Posts filed under “Currency”

The King Report: China’s Reserve Currency



China called for a new reserve currency, again. This killed the dollar, again. One can assume that China is unhappy with Bernanke and the status quo FOMC Communiqué.

Income increased 0.3% due to tax rebates and increased entitlements, including unemployment pay. Most economists and pundits trumpeted the income gains as sign of economic recovery, green shoots.

They are remiss or deceitful. Wages & salaries DECLINED 0.1% in May. Personal income
increased $167.1B but ‘private wage and salaries’ DECLINED $12.4B in May (-$0.7B in April).

The BEA: Personal current transfer receipts increased $162.6 billion in May, compared with an increase of $59.1 billion in April. The American Recovery and Reinvestment Act of 2009 provides for one-time payments of $250 to eligible individuals receiving social security, supplemental security income, veterans benefits, and railroad retirement benefits. These benefits boosted the level of personal current transfer receipts by $157.6 billions at an annual rate in May. These payments are classified in “other” personal current transfer receipts rather than in old-age, survivors, disability, and health insurance benefits because they are not benefits paid from the social security trust fund.

Ergo, 97% of the income gain in May is due to government largesse/welfare. Is this the sign of economic rebounding, or green shoots?

The saving rate jumped 6.9%, the highest rate since Dec 1993, but the gain is a temporary event unless Obama administers more welfare.

Let’s have some fun with Keynesians! For decades, the Fed and academicians have believed and taught the wage growth is the number 1 fuel for inflation – the old ‘sticky wages’ concept. If income surges, isn’t it inflationary, no matter how it is derived? If wages growth is inflationary, so is income growth from government largesse…Isn’t Obama practicing ‘trickle down’ from the government economics?

CNBC: Mounting Jobless Claims Force States To Borrow Funds Fifteen states have depleted their unemployment insurance funds so far, forcing them to borrow from the U.S. Treasury. A record 30 of the country’s 50 states are expected to have to borrow up to $17 billion by next year, said Rick McHugh of the National Employment Law Project, a nonpartisan advocacy group. “We are setting the stage for big pressures for states to restrict eligibility and benefit levels,” McHugh said. “Those type of restrictive actions undercut the (Depression-era program’s) economic and social stability purposes.” [This would kill part of the welfare state.]

The LA Times: Personal bankruptcies surge in Southern California The region had the nation’s biggest percentage jump in 2008, and the number this year through April is up 75% despite a 2005 rule overhaul aimed at curbing filings by those who would benefit unfairly.

The Great American Bubble Machine; Goldman Sachs: “Engineering Every Major Market Manipulation Since The Great Depression” With a subtitle like “From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they’re about to do it again” run, don’t walk, to your nearest kiosk and buy Matt Taibbi’s latest piece in Rolling Stone magazine. One of the best comprehensive profiles of Government Sachs done to date. Speaking of GS, they sure must be busy today, now that Bernanke is about to be impeached and take the fall for all their machinations.

From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they’re about to do it again

Zero Hedge: Goldman Sachs Principal Transactions Update: Back With A Vengeance
Just released NYSE data indicate a 50% ramp up by Goldman’s principal Program Trading unit. Whereas the prior week saw Goldman trading only 631 million principal shares on the NYSE, the most recent data indicate a massive rise to 977.8 million. Also notable is Credit Suisse’s doubling in principal program trades to 586 million from 245 million. Zero Hedge is compiling materials to demonstrate the phenomenal gamble CS is taking by being the largest holder of the ETF-underlying pair trade. The ensuing implosion, once the market loses the invisible futures bid, will likely destroy Switzerland’s second biggest bank and likely take down the country with it.

Probably most notable is the screaming increase in overall program trading, from 30.7% of all NYSE volume to 40.4%! Virtually every broker saw their Principal PT operations double week over week: seems like everyone is brokering those ETF trades now. Poor SPY and IWM are being mangled 10 ways from Sunday nowadays.

Ambrose Evans-Pritchard, Telegraph: China’s banks are an accident waiting to happen to every one of us China’s banks are veering out of control. The half-reformed economy of the People’s Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December. Money is leaking instead into Shanghai’s stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump…

The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a “massive lending spree”. Bank exposure to corporate debt has reached $4,200bn. It is rising at a 30pc rate, even as profits contract at a 35pc rate.

Category: Currency, Think Tank

That’s a lot of money

Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.


