgium, even excluding France because they don't have the proper culture of responsibility.

More CDS news from Europe

Q+A-How the EU is waging war on speculators
BRUSSELS, May 18 (Reuters) - European Union finance ministers backed tough new rules for hedge funds and private equity groups on Tuesday, marking a political defeat for Britain and paving the way for other financial reforms.

WHO ARE THE SPECULATORS EUROPE WANTS TO STOP?

Political leaders single out hedge funds as the culprits for snapping up default insurance on Greek debt, exacerbating borrowing problems and forcing European neighbours to agree a $1 trillion rescue package for weaker states.

They believe such buying exaggerated a price spiral of this insurance -- credit default swaps -- which was already rising in cost amid fears Greece could go bankrupt.

This in turn aggravating Athens' attempts to borrow money on the open market, forcing them to turn to their European neighbours for help and triggering fears problems could spread elsewhere.

In particular, politicians denounced the buying of CDS by speculators who do not own the bond it insures.

HOW WILL NEW EUROPEAN RULES CHANGE HEDGE FUNDS?

The new law, which first needs the blessing of parliament and European countries, will open a new chapter for hedge funds by forcing them to reveal closely-guarded information about their investments and borrowings to supervisors.

It also gives the authorities -- under the eye of a new pan-European super watchdog -- the power to intervene by imposing borrowing limits on a hedge fund that it fears is taking risky gambles.

The new regime also imposes loose rules on how managers should be paid, demanding that pay is staggered over a number of years to prevent risk-taking for a big bonus.

The most controversial part of the draft law is that it would not give foreign funds a licence to do business across all 27 countries in the European Union.

Private equity groups too, many of whom borrowed heavily in the run up the crash to pay for multi-billion-euro company takeovers, will also be subject to stricter monitoring.

HOW WILL THE EU CURB THOSE WHO BET AGAINST STRUGGLING STATES LIKE GREECE?

Michel Barnier, the European commissioner in charge of an overhaul of financial services, will outline in June proposals to regulate trading of the derivatives that are often blamed for market price swings.

It would be the first rules for trading in instruments whose value is linked to an asset such as currency, a market which ballooned to roughly $600 trillion.

Barnier may propose capping the size of individual trades, giving watchdogs the power to police big deals in derivatives such as Greek debt default insurance.

Under a model which would resemble the approach in Washington, traders could be stopped from building up a large position that could let them swing prices in anything from oil to currency in their favour.

The new regime is also likely to demand the recording of derivative trades and gradually push the market onto exchanges or central warehouses and under the close watch of supervisors.

Greek Prime Minister George Papandreou has raised the prospect of banning this type of trading but Barnier is unlikely to do this.

WILL NEW EUROPEAN WATCHDOGS HAVE ENOUGH CLOUT?

Many experts believe the success of the EU's financial reform hinges on the strength of the new watchdogs being set up to police banks, insurers and markets.

As with hedge funds, Britain has fought hard to water down the watchdog's influence, and won a veto that could be used to overrule them. But parliament is fighting back, demanding the watchdogs get more clout.

They propose giving more direct powers to the supervisors which means they could overrule national watchdogs like Britain's Financial Services Authority in telling international banks in London such as HSBC what to do.

WHAT OTHER RULES COULD PUT A BRAKE ON RUNAWAY MARKETS?

Alongside a host of rules that span placing limits on banker pay to demand that lenders set aside more capital to cover the risk of recession, the European Commission is also examining curbs on credit rating agencies.

Germany to ban naked CDS shorting?

Stronger CDS Regulation will trigger a U.S. dollar rally and global recession


So said Liu Junluo. Go back and read it.

Here's Reuters: Germany to ban certain short-selling -coalition source

FT Alphaville says the ban will apply to CDS.

Euro ist kaputt.

The ban on short-selling financial stocks in the U.S. came in September 2008. I don't know what is going to happen, but given the May 6 crash and guys like Richard Russell are saying:
Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.

And I ask myself, "Am I seeing things? The April 26 high for the Dow
was 11205.03. The Dow is selling as write at 10557 down 648 points
from its April high. If business is even better than expected, then
why is the Dow down over 600 points? And why, if there were 674 new
highs on the NYSE on April 26, were there only 20 new highs on Friday,
May 14? And if my PTI was 6133 on April 26, why is it down 17 points
since its April high?

The fact is that I've been seeing deterioration in the stock market
ever since early-April, and this in the face of improving business
news. The D-J Industrial Average is composed of 30 internationally
known top-quality blue-chip stocks. These are 30 of "America's biggest
companies." If Barron's is so bullish on the future of America's
biggest companies, then why isn't the Dow advancing to new highs?

Clearly something is wrong. But what could it be? Much as I love
Barron's, I trust the stock market more. If I read the stock market
correctly, it's telling me that there is a surprise ahead. And that
surprise will be a reversal to the downside for the economy, plus a
collection of other troubles ahead.

About Dow Theory -- First, we saw the recent April highs in the
Averages. Then we saw a plunge in both Averages to their May 7 lows --
Industrials to 10380.43, Transports to 4298.12, next a short rally. If
ahead, the two Averages turn down and violate their May 7 lows, that
would be the clincher. Such action would signal the certain resumption
of the primary bear market.

Just as for years I asked, cajoled, insisted, threatened, demanded,
that my subscribers buy gold, I am now insisting, demanding, begging
my subscribers to get OUT of stocks (including C and BYD, but not
including golds) and get into cash or gold (bullion if possible). If
the two Averages violate their May 7 lows, I see a major crash as the
outcome. Pul - leeze, get out of stocks now, and I don't give a damn
whether you have paper losses or paper profits!

Could a major rally in the U.S. dollar, decline in stocks be on the way?

Liu Junluo: We have already entered the economic depression

This is a short post from Liu Junluo, he's been busy writing a book. I'm not sure how much this squares with Prechter and the other deflationists, but this is close to my own view, that first we have deflation and then inflation. Marc Faber has been more inflationist in his arguments, but he has said he holds that position because if the market or economy have a severe decline, the response will be money printing.

