Posts filed under “Currency”
Joshua Rosner is a managing director at the independent research consultancy Graham Fisher & Co., where he advises regulators and institutional investors on housing and mortgage finance issues. Rosner has provided advice on monetary, fiscal, regulatory, and political developments to many of the world’s leading banks, mutual funds, hedge funds, and other institutional investors. Mr. Rosner was among the first analysts to identify operational and accounting problems in the government-sponsored enterprises (GSEs), the peak in the housing market, the likelihood of contagion in credit markets, and the weaknesses in the credit rating agencies’ collateralized debt obligation (CDO) assumptions.
What follows is his most recent commentary on Bank of America:
Ken Lewis must not have listened if his parents told him what mine told me:
-”Don’t buy something you can’t afford”;”
- “Chew before you swallow”;
- “You just got a new toy (Countrywide), you don’t need another now (Merrill)”.
These are lessons our grandparents learned, our parents preached and we forgot. Now, unfortunately, our children will learn it too. Perhaps, for the good of the Republic, the Treasury and our nation’s bankers will as well.
Back stopping Countrywide was premature, buying it was ego driven and, even at the time, buying Merrill seemed plain dumb.
The whole Treasury approach is as dumb as taking equity warrants in a company you may decide is better off in reorganization. How can you teach market participants the lessons of the importance of risk assessment and responsibility if every time a banker blows up his firm you bail him out and then finance his next trade.
Worse yet, Treasury bail’s him out and allows him, without restriction, to use the money to play CDS, not to hedge and put risk back into the market but to speculate.
We need to take large and aggressive action to stop a deflation but the crisis has moved to main street and we can’t keep pretending that bank losses, which will begin to accelerate again (with rising unemployment and commercial losses) can reverse if only we use money to hide them.
We keep hearing DC talk about “when we restructure we must better regulate the large banks”. Hello!?, it has been 18 months since I began loudly calling for the SEC to require more detailed disclosures about the structured holdings of banks and warning of risks for the failure to disclose (see link at bottom). Disclosure is better than regulation and easy to achieve yet we talk as though the Fed and SEC need new powers to achieve these confidence inspiring and risk assessing disclosures.
“A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labour markets from rising unemployment will control labor costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1 per cent level that leads to concerns about deflation.
“Deflation is dangerous as it leads to a liquidity trap, a deflation trap and a debt deflation trap: nominal policy rates cannot fall below zero and thus monetary policy becomes ineffective. We are already in this liquidity trap since the Fed funds target rate is still 1 per cent but the effective one is close to zero as the Federal Reserve has flooded the financial system with liquidity; and by early 2009 the target Fed funds rate will formally hit 0 per cent. Also, in deflation the fall in prices means the real cost of capital is high – despite policy rates close to zero – leading to further falls in consumption and investment. This fall in demand and prices leads to a vicious circle: incomes and jobs are cut, leading to further falls in demand and prices (a deflation trap); and the real value of nominal debts rises (a debt deflation trap) making debtors’ problems more severe and leading to a rising risk of corporate and household defaults that will exacerbate credit losses of financial institutions.”
- Professor Nouriel Roubini of New York University
I had breakfast with Nouriel this morning down in Soho (I am in New York today). I thought the above quote was an excellent way to lead off this week’s letter. Some of the more important questions of the moment are whether we face a serious bout of deflation, and if so, what can be done about it. There are market observers who are looking at the graphs which show the meteoric rise in the monetary base (see below) and predict that we will soon see much higher and rising inflation and a seriously falling dollar (accompanied with a large rise in gold). Is inflation everywhere and always a monetary phenomenon, as Friedman taught us? Can we see a large rise in the monetary base that is not accompanied by inflation? As Frederic Bastiat said (roughly), “In economics there is what you see and then there is what you don’t see.” The more important of the two items is what you don’t see. In this week’s letter we talk about what most market observers are not seeing, and why you should be paying attention.
We are going to revisit portions of an important e-letter I wrote earlier this year about the velocity of money. I am updating the charts and adding a lot of new commentary. I cannot overly stress how important this is. If you want to understand the markets, the dollar, gold, and more, you have to have this information down. You will need to put on your thinking cap, as much of what I am writing is counterintuitive and certainly
not considered as received wisdom in much of the financial-commentator media. (Note: this letter will print longer than usual as there are a lot of graphs.)
Also, I am going to make an important announcement at the end of the letter about a new information
service, and I need feedback from some of you.
Richard Russell Tribute
But first, I and some of my fellow newsletter writers (Bill Bonner and Dennis Gartman, among others, are slated to be there) are going to be hosting a special tribute dinner to honor Richard Russell for his outstanding contribution of over 50 years to not only the craft of investment writing but to the lives and investment portfolios of his readers. He is one of my personal heroes as well as a good friend. At 84, his
writing today is better than ever, and now he writes every day, not just once a month! Richard is an institution in the investment writing world, and after talking with his wife Faye he has said he would let us plan the dinner.