Household debt is “down” to 130% of disposable income. “Down” is a relative term. It was 134% recently. But it was half the current level as recently as the mid-1980′s. Total debt in the U.S. (all debt including the government) stands at about 360% of Gross Domestic Product. It was 155% in 1980. Another way to slice the debt overview is to look at non-financial debt (take the banks’ debt, etc. out) and that is 240% of GDP. The Euro zone is also at about that level and Japan is at something like 450% of GDP. But that economy has been down for a long time, so I take no comfort we are better off than that.

Let’s look at household debt for a moment. Disposable personal income is close enough to $11 trillion that we can use that as a number. If household debt were to retreat to, say, 100% of income, it would be a retrenchment of a good bit over $3 trillion. That would be one big bite out of consumer expenditures. I have no idea where this debt to income will or should go. Things tend to revert to the norm over time, and if we were in the 70% range in the 1980′s, I don’t think returning to 100% is a crazy view. If the savings rate were to return to its 70-year average of 9%, that would chip in almost $1 trillion a year. Savings might not go to pay off debt, but, from a total balance sheet overview, we could balance one against the other. If all else stayed equal (which of course it won’t), it would take several years to get back to 100%. Not a joyful prospect for a booming economy led by the consumer, but I don’t think any of us believe the consumer is going to be a driving force in any recovery.

What might be a driving force would be inventory restocking. I mentioned yesterday that Industrial Production was down again, which means there is no inventory build at all, and inventory liquidation instead. If final demand started to pick up, there would be a need to increase production quickly.

New York City has balanced its budget with the aid of Federal stimulus dollars. But the smoke and mirrors employed also revealed a rise in the sales tax and a reduction in the work force. How does the use of stimulus dollars in this sense stimulate? Taxes are up and employment down. I don’t get it. Only about $50 billion or so of the total stimulus package of $787 billion has been spent, and there is a lot of enthusiasm that, when the rest gets spent, the economy will prosper. But if it non-stimulates like this, we are in for a reassessment.

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Category: Credit, Currency, Think Tank

World’s Best Currency? South African Rand

Surprising story buried deep on Bloomberg: The world’s strongest currency is the South African Rand: South Africa’s rand, the world’s best-performing major currency this year, may rally another 4 percent if it breaks through 8.23 per dollar and stays there, based on technical analysis by Barclays Plc-owned Absa Capital. Candlestick charting shows the rand closed…Read More

Category: Currency, Technical Analysis

US Dollar Redesign Project

The dollar may be going to hell, but that doesn’t mean it can’t look good doing so. Hence, the Dollar ReDe$ign Project, by Richard Smith. I found the coolest versions via the Ministry of Type: > > via kottke

Category: Currency

Ron Paul: Audit the Fed, Then End It

I’ll say this much about Ron Paul: He is intellectually consistent in his staunch opposition to the incredible money creation that has been going on at the Federal Reserve. While I cannot imagine anyone managing to disband the Central Bank — as long as any other countries have one, it would amount to unilateral disarmament…Read More

Category: Currency, Federal Reserve, Politics, Taxes and Policy

US Dollar Index Since March 2008 Bottom

Another good chart from Ron Geiss via The Chart Store: >

Category: Currency, Markets

Can There Be Market Solutions With No Real Markets?

“I don’t know of any economist who doesn’t believe that better functioning capital markets in which assets can be traded are a good idea.” -Lawrence Summers > There are Markets, and then there are markets. I am less sure that Larry Summers understands the differences between the two. That’s why I almost called this post…Read More

Category: Bailouts, Credit, Currency, Derivatives, Markets

Open Thread: Fed Driving Rates Much Lower

Buy a third of a trillion in treasuries, and watch rates plummet. That is the Fed’s obvious goal. The mere announcement sent rates plummeting: Yields on the 10-year note plunged to 2.48% from 3.01% late yesterday. Bloomberg noted this as the biggest decline since 1962. Not surprisingly, the dollar got whacked and gold rallied. ~~~…Read More

Category: Currency, Data Analysis, Federal Reserve, Fixed Income/Interest Rates, Markets

Top 10 Financial Crises

Here is yet another click-whoring festival, this time spread over 3 pages (it would have been 10 on CNN/Money’s pages). Top 10 Financial Crises 10. The Panic of 1907: The fourth so-called ”panic” in 34 years. 9. The Mexican Peso Crisis 1994 aka “The December Mistake” Punta ! 8. Argentine economic crisis – 1999 If…Read More

Category: Currency, Economy, Markets

Jim Welsh Investment letter – February 2009

Jim Welsh of Welsh Money Management has been publishing his monthly investment letter, “The Financial Commentator”, since 1985. His analysis focuses on Federal Reserve monetary policy, and how policy affects the economy and the financial markets.