世界已快进入了真正的大萧条期
本人今年3月14日在北京讲课时,是谈今年底美元指数会站在85,年内很可能上冲90,当时也指出这是非常非常保守的估算。现在,故事已进入秦国统一战争的最后时刻,这个时刻对秦国是万马平川、轻松自如。所以,美元是不是会走出让全世界人与全体中国人都一辈子也看不懂的宏大行情呢!请你设想一下,当秦国最后统一六国的那个时刻,是怎么样的暴风骤雨。黄金现在与美元同步上涨,是世界上有几个人用黄金创新高来鼓励全体中国人相信“通货膨胀”快来了,是掩盖美元即将爆发的真正的壮观行情。这个时代是伟大与贫富严重分化的时代。今天的保存,才会有明天的生长。相信“通货膨胀”的中国人都快要死了。本人再说一遍,中国是先“恶性通货紧缩”,再“恶性通货膨胀”,美国人现在要把中国市场防“通货膨胀”的人,先用“通货紧缩”吊死,而后再使中国爆发“通货膨胀”。


My synopsis: Liu Junluo says that at a March 14 lecture in Beijing, he said the U.S. Dollar Index would be at 85 by the end of the year, maybe 90, but this was his conservative estimate. He says the U.S. dollar is about to make its greatest move in our lifetimes. He compares the current situation to that of state of Qin, which conquered the other six states to unify China in the Warring States period, that this was a very violent period. He says that gold and the U.S. dollar rising together is seen as a sign of coming inflation by most people, but that in fact it conceals the U.S. dollar's spectacular move. He says that today's savings are tomorrow's growth and that those Chinese who believe in inflation will soon want to die. He reiterate that first their will be horrible deflation, and that will be followed by hyperinflation.

2010-05-17

Martin Armstrong's latest

The Euro is acting like gold during the great depression. It has cut off the option of devaluation of the currency as the only alternative to permanent default on the debt In 1931, most of Europe defaulted because they could not repay their debts in gold. Now it is the Euro instead of gold. It is the same crisis, just with a different twist.
This is from Closing at 10520.32

Other articles can be found here.

Yuan continues on path to convertibility

MUFG Plans Yuan Bonds in a First
Bank of Tokyo-Mitsubishi UFJ Ltd.'s China unit said Monday it plans to issue 1 billion yuan ($146.5 million) worth of bonds on China's interbank bond market Thursday, the first yuan-denominated bond sale in mainland China by a foreign commercial bank.

The issue marks an important step forward in China's efforts to gradually transform the tightly controlled yuan into a major global currency by boosting its use for international trade settlement and encouraging foreign firms to raise funds in the currency for their operations in the country.
China continues make progress on its long-term goals for the currency.

2010-05-16

谢国忠:低利率致每年向储户征税1.4万亿

低利率致每年向储户征税1.4万亿
经济学家谢国忠接受《华夏时报》记者采访时表示:“我不知道他们的数据是从哪来的,实际上恶性通货膨胀早已发生。”

  谢国忠认为,抑制通胀最有效的手段是加息,至少要加5个百分点,但实际上央行远远不会加那么多,央行受制于各方利益博弈。谢国忠称,3月末金融机构住户存款余额为28.5万亿元,低利率等于向储户家庭征收了1.4万亿的税(28.5万亿乘以5%的应加利息计算得出)。

  由于银行信贷大部分投向了房地产、国企以及地方政府,低利率只会对这些拿到贷款的部门有利,这些势力显然比央行强大。央行加息必然会触动其利益。央行在一季度货币政策执行报告中,提到货币数量控制时,只字未提货币价格调控——即加息。

  谢国忠认为,以前对这些势力的补贴主要靠低工资和低资源价格,现在,资源价格高了,用工荒之后,工资也在上涨。
通货膨胀的时候,如果利率比通货膨胀少,通货膨胀会增长。我记得几年前我跟中国学生吵架。我说了如果中国继续了货币挂钩,最后是通货膨胀。 人民币升值预防通货膨胀,因为美国中央银行创造很多通货膨胀。货币挂钩是个从美国到中国的通货膨胀管道。

Euro weak today...but fundamental shift underway

Euro weakness is the headline today and there may be further weakness, perhaps taking the euro to parity or lower. However, a fundamental shift in global finance is underway thanks to the action of Euro governments.
Global systemic crisis – From « Eurozone coup d’Etat » to the tragic solitude of the United Kingdom, the pace of global geopolitical dislocation accelerates
The EMF will, in the long run, deprive the IMF of 50% of its major contributions: those of the Europeans

Concerning this, LEAP/E2020 reminds readers of a fact that the majority of the media has been oblivious of for many weeks. Contrary to the prevailing discussion, the IMF is first and foremost European money. In effect one out of three IMF Dollars is contributed by Europeans, compared to only one in six by the USA (their share has been cut in half in 50 years) and one of the consequences of the European decisions of these last few days is that it will not be the case for very much longer. Our team is convinced that, within three years at the latest, when it is time to formalize the integration of the intervention fund created on the 8th and 9th May 2010 into the European Monetary Fund, the EU will reduce its contribution to the IMF by a similar proportion. One could guess already that this reduction in the European contribution (UK excluded) will be in the order of 50% at least. That will allow the IMF to become more globally representative by automatically rebalancing the BRIC share and, in the same breath, requiring the USA to abandon its right of veto (7). But that will equally contribute to it becoming heavily marginalized since Asia has already created its own emergency intervention fund. It is an example which illustrates just how many of the European decisions of the beginning of May 2010 are full of wide sweeping geopolitical changes which will scale out in all of the coming years. In fact, it is unlikely that the majority of the decision makers involved in the « Eurozone coup d’Etat » have clearly understood the implications of their decisions. But no-one has ever said that history was largely made by those people who knew what they were doing.
The article goes on to predict that the United Kingdom will become the center of the sovereign debt crisis in short order.

On a larger scale, crisis always unleashes and accelerates change. EU political integration is unlikely to be a good thing for the European people in the long-run, but it will be worse for the Americans in the short-run.

2010-05-13

Holy rumors Batman! China buying euros?

WHOA, Rumors That China Is Now DEVALUING The Yuan
China's largest export market is Europe. The renminbi is rising against the € because the RMB follows $ higher. If China is doing this, they are selling $ and buying €, which means they would devalue against the €, but gain against the $.