Richard has some of the most loyal readers anywhere. I have personally talked to readers who have been reading Dow Theory Letters almost since the beginning (1956), and their enthusiasm for all things Richard has not waned.
We really hope we can get a roomful of Richard’s friends, writing colleagues, and fans who have benefited from his wisdom over the years, to honor him for a life well lived and a true servant’s spirit, as well as being a guide not just in the markets but in life. The dinner will be Saturday evening, April 4, 2009 in San Diego. In order to know how many people we should plan for, please send an email to email@example.com indicating how many tickets you would like. Plan on the tickets being around $200, with any money left over going to Richard’s favorite charity. I actually expect tickets to go rather fast, so let us know as soon as possible. We will get back into contact with you as to the exact time and place. Thanks.
The Velocity Factor
When most of us think of the velocity of money, we think of how fast it goes through our hands. I know at the Mauldin household, with seven kids, it seems like something is always coming up. And with Christmas looming, the velocity, at least in terms of how fast money seems to go out the door, seems faster than normal. And what about my business? Travel costs are way, way up; and as aggressive as we are on the budget, expenses always seem to rise. Compliance, legal, and accounting costs are through the roof. I wonder how those costs are accounted for in the Consumer Price Index? About the only way to deal with it is, as my old partner from the 1970s Don Moore used to say, is to make up the rise in costs with “excess profits,” whatever those are.
Is the Money Supply Growing or Not?
But we are not talking about our personal budgetary woes, gentle reader. Today we tackle an economic concept called the velocity of money and how it affects the growth of the economy. Let’s start with a few charts showing the recent high growth in the money supply that many are alarmed about. The money supply is growing very slowly, alarmingly fast, or just about right, depending upon which monetary measure you use.
First, let’s look at the adjusted monetary base, or plain old cash plus bank reserves (remember that fact) held at the Federal Reserve. That is the only part of the money supply the Fed has any real direct control of. Until very recently, there was very little year-over-year growth. The monetary base grew along a rather predictable long-term trend line, with some variance from time to time, but always coming back to the mean.
But in the last few months the monetary base has grown by a staggering amount – by over 1400% on an annual basis, as shown in the next chart from my friend Dr. Lacy Hunt at Hoisington Asset Management. And when you see the “J-curve” in the monetary base (which is likely to rise even more!) it does demand an explanation. There are those who suggest this is an indication of a Federal Reserve gone wild and that 2,000-dollar gold and a plummeting dollar are just around the corner. They are looking at that graph and leaping to conclusions. But it is what you don’t see that is important.
Now, the same graph but in percentage terms:
Only a week after the Treasury Secretary said that the government bailouts had stabilized the most important financial institutions, plunging stock prices forced the government to step in again.
click for video
Another Crisis, Another Bailout
New York Times, November 24, 2008
Jim Rogers on Bloomberg TV
The U.S. dollar will be “devalued” as policy makers seek to weaken it, undermining the greenback’s role as an international reserve currency, said Jim Rogers, chairman of Rogers Holdings in Singapore.
“They think that if you drive down the value of your money, it makes you more competitive, now that has never worked in history in the long term,” said Rogers. The ICE’s Dollar Index has gained 19 percent since Rogers said in an interview on April 27 he expected a dollar rally “about now.”
The dollar is “going to lose its status as the world’s reserve currency,” Rogers said yesterday in a televised interview with Bloomberg News. “It will be devalued and it will go down a lot. These guys in Washington, they want to debase the currency.”
click for video
Rogers Says Dollar to Be `Devalued,’ Buys Commodities
Ron Harui and Mike Schneider
Bloomberg, Nov. 25, 2008
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.
The Mount Washington Hotel is in Carroll, New Hampshire. It is not the hotel featured in the Jack Nicholson movie “The Shining.” That was the Timberline Lodge near Mount Hood, Oregon. So it’s ok to stay in rooms 215 and 217 (or is it 415 and 417 ?) The hotel’s golf club-the course was designed by Donald Ross- has enshrined the locker used by Babe Ruth on his visits there. Because it’s near the Bretton Woods ski area, the conference of Allied world leaders held towards the end of World War II at the hotel was called the Bretton Woods Conference. That is a much better name than Mount Washington Resort Conference. The conference was held in July of 1944. The war was still raging. The D-day Normandy invasion of Europe was barely a month old and the tide of war had changed, but the outcome was not yet assured. The 44 countries that attended had been victims of unenlightened monetary and fiscal policies in the 1930′s and had come to realize international cooperation was necessary. Repeated currency devaluations to increase the competitiveness of exports had led to corresponding actions by other nations and only worsened deflationary spirals. In a sense, WW II was an economic savior as demand for goods was met by labor shortages and inflation fears broke the deflationary mindset.
But few, if any, believed the conditions that spawned the Depression were gone, so at the behest of the U.S. and Britain who had been talking and planning for a few years, the conference to figure a post war economic agenda was held.