Investment letter – February 17, 2009


On Friday, February 13, Congress passed the $787 billion stimulus plan. I’ll bet every member in Congress stayed up until the wee hours of Friday morning reading every one of the 1,434 pages needed to express the vision of the 110th Congress. About 40% of the total will be discretionary spending on education and job training, highway and bridge construction, modernization of the electricity grid, health and science research, housing programs and extending food stamp benefits. About 24% of the total will be spent in direct aid to states to supplement Medicaid costs, extend unemployment benefits, and expand health care programs for the needy. And almost 30% of the total goes for tax breaks for individuals and families, a temporary alternative minimum tax patch, state tax credit bonds to finance public education facilities, renewable energy incentives, and a $3 billion tax break for General Motors.

This legislation has ignited a contentious debate on whether it is too big or not big enough, or whether it contains too little or too much in tax cuts, at the expense of those who have lost their job or home in this crisis. Even more remarkable, not a single defender or detractor noted the inauspicious date it was passed – Friday the 13th! Yikes! Those who have consistently underestimated the magnitude and scope of the credit crisis, and its impact on the economy, seem impressed and hopeful about the plan’s effectiveness. They believe it is the right medicine to not only arrest the deep economic contraction and serious wave of deflation we’re experiencing, but also believe it will have enough muscle to launch a sustainable recovery. This is stimulus on steroids.

My concern is that this plan is being cheered by those who still don’t appreciate the structural nature of the problems we’re facing. It’s like a doctor who prescribes aspirin for a patient with a fever. Hours later, the fever is down, but the patient is admitted to the hospital with acute appendicitis. The doctor treated the symptom successfully, but not the cause of the fever. The Federal Reserve initially misdiagnosed the problem, thinking it was just a sub-prime mortgage problem that would run its course by the end of 2007. The collapse of Bear Stearns in March 2008 was certainly a wake up call. But over the next few months, two Fed members were more worried about inflation and voted against additional easing. It really wasn’t until the demise of Fannie Mae, Freddie Mac, AIG, Merrill Lynch, Washington Mutual, Wachovia, and of course Lehman Brothers that the Federal Reserve and Treasury Department realized how far behind the curve they were. Unfortunately, they are still behind the curve, and now the patient has more than just a fever. In fact, an emergency room doctor might describe it as multiple organ failure. Large segments of the U.S. banking system are effectively insolvent. The securitization markets remain inoperable. The consumer is still in shock, and the global economy has pneumonia. The triage needed to save and revive the patient goes well beyond the scope of the stimulus plan. Remarkably, the majority of economists and investment professionals still believe all that’s needed is aspirin.

In my September 2007 letter I used the metaphor of a tsunami to describe the convulsion that swept through the credit markets in August 2007. Seismologists usually know within hours whether a 100 foot tsunami traveling 500 miles per hour, or a 2 foot wading wave was created by an underwater earth quake. I noted then we wouldn’t know for a number of months the full economic impact, but the displacement in the financial markets left no doubt that a significant seismic event had occurred. The majority of economists and investment professionals saw it as nothing more than a speed bump. There is the perception that a tsunami is a single giant wave of water that sweeps away everything in its path once it reaches land. As financial market participants have painfully learned since August 2007, a tsunami is actually a series of giant waves, each one causing more destruction. After the first wave hits, survivors feel a sense of relief, as the sea water retreats. But that respite is brief, as the second, third and fourth tsunami waves crash on shore. They seem to arrive without warning.

After the first wave in August 2007, the second wave took Bear Stearns down in March 2008. The third and fourth waves hit in July and September 2008 and brought the financial system to its knees. The fifth wave has pushed every developed economy into recession, creating the deepest synchronized global economic contraction since the 1930’s. Although not yet visible, there is a sixth wave coming, as the global recession creates more losses for banks, prolonging this period of weakness and increasing the risk of a much deeper contraction.