This is why I argued that China would not revalue while the U.S. dollar is rising. They're already allowing their currency to revalue higher, just by the fact that the U.S. dollar is rising. The fact that many people ignore, however, is that China's currency is expected to rise because it has a pile of U.S. dollars. It can change the mix of assets it holds, in which case RMB will strengthen versus the U.S. dollar. But if they outright sell U.S. dollars and deplete their reserves, then they cannot maintain the currency peg and they must devalue versus the U.S. dollar and the euro.

Depending on how powerful the weakness in the euro is, the Chinese may be forced into an across the board devaluation if the U.S. dollar continues to rally versus the euro.

P.S. The euro has major support at $1.25, so it wouldn't surprise me that there's heavy support at that level. People come up with all sorts of explanations for why "the market", millions of individuals, make decisions. Until there's confirmation, I'd assume that a lot of traders, and perhaps the Federal Reserve, ECB and Swiss central bank are more likely buyers of euros at this point.

China's real estate market

Read Michael Pettis' latest post, good all the way through.
Beijing’s stop-and-go measures

2010-05-12

S&P 500 in Gold

Remember that the U.S. dollar was backed by gold at the time of the depression. Here's what a chart of the S&P 500 looks to someone who is using gold as their base currency.Since April, the stock market has gone nowhere.

2010-05-11

Gold to Guns: Armageddon Ratio?

Your gold will buy less stock in gun manufacturer Sturm Ruger (RGR).

Flash Crash Redux

The Wall Street Journal reports the details on why it was a panic.
Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?
On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.

The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.
It was a big trade, but nothing out of the ordinary. The crash was caused by panic, no different than the rush to exit a burning building. Europe and the markets were burning and this trade what happened was a cascade of fear.
"Universa alone couldn't have caused the meltdown," said Mark Spitznagel, Universa's founder. "We had reached a critical point in the market, and it was poised to collapse." Barclays Capital declined to comment.
Exactly right. The market was ready to crash. And it still may be.
With the high-frequency funds either selling or pulling out of the market, Wall Street brokerage firms pulling back and the NYSE stock exchange temporarily halting trading on some stocks, offers to buy stocks vanished from underneath the market. Normally there can be hundreds of offers to buy the iShares Russell 1000 Growth Index exchange-traded fund, but at 2:46 p.m., there were just four bids north of $14 for a fund that had been trading at $51 minutes earlier, according to data reviewed by The Wall Street Journal.
Thus, the price of $14 wasn't necessarily the "real" price under normal conditions, but it was a price and the one that was offered during those 15 minutes of panic.

Got silk?

Silk price soars as China’s farmland shrinks
The price of silk cocoons, the raw material for the fabric used in expensive items of clothing, has doubled since the start of 2009 to Rmb92,700 ($13,570) a tonne in mid-April, according to the China Cocoon and Silk Exchange.

...The urbanisation of the key silk-producing region around Shanghai has reduced the land available for mulberry trees, whose leaves are the only thing silk worms eat.

“It’s as if you had a very large city in Champagne on the soil of the famous wine,” Mr Morel Journel bemoaned.

Chinese output fell 15 per cent to 84,000 tonnes last year, according to the International Sericultural Commission, and a drought that began in late 2009 has further reduced production. China accounts for 70 per cent of global silk production.

The rally coincides with a surge in the cost of other natural fibres: coarse wool, used for carpets, has soared to the highest level since 1980, while cotton is near a 14-year high. Silk accounts for a small part of the final price of fine clothing.

2010-05-10

Euro rally

Some of today's rallies are likely to reverse in the coming days. The one I most expect to reverse is the euro.

2010-05-08

Euroland burned down: A continent on the path to bankruptcy

Originally posted on May 3, I've bumped this now that the English translation of the cover story is available.

The new Der Spiegel cover. German antipathy towards Greece cuts across the political spectrum.

Greece is only the beginning. The world's leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.

Huge National Debts Could Push Euro Zone into Bankruptcy

Many people will jump from tall buildings

Liu Jun Luo called it two months ago...

Stronger CDS Regulation will trigger a U.S. dollar rally and global recession - 刘军洛

In May 2010, Greece will face nearly $30 billion of debt financing. And in June 2010 at the G20 meeting, EU and Greek officials hope to strengthen oversight of financial derivatives. In a couple of months we'll be in May and June, and if the U.S. dollar strongly appreciates, many people in the world will jump from tall buildings.

2010-05-07

1987...2010...What's changed?

Bye-bye Anadarko

It's down 10%. I know I'm probably getting chased out of it, but I'm cutting my losses.

Gold and gold miners are holding up very well this morning. Sticking with NSU, SA and EVOGF for now.

As of this moment, the major indexes are about 5% to 6% away from Thursday's plunge lows.

It was a panic

Listen to the action from the open outcry pits at ZeroHedge.

Mish Shedlock shows how a huge spike in the yen preceded the panic by 45 minutes.
Equity Plunge Yen Connection; Reflections on Ponzi Markets and Program Trading

2010-05-06

What the hell happened?

Rumors go as far as malicious hacking, cue Tom Clancy, Debt of Honor. That was also the book that had the plane flying into the Capitol building. The sequel had Iran invading Iraq and becoming a Muslim superstate...

One theory that sounds plausible is that the shutting down of computers caused the crash. Did Shutdowns Make Plunge Worse? ZeroHedge has covered the large amount of computer trading in the market for the past year on their site, but I found this interview with Joe Saluzzi discussing a situation that may be similar to what happened.

From Sense of Cents, an interview with Joe Saluzzi, who was often on ZeroHedge.
53:25 – What is the risk or potential that HFT could crash the market? What is pushing the market higher currently?
Saluzzi talks about the volume going away and says the HFT (high frequency traders) would not dump into the market, but rather they wouldn't be there to buy, but if you wanted to sell, there'd be no buyers. He says an intraday event could cause them all to sell, if they were caught long before an adverse event.

Either scenario could be in play here. From the WSJ article:
A number of high-frequency firms stopped trading Thursday in the midst of the market plunge, possibly adding to the market's selloff.

Tradebot Systems Inc., a large high-frequency firm based in Kansas City, Mo., closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points, said Dave Cummings, founder and chairman of the firm.

Tradeworx Inc., a N.J. firm that operates a high-frequency fund, also stopped trading during the market turmoil, according to a person familiar with the firm.
If they turned off their computers in the midst of an adverse event, that could mean liquidity dried up, if many other firms did the same thing. If you went to sell, perhaps due to a stop order, the stock could fall until someone was willing to buy.

The New York Times is running with the HFT theme as well in High-Speed Trading Glitch Costs Investors Billions

The cynical bearish view is that the computers have just been trading with each other, slowly moving stock prices higher to restore confidence in the public. These firms execute trades in milliseconds and a firm could buy and sell one stock multiple times in one second. Since they're not trading on fundamentals, all the Federal Reserve would have to do, for instance, is push the HFT algorithms into buying patterns, which might not take all that much capital.

I would need to see hard evidence of that before I believe it, but the reality is that computer algorithms may be responsible for a large amount of market volume and that raises the question of whether the current stock prices are accurate or not; whether HFT just create noise around the "real" buyers and sellers in the market, or whether they have in fact become the market. Did the noise stop today? Or did the noise become harmonic to the downside? Or is there another, perhaps completely benign explanation? Hopefully there'll be more answers in the morning.

Mish Shedlock has some good comments on the topic in Black Swan in Computer Trading? Nasdaq to Cancel Some Trades; Plunge Raises Alarm on Computerized Trading
Computers vs. Computers

In essence computers trading against computers decided at some point today to throw in the towel and not bid.

At some point (manual intervention?) they all decided to bid again, driving stock prices back up. This is what our stock market casino has become.

Lovely, isn't it?

I have been waiting for this to happen and today it did. Supposedly, computer trading lowers volatility and bid/ask spreads for traders. Today we see that works until it doesn't.

Most of the day Citigroup was erroneously blamed for the plunge. Citigroup was not to blame, flash-trading computers vs. computers with fake orders appears to be the culprit.

Who benefits from that? In general, Goldman Sachs. Perhaps I am wrong but I bet they had a great day.
He goes on to say:
Nasdaq has set the screw-job limit at a whopping 60% threshold. If you lost 45% today with a stop loss in the wrong spot you just may be out of luck.

It's just what we need to inspire confidence.

Black Swan Event?

By the way, this was not really a "black-swan" event. This was perfectly predictable although timing it was not. I have been discussing this scenario with a few friends for months.

I have one question for the computers: Did someone manually intervene triggering your huge afternoon buy program or did you simply figure out on your own accord there were no more stops to run?

Regardless, a whole bunch of people with "far away" sell stops got taken to the cleaners today.

The Second Great Depression

Great Depression I: Autumn 1929 stock crash, but the bankruptcy of an Austrian bank, Creditanstalt, on May 11, 1931, was the key event for causing sovereign debt and bank defaults.

The time frame is about 20 months from the start of the crisis to the major event that made everyone realize this was a depression. The failure of Creditanstalt was not a trigger event, in that it was a depression and there was going to be a bank failure of some sort, but it marked the turn.

May 2010 is about 20 months from the Autumn 2008 stock market crash. Today is May 6.

Does history repeat? Is this an over reaction by the market? What is making me nervous is that preferred stocks of banks are down huge today, nearly double digits in early afternoon trading. I've assumed bad things were coming all through the rally because I believe we are in a depression and not a recession. I lost a small sum trying to go short at various points. (I should have shorted the euro with reckless abandon though! Hindsight is 20/20.) But I've never been nervous before. Even though I have expected it and believe I'm well prepared, today I am nervous.

Which probably means today is capitulation day and tomorrow will see an awesome rebound. I did actually turn so pessimistic on March 3 that I questioned whether it was the bottom, since I literally could not find a piece of good news. I don't think today is anywhere near the pessimism of March 3 though. There may be a bounce tomorrow no matter what, but rationally I think we've crossed the threshold and the markets are in for some trouble.

Update: It turns out that plunge today was a fat finger trade in Proctor & Gamble (PG). This makes it very likely there's a rally tomorrow, but I wrote the above before the plunge took place. The timestamp is 2:12 and at that time, the S&P 500 was at 1138.96. It closed at 1128.15. I'm not sure if the plunge is good or bad for the market in the near term. Will people think today was just a bad trade and overreaction, or will confidence be shaken such that more losses are coming soon?

Buying some gold miners

In one account, my only position for several months has been ProShares UltraShort Euro (EUO). I picked up Anadarko Petroleum (APC) last week. I expected the broader market sell-off, but thought APC sold off too much on the news of the leak in the Gulf. I think they're a great company, but if it breaks down, I'd sell and wait to buy it back at a lower price, especially since the miners may become much more attractive soon. At the moment I'm down about 4% in APC.

Today, I just moved back into Nevsun (NSU), a gold miner that was profitable for me from late 2008 to summer 2009. I sold out and it went up 100% after that. I also picked up some Seabridge Gold (SA) and possibly some Evolving Gold (EVOGF; EVG.V) if my limit order goes through.

Gold continues to be strong and I believe that gold miners can benefit if gold rises or stocks rise. Plus, if the euro reverses, gold and stocks may both rally. I think one can do fine holding an ETF here, such as Market Vectors Gold Miners (GDX) or Market Vectors Junior Gold Miners (GDXJ).

Yuan denominated H-shares

Joseph Yam, former chief executive of the Hong Kong Monetary Authority, discusses ways the yuan will become more of an international currency.

Hong Kong and the Yuan's Internationalization
Yuan-Denominated H shares?

Caixin: If Hong Kong is to serve as an offshore market for the yuan, this means there must be yuan-denominated assets. In this respect, how can the yuan's presence in Hong Kong be increased? Why has yuan business been slow to develop in Hong Kong?

Yam: This needs to be brought about by changes in mainland policy. In order to internationalize the yuan, many policy directions need to be changed.

Yuan deposits were not allowed in Hong Kong until 2004. Next came yuan-denominated bonds. I think the next step will be yuan-denominated stocks. But if the yuan is to become a trading unit, it needs to get out of mainland China.

One of the reasons the yuan business in Hong Kong is slow to develop is because of a settlement agreement between the People's Bank of China and Bank of China (Hong Kong). The government initially maintained a very cautious attitude. For example, they only allowed Hong Kong residents to hold yuan deposits. These restrictions should be lifted. In Hong Kong, all you need is an identity card to open a U.S. dollar account or a euro account. Why can't you open a yuan account?