Two weeks ago, the Commerce Department reported that fourth quarter GDP fell at an annual rate of 3.8%, which was the largest drop since 1982. Though bad, that figure grossly understates the degree of actual weakness. Since sales were weaker than production, inventories grew. If sales and production had been in balance, GDP would have been lowered by 1.32%. Instead, the unwanted inventories will cause companies to reduce production in the first quarter. The GDP report measures domestic output, so the Commerce Department subtracts imports to determine domestic production. In the fourth quarter, imports plunged and boosted GDP by 2.93%. The collapse in domestic demand for imports is hardly a sign of economic strength. Without the misleading additions from inventories and imports, GDP would have been down 8.0% in the fourth quarter.

In last month’s letter, I discussed how the slowdown would create excess capacity, forcing companies to reduce investments in new plants, equipment and software. In the fourth quarter, business investment dropped at a 28% annual rate. This is significant since business investment is a key driver of growth, representing up to 15% of GDP, and a big contributor to gains in productivity. The decline in sales volume and increase in excess capacity is forcing companies to aggressively cut costs. In the last five months, almost 2.5 million jobs have been eliminated and the average work week is at a record low of 33.3 hours. Personal income fell .2% in December for the third consecutive month. Personal spending has declined for five consecutive months, after plunging 1% in December.

In the last twelve months, the unemployment rate has soared from 4.9% to 7.6%, and could exceed 9% by the end of 2009. The surge in unemployment will result in higher default rates on every type of consumer credit and lead to more losses for banks. A 1% increase in unemployment leads to a 1% increase in the credit card charge-off rate. The huge jump in unemployment over the last year, and especially the past five months, means banks are facing a big increase in credit card losses. As the unemployment climbs further, more prime borrowers, who tend to have larger loan balances, will be affected. This suggests bank losses could accelerate, as the unemployment rate rises in coming months.

From 2002 to 2006, banks originated an average of $557 billion a year in jumbo mortgage loans, according to Inside Mortgage Finance, and a total of $750 billion of option adjustable-rate mortgages. As of December, the percent of jumbo loans that are at least 90 days delinquent has surged to 6.9% from 2.6% in December 2007. Moody’s Investor’s Service has downgraded 75% of all prime jumbo loans originated in 2006 and 2007 that previously carried the top rating of triple-A. According to LPS Applied Analytics, 28% of option ARM mortgages are delinquent or in foreclosure. More than 55% of borrowers with option ARMs owe more than the value of their home, which means these borrowers have no option to refinance.

A year ago, I noted that it was not a good sign for the banking system or the economy that the Federal Deposit Insurance Corp. was hiring. Although FDIC bank examiners have increased the frequency of examinations for at-risk banks, many are falling into trouble faster than in previous downturns. Of the 25 banks that failed in 2008, 9 collapsed before regulators could respond, including Washington Mutual and IndyMac, two of the largest failures in history.

In recent weeks, the International Monetary Fund increased its estimate of total global banking losses from $1.4 trillion to $2.2 trillion. The IMF said the world’s advanced economies – the U.S., European Union countries, Britain, and Japan – are “already in depression.” The IMF estimates that United States banks have a capital shortage of $500 billion, and that’s if things aren’t worse than expected. Keep in mind that future lending will be reduced $10 for every $1 of capital shortage. A reduction of $5 trillion or more in future lending will dampen economic growth for at least two years.

Prior to August 2007, more credit was created by the securitization markets than through bank lending. Unfortunately, the securitization markets are in worse shape than the banking system, with the volume of securitization down 70% over the last year. In November, the Federal Reserve announced a plan to resuscitate the securitization of auto loans, student loans, and credit card debt. Almost 3 months have passed since the Fed announced its plan, but nothing has been done. Obviously, the complexity and size of the task has proven more daunting than expected. It took years for the securitization markets to develop, and central to that growth was the trust buyers of securitized debt placed in the rating agencies. That trust was destroyed, when investors were told their ‘AAA’ holdings were really junk, virtually overnight.

The collapse of the banking system and almost complete breakdown of the securitization markets represent a structural fissure in the credit creation process. What many economists and investment professionals have failed to understand is that there is no easy or quick fix. By their nature, structural problems take years to repair, not just a few quarters. Unfortunately these are not the only structural problems challenging policy makers.

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Category: BP Cafe, Currency, Fixed Income/Interest Rates, Investing, Markets