In terms of bonds, mainland financial institutions can issue them in Hong Kong. Subsidiaries of Hong Kong companies in mainland China can also issue them in Hong Kong. But the problem is, it is the market that should determine who can issue and how much. There should not be a quota, and you should not only allow Hong Kong residents to purchase the bonds.

Another example is the settlement agreement does not allow unauthorized companies to borrow money in Hong Kong then remit it to the mainland. This is also limiting the yuan's development in Hong Kong.

Therefore, I believe the next step is to allow the yuan business to function in accordance with Hong Kong's conventions, and allow it to develop based on market demands. The settlement process and infrastructure between the two markets should be more open, allowing funds to freely flow back to the mainland.

Caixin: If capital flows to the mainland are not regulated, could this encourage hot money and increase the size of the mainland's asset bubble?

Yam: Hong Kong's offshore market is very small. There is no need to worry. The banking system only has tens of billions of yuan. This will not affect the mainland.
Of course, if you don't want the offshore market to negatively impact the home market, then the most important thing is to ensure a strong relationship between the two markets. This means transparent and enforceable settlement. If you feel the home market is being adversely affected, you can use regulatory measures to control it.

Caixin: Currently, the Hong Kong Exchange settlement system already handles yuan products. Hong Kong's securities and interbank settlement systems have already completed preparation work for handling yuan products. How do you think Hong Kong should build and promote this multi-layered yuan product market?

Yam: A lot of work has already been done on Hong Kong's financial infrastructure. There are currently four payment systems: Hong Kong dollar, U.S. dollar, euro and yuan. All four are interconnected, and there is no risk. Now we're just "waiting for the car to arrive." In order for this to happen, mainland China needs to give the green light.

For example, giving investors a choice to trade stocks with yuan. If there were yuan-denominated shares on the Hong Kong Exchange, the market would be very active.
There are technical problems with yuan-denominated stocks, such as brokers can't open yuan accounts. This is a result of the settlement agreement, so the agreement needs to be changed. We need to let non-Hong Kong residents open yuan accounts. Of course, if the money is not clean, we wouldn't allow it. This would need to be supervised.

Goldman puts an interesting bet?

You can't get a put option for less than a $65 strike for Goldman Sachs (GS) for Jan 2012, but Jan 2011 contracts go as low as $2.50.

The last trade was $1 at the $55 strike price, which means you'd have to pay $100 to have the right, but not the obligation, to sell 100 shares of GS for $55 per share, on or before January 21, 2011.

Here's the link to the 2011 contracts, calls are on top, puts below.

If you're someone who spends an average of $2 per week on the lottery, then I think buying a $55 put on GS would be better odds than what the state gives you. To go out to January 2012, you'd need to spend more than $300 for the cheapest contract at the $65 strike.

Update: It looks at though there may be a settlement, which greatly reduces the risk of bankruptcy...

2010-05-05

Was the Demise of the USSR a Negative Event?

This came from John Mauldin. You can recieve his weekly Outside the Box newsletters by clicking that link. This is the second email sent this week, an essay by Charles Gave of GaveKal. It's really long, so I don't want to add a lot of comments. I'll just say that I agree with the main thrust, that a euro breakup is good, but think that if it happens, the road there will be quite rocky. Everything that follows is Charles Gave.

Was the Demise of the USSR a Negative Event?


Everything one reads on Europe these days varies from the seriously gloomy to the downright apocalyptic so let us immediately re-assure our reader: this is not yet another GaveKal paper explaining that the Euro is a doomed currency. GaveKal has done too many of those over the years to the point where our friend Marc Faber started to refer to us as the 'Euro perma-bears'. I even wrote a book, in French (Des Lions Menés Par Des Anes) in which I explained, as simply as I could, that the Euro would lead to the biggest misallocation of capital since the Soviet Union, leaving us with too many houses in Spain, too many factories in Germany, and too many civil servants in France, everybody specializing in what they were best at.

Amazingly, now that the markets finally seem to be putting an end to a political interference in the free market which, like the Soviet Union, or Fannie and Freddie Mac, could only lead to disaster, most commentators appear to believe that Europe is on the edge of a precipice. And two reasons are typically proposed to defend the notion of sending good money after bad: the first is that without a bailout of Southern Europe, the very existence of the Common Market and the dream of European Unity will collapse.

The second is that, without a bailout, the European financial system will enter into a tailspin which will make the Lehman crisis look like a dress-rehearsal. In our view, both of these assumptions are either tremendously self-serving (when wheeled out by politicians hoping to avoid the blame that should rightfully fall on their doorstep for putting together a monetary system that had no chance of working), or belie a lack of knowledge of European History, and a fundamental understanding of how financial markets work.

1– The Ideological Background Behind the European Idea

Every French school child will at some point have been told by his professors: 'very well, this works in practice. But more importantly, does it work in theory?' Probably for this reason, it is hard for me to believe that there can be any kind of political construction without some kind of hidden, or obvious, ideological backbone. Looking at Europe, I have long felt that two 'ideologies' have been competing since the 1950s to define what the future organization of Europe should look like:

The 'Roman Empire' Model:

the main goal is to have Centralized State, managed by an efficient techno-structure with a supremacy of the center over the periphery. Unification of the law through a common jurisprudence is necessary, as are regulatory powers leading to a de facto unification of all regulations. This vision is fundamentally Hegelian with the notion of 'History on the March" and while the process of integration is a work in progress, crisis should be seen as opportunities to re-enforce the center against the periphery either through new institutions being created to deal with the problem (e.g., the ECB, the creation of a European Ministry of Finance) or the granting of new powers given to existing centralized institutions (European Commission, European Parliament, etc.).

The end goal is obviously to arrive at a European State which will be "big enough" to have an impact not only on the rest of the world, but also on the underlying sovereign states which will have no choice but to become subservient over time. Aside from the Roman Empire, historical precedents for this include Charlemagne, Louis XIV, Napoleon, Hitler, Staline... The good news, of course, is that this time around, the integration is proceeding peacefully, rather than through military conquest. The main problem is that the institutions being built are less and less democratic and increasingly more technocratic and removed from public control (Commission, Court of Justice, ECB, soon a European EMF).

This leads to a general disenchantment from voters and a backlash from the countries with the longer democratic traditions (UK, Sweden...). The other problem in this model is that there are no obvious geographical limits to the growth of this vision of Europe since the main criteria of acceptance is a common belief in general humanist ideas loosely defined as 'European values'. So why not include Turkey, Georgia, Ukraine... and who knows, one day maybe even Russia or North Africa?). This leaves a lot of traditionalist voters feeling very uncomfortable.

The Catholic Model.

In The Rise of Christian Europe, Hugh Trevor Roper, explained the diversity of political systems was one of the key reasons why the Europe 'controlled' by Rome was successful while the Roman Empire of Constantinople failed. Under the catholic popes, Western Europe was catholic from one end to the next with free movements of people, traders, businesses, etc... But meanwhile, political structures were massively different systems, from independent cities in Flanders and Northern Italy, to Kingdoms, to Republics like Venice... So it could be argued that political diversity served Europe well; until, of course, the 19th and 20th century when Europe's nation-states (well, really France and Germany), in a mutual suicide pact, went for each other's throats in a bid to each become 'the new Rome, the new Imperial Power".

These fratricides led to the efforts towards European integration which, in their infancy, were heavily supported by the Catholic Church. Indeed, the real founding-fathers of Europe, Schuman (France), Adenauer (Germany), Alcide de Gasperi (Italy) were all Christian Democrats, and (German-speaking) Catholics. And their main bond was obvious enough: they shared a common, Christian, civilization. But beyond that, at inception, the European ideal's main legal principle was subsidiarity. Competing political systems were the norm, integration was the exception. Pieces of political sovereignty could be abandoned but never the principle of sovereignty itself (incidentally, we now have had a reminder of this view in the recent decision by the German high court to block any further abandonment of sovereignty by Germany).

Such a system automatically leads to the re-emergence of old political systems centered on provinces and ever closer proximity to the voters. Examples of such an evolution include Spain, Switzerland and Germany (with a lot of political powers such as taxation, education, police... being decentralized). Italy might be moving fast in this direction. Philosophically, this model has to stop at Europe's borders (no Turkey), since the common ground is Christianity. In this model Nation-States are weakened dramatically though instead of losing out to a super-state, they lose to provinces. Another fine example of this trend is the re-emergence of forgotten nations following the collapse of communism across Eastern Europe, either peacefully (Slovakia) or through bloodshed (Bosnia).

For this model to work, one needs adherence to the same legal rules (with final decisions belonging to the European court of justice, or to the Commission, used as some sort of arbitration court). Experiments are the rule and normalization to a common standard the exception. The main challenge is establishing processes to arrive at a common decision and the biggest is that some countries (think France, the inventor of the Nation-State) could decide to discard common rules and instead return to the old European ways of nationalism, protectionism, industrial policies, national champions, etc... Aside from that, the common institutions should be seen as places where arbitrages between different views take place, rather than places where decisions are taken. Another risk worth mentioning is the simple disappearance of nations which have no real reason to exist (Belgium?).

To summarize and put it in the language of today, at the risk of oversimplifying: In partisan political terms, Europe's Christian Democrats, typically led by Germany and Holland, were usually aligned with the "Christian" view of Europe, while Social-Democrats and Socialists, usually led by France, were more of the "Roman Empire" persuasion. And so, Europe went on and on, never really making a choice between the two models, which was quite wise. Europe was in fact a "Hayekian" construction, emerging from below in ways that nobody really understood, but which at the end delivered a satisfactory result. If Democracy can be defined as "government through discussions, compromises and debates", then Europe was indeed democratic, in its own inimitable and incomprehensible ways.

2– The Collapse of the Evil Empire Tips the Scale

However, this marvelous equilibrium was broken with the collapse of the Evil Empire and the German reunification. With a stronger Germany, a free (and very Christian) Poland, Hungary, Czechoslovakia... came the threat that the 'Christian' vision of Europe would overwhelm the 'Roman Empire' camp. The sense of urgency was profound: If a European State was not built rapidly, the newly freed Eastern European countries would, in the future, likely be very weary of abandoning large chunks of the sovereignty they had just recovered from the Soviets (without any help from the rest of Europe) to a European State (see Vaclav Klaus as an example).

For the proponents of the "Roman Empire", the European State had to be organized immediately, whatever the risks, and become inevitable. Otherwise, the proponents of 'Christian Europe' would win by default and History would likely never reverse its course. The collapse of the Soviet Union was the crisis which gave the opportunity, and drive, to the Roman Empire to push though an overly ambitious program. The scale had been tipped and the "Roman Empire" needed to tip it the other way; and the creation of the Euro, more than anything, came to symbolize the push by the Roman camp towards a centralized super-structure.

Of course, the reasoning was that a common currency would facilitate trade, tourism and exchanges amongst Europe's people and thus generate a large "Ricardian growth" spurt. But the common currency was also seen as a first step towards the creation of a European State. And the only reason "Christian Democrat" Germany, which for historical reasons should have been wary of such an endeavor, went along with the plan is that it was seen as a qui-pro-quo for German Reunification. The Germans thought: "we allow the French to build their European 'Roman Empire' and sacrifice the DM, and we get to re-unify with East Germany".

In this 'Roman empire' roadmap, The second step would be the writing of a constitution (by French ex-President Giscard) which would establish the super-structures of a functioning state. Unfortunately, this constitution was immediately voted down by the French themselves and then by the Dutch to boot (the Germans were never given a vote but would have most likely voted 'nein'). Having been shown the door by the citizens, the constitution came back through the windows, under a different name, which did not require a popular vote. Still, the new construct was not a "Constitution" per se, but merely a treaty. And this thus left the Euro as the only tool for the 'European State' to deploy its nascent power.

This is why today one reads everywhere that, should the Euro be consigned to the trash heap of History, then the whole European Union effort might disappear along with it. Of course, this is dead wrong. Rather than the death of Europe, a demise of the Euro would simply mean the collapse of the "Roman Empire" idea of Europe and the resurgence of the "Christian" idea of Europe.

After all, if some countries start to revert to their own currencies, why should this impact common market rules? A number of European countries are not members of the Euro (UK, Sweden, Denmark, Poland...) so who cares if Greece, or Spain, or Ireland join them? Instead, the bigger question investors, and commentators should ask themselves when confronting the current crisis is simple: for Europe to function, do we need more centralization, more government and more intervention? Or does Europe need more freedom to experiment? The answer to that question will dictate whether our reader is a proponent of the 'Roman Empire' idea of Europe, or the 'Christian' idea of Europe.

Needless to say, there are no prizes for guessing which camp I happen to fall into. However, let me dispel any possible lingering doubts by saying that, for me, the revival of the 'Christian idea' of Europe, and the possible, though still unconfirmed, demise of the 'Roman Empire' idea of Europe could actually be one of the most bullish developments since the collapse of the Soviet Union. So why does every one think it is bad news?

3– The End of Massive Capital Misallocation

As has now become painfully obvious, the low cost of financing which resulted from the Euro has allowed various governments to borrow at rates far too low for far too long. In other words, for the past decade, and because of political diktat, Europe has been grossly misallocating capital. That much is clear. So what could be the possible answer for Europe's policy-makers? Is it:

*Recognize the capital misallocation, restructure the debt, and reform a system which obviously, and painfully, does not work?

*Try to force a square hole into a round peg by imposing conditions on Greece, Portugal and Spain that would have made Bruning or Laval blush?

*Send good money after bad?

Somewhat unsurprisingly, Europe's policymakers first tried the second option and are now drifting towards the third. But this is where things are getting very exciting, and in my view, very long-term structurally bullish; the one conclusion we can draw from recent events is that the markets are simply not letting the European governments get away with the idea of sending good money after bad! Since the Greek rescue plan was announced, instead of tightening, and to the great surprise of all European policy-makers, spreads on Greece and all other risky European signatures have widened massively.

As our friend Alain Madelin (a former French Minister of Finance) recently said on French radio: 'politicians are saying that markets are acting irresponsibly but instead what is happening is that markets are starting to ensure that politicians act responsibly!' This reality means that Europe's politicians will either have to send even more good money after bad (and that too may fail), or throw in the towel and allow for the weak debt to be restructured.

Of course, it would be Panglossian of us to assume that a restructuring of the debt of Southern European nations, and the possible return to national currencies, would not trigger large hits across Europe's financial system. Indeed, the balance sheets of European banks and insurance companies are heavily distorted by past investments made in the debt of technically bankrupt governments. For the past 15 years, banks and insurance companies all over Europe have been lured into believing that the Greek risk was equivalent to the German risk, or the Spanish risk similar to that of the Dutch, etc. As a result, the capital of too many financial institutions was invested in very dubious paper.

Moreover, in the countries which have "enjoyed" a massive real estate bubble (Spain, Ireland...) because of the distortions in the cost of money introduced by the Euro, the banks are now loaded with real estate loans of very questionable value. To add insult to injury, regulatory powers all over Europe have literally forced banks and insurance companies into buying the bonds issued by European governments ("risk free" they were told, and zero reserve requirements!) while forcing them to sell good quality equity positions established over decades. So whether one looks at balance sheets, reserves, loan books or future sources of income, it is hard to avoid the conclusion that European financials are in a pickle. This is a true and very unfortunate consequence of the Euro.

But having said that, I believe that the banking crisis that a sovereign debt default in Southern Europe would most likely trigger need not unleash a wave of destruction similar to what followed Lehman's bankruptcy. Indeed, if we look back at the situation in 2008:

Financial leverage in the system was off the charts with every hedge fund, investment bank, retail investor, fund of funds... running on as much leverage as risk-blind commercial banks would provide.

Operational leverage was also at record highs with companies having built up stocks, double or triple-ordered commodities to cushion from further price increases, expanding rapidly on all continents, etc.

The situation could not be more different today. Following the Lehman shock, investors everywhere around the world have learned to focus disproportionately on risk rather than on returns. Companies have cut inventories, salaries, workers and are now as efficient as they have ever been (see Europe and The SAP Recession).

This profound difference between the 2008 and current underlying economic and financial conditions help explain why, while the bond markets are increasingly pricing in a debt default in Europe, an event which would undeniably trigger much gnashing of teeth amongst European financials, the larger European equity markets (Dax, FTSE, OMX, AEX...) seem to be taking the bad news in stride. The decent performance of European equity markets in the face of the EMU bond market meltdown indicates that, as things stand, the larger European companies do not need the banks.

The other possible explanation for the resilience of Europe's equity markets is that European stocks are looking beyond the near term hic-cups and problems linked to debt restructuring and towards a far more bullish 'Christian' Europe, which stops misallocating capital on a grand scale. After all, does any one seriously believe that, by maintaining the institutional arrangement which created the current problem, that Europe's policymakers would solve the balance sheet problems of the European financial institutions? Would creating an unprecedented depression in Greece, Portugal, Spain, Ireland and elsewhere across Europe, as the current plan seems to propose, really improve the ability of such nations to repay their debt?

Instead, isn't the reality that a nation such as Greece has now been found to be insolvent and that the longer we wait to acknowledge that fact, the worse the pain for both investors, and the Greek population, will be? To ease the suffering of this particular dog, should we cut the tail in one motion, or in small increments? The current reality is that the losses are already there, and now blatantly visible. The losses will thus have to be marked to market pretty soon and trying to sweep them under the carpet will not work now that the markets have understood that Europe's Roman Emperor has no clothes.

4– The Way Out

The question for Europe should not be how we can get the highly indebted and unproductive Southern nations to service their debt. Instead, the question should be how will Southern Europe achieve an improvement in its income statement? And the answers provided by both the economic textbooks and experience are obvious enough: the exchange rate has to fall to a level where the external sector starts contributing massively to growth and a level where asset prices become incredibly cheap for foreigners. Of course, right now, the weaker countries cannot devalue within the Euro.

Which leaves us with two possibilities:

*The Euro itself collapses and falls below its current purchasing parity of US$1.1/€. With Greece, and potentially others, having to restructure their debt and the European financial system having to take large hits, one would expect the ECB to maintain short rates at zero forever. But meanwhile, Northern Europe does not really need very low interest rates, nor does it need an undervalued exchange rate, but this will happen anyway. From there, we can imagine an export-led boom of historic proportions for Northern Europe. In turn, this should trigger tremendous capital flows which will no longer be recycled into Southern European debt. Instead, that money will more likely get re-invested in local real estate and local equity markets—for one of the consequences of the current crisis may well be that equities start being perceived as a better 'risk-free' asset than sovereign bonds! Or perhaps even in undervalued assets in Southern Europe (beach houses in Corfu).

*But if the above scenario is not bullish enough for you, try this one on for size: European governments decide that the Euro was a bad idea after all and that the time has come to return to national currencies. They restructure their debt— which at first triggers some volatility (a mild understatement) though, after that, the threat of defaults would disappear. From there, capital would start flowing in Europe according to the various nations' real comparative advantages, and not according to the monetary diktats of Frankfurt and Brussels-based technocrats. The currencies would settle at levels that would ensure the financing of external or domestic deficits... and Europe would then embark on the mother of all bull markets (think Asia post Asian Crisis).

5– Conclusion

As we write, the level of uncertainty about Europe's future remains at an all time high. The current lack of visibility, and the feeling that Europe's survival depends on the decisions of a few politicians, is leading most of the clients we talk to into a great level of despondency. But, although one has to acknowledge that the short term outlook will remain extremely challenging, there are very good reasons to start feeling cautiously more optimistic about the future. These reasons include:

The fact that the markets are simply no longer letting politicians send good money after bad. In essence, the markets are calling time on the disastrous experiment of the Euro and this should lead to a structurally more efficient allocation of capital across the Old Continent.

The fact that this crisis is coming at a time when EMU companies have never been so efficient, when leverage in the financial markets has never been so low, and the dependency on local banks has never been so insignificant. All this ensures very limited transmission mechanisms from 'weak hands' to 'strong hands'.

The fact that the "Roman Empire" idea may, with this crisis, have reached its nadir and will now never recover. Indeed, if Europe is now returning towards its marvelous historical roots of allowing diversities and differences to express themselves freely, then we should rejoice!

But we return to the most simple of questions, namely: Was the end of the USSR a negative event? When Americans stopped wasting capital building empty condos in Florida or Arizona, was that bad news? If, like us, our reader answers "no" to the above questions, then the Greek crisis should be seen as a reason for hope, rather than despair.

How Singapore advertises

In-Flight Advertising On Singapore Airlines
On long-haul flights, one can watch ads before the on-demand movies (you can actually skip the ads if you want). One of the ads is for Silversea which is a luxury condos company aimed at expats. The ad shows a video of the place with gorgeous Westerners doing some shopping, sunbathing, and having a good time. And the caption reads: “No capital gains tax; no currency controls; no restriction on foreign ownership; no inheritance tax; no withholding tax for sale of properties; no value added tax”. That’s all. Nothing is said about the place itself. Clearly, businesses in Singapore know what a difference the island-state’s tax system can make to foreigners desiring to invest their money. This is global tax competition at work for you. Actually, one should rather call it “institutional competition.” This is the way Singapore Inc. establishes its name and reputation.

H/T Marginal Revolution.

American Expatriation Guide

American Expatriation Guide

Yuan weakens versus U.S. dollar

I mentioned some of the weak yuan arguments before, but now we're seeing a weaker yuan in action.
Yuan Forwards Fall on Concern Europe’s Woes to Delay End to Peg
The yuan itself isn't falling, just the non-deliverable forward contracts that are traded. They had been bid higher on the expectation of currency revaluation.

At the start of the year, I expected China to let the rising U.S. dollar do its work for it, rather than appreciating the currency on top of the U.S. dollar. I believed China would take many steps before using the currency option to fight inflation. Now, there's a chance that the solution for European Central Bank is to follow in the Federal Reserve's footsteps and print money, in which case Chinese exporters will suffer greatly as the euro tumbles towards parity. There is a case for revaluation in that China wants to gradually move towards a floating currency, but I do not believe there will be any change in the near-term.

Of course, the yuan might go down


Revaluing the Chinese yuan

2010-05-04

Democrats: The best friends big business ever had

Republicans have a reputation as being in the pocket of Big Oil, Big Pharma, etc. Despite Democrat rhetoric, however, and stated desire to hamper big business, it is usually the Democrats that pass the most overtly pro big business legislation of two parties. Sometimes it's overt, such as when they desire to control an industry. Other times, it's just the outcome of their policies. I make no judgement as to whether they are liars or ignorant of basic economics, but here's the latest example:
The cost to protect Anadarko Petroleum Corp. debt from default rose to the highest in almost a year as federal legislation was introduced that would raise the potential liability for oil spills to $10 billion from $75 million.

The liability increase would be “a little bit more problematic” for smaller companies, said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC.

“It’s a high exposure level,” Lebas said in an interview from Philadelphia.
An independent oil & gas producer woould go bankrupt if they suffer one accident under the new law. The result, if this legislation passes? Exxon, BP and the other oil giants will buy up these assets, since they can survive such a loss. Big oil will get bigger. Bonus points for the Dems, however, if they have Congressional hearings to try to block Anadarko or another company with extensive oil interests from selling themselves to the Chinese.

German Public TV: Bring Back the DMark!

ARD is running a program tonight that is openly debating the pros and cons of reintroducing the deutschmark. The pros include the deutschmark becoming the anchor currency of Europe and making Germany's debt easier to repay, since the deutschmark would likely rise versus the euro, and certainly against any other reintroduced national currencies. Overall favorable toward bringing back the DM.

2010-05-01

April Performance

Index

Apr %

YTD %

S&P 500 TR

1.58

7.05

MSCI EAFE

-2.10

-1.88

上海 Shanghai

-7.67

-12.41

Fund



Entertain. Trends

3.07

7.63

Green Dragon

1.24

2.42

Best of Funds

1.69

-1.93

Pharma & Dogs

1.36

6.79

China Fund

0.28

0.16

Software Security

2.30

5.00

Yield to Me

-0.06

2.84

Catch a Falling Knife

-10.64

-26.78

Scam Nation

Still Government Motors
In short, GM is using government money to pay back government money to get more government money. And at a 2% lower interest rate at that. This is a nifty scheme to refinance GM's government debt--not pay it back!

The federal government and Federal Reserve are running a confidence game.