The conferees decided on a fixed exchange rate for currencies pegged to gold, with the only currency worth anything after the devastation of the war, the dollar, as the “reserve” currency. In reality, the conferees knew the only country that had an industrial base capable of pulling the world back from the precipice was the United States. The rest of the world was in ruins. The organizations that became known as the International Monetary Fund and the World Bank were created. And it all more or less worked until the world outgrew the supply of gold and the U.S went off the gold standard in 1971.
This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand’s Capitalism: The Unknown Ideal
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
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.
In his March 2007 letter, he warned that a tightening of lending standards by banks represented a sea change that would lead to a slowdown in the economy before the end of 2007, and more credit losses for banks. In October, he noted that technical weakness in the U.S stock market, combined with an economic slowdown would be bearish for stocks. In December 2007, he warned, “Most investors really don’t understand the credit creation process, and as a result, don’t comprehend the scope of this crisis, or the Fed’s limited ability to deal with it. It really is different this time.” In his March 2008 letter, he forecast a rally in the S&P to 1420-1440, before the bear market in stocks would resume. His analysis provides a unique blend of fundamental and technical analysis
This is his October 21, 2008 writing:
In the July letter I wrote, “Bank balance sheets are not only burdened by loans they are unable to
securitize, since global securitization is down 84%, but their capital base is being squeezed
unmercifully, as they write off bad loans and increase loan loss reserves. Unfortunately, large banks,
regional banks, and community banks will be forced to recognize more losses as home prices fall
further, and default rates climb on home equity and auto loans, credit cards and corporate debt, due
to weak economic growth. Oh, and commercial real estate prices have just started falling. It’s bad,
and it’s going to get worse.” Six months ago, the International Monetary Fund estimated global
losses would total $950 billion. Two weeks ago the IMF increased their estimate to $1.4 trillion. I
had noted in the July letter that Bridgewater Associates, a respected research firm, had estimated that
losses from the credit crisis could total $1.6 trillion. As estimates converge, confidence builds that
these estimates are at least in the ballpark. It is noteworthy that only $600 billion in losses have so far
been recognized. Despite all the turmoil and almost frantic efforts by global central banks and the
U.S. Treasury to address the credit crisis, the reality may be that we aren’t even half way through this
This perspective certainly is contrary to what one hears on CNBC, Bloomberg, and read in the
financial press. Within days of the stock markets reversal on October 10, a consensus has developed
that by mid 2009, the economy will have weathered the worst and begun to improve. And since the
market is a discounting mechanism, it will bottom soon (if it hasn’t already), and begin to advance in
anticipation of the better times ahead. If this story line sounds familiar, it should. After the market
reversed higher in mid-March, a cavalcade of analysts forecast a second half rebound in 2008, based
on Fed rate cuts and a $160 billion stimulus plan. In my February letter I offered this assessment of
their forecast. “I think the experts on Wall Street are asking the wrong question. The question is not
whether the economy will get a lift from the rate cuts and fiscal stimulus. It will. The more important
question is whether the boost will be enough to ignite a self sustaining economic expansion. This is
going to be made more difficult in coming quarters, since the availability of credit from banks and
the corporate credit market will not be supportive of consumer spending and corporate investment. If
the one-time lift from fiscal stimulus fails to launch a self sustaining economic expansion, the
economy will sink again, after the temporary effects of the tax rebate have been spent. Will the $160
billion in stimulus be enough to ignite a self sustaining economic recovery in the face of significant
headwinds? I don’t think so, which will give Wall Street experts forecasting a snappy recovery later
this year another unpleasant surprise.”
Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.”
In our sparsely populated office – a beacon of both waste and hope – hangs a framed poster of Albert
Einstein and his quote: “imagination is more important than knowledge.” The poster is different from
the other “art” hanging on our walls – not because of its cheesy cheapness or because it makes an
otherwise stark white wall only slightly more interesting. (That is common in our office, where
taciturn riveters laze on I-Beams perched 800 feet above what would become Rockefeller Plaza.).
No, the Einstein poster is different because its simple declarative is neither ironic nor banal. The
most brilliant man of his time noted the importance of imagination, which we’re sure was an
acknowledgement of its scarcity.
Maybe Einstein recognized early something the rest of us just confirmed? Senators McCain and
Obama spent two years competing to convince us that each was more naturally at ease with political
dynamism and that change was the secret sauce to fix a world where US democracy- and wealth-
spreading machines had run into a ditch. People didn’t need convincing. The wars became pointless
to most Americans and the economy became more important to most people than merely glancing at
the closing level of the Dow Jones Industrial Average. Within this context, electing Obama would be
a rational choice – not because his ideology was necessarily better for the times but because the
country’s economic situation had no precedent from which age or experience would add any value.
Change seemed like a reasonable priority and Americans voted for the candidate they felt could
execute it best – the one with the better imagination.
There are no formal elections held on Wall Street, where daily money flows are the only votes cast.
Such a free-market approach should, theoretically, reflect (or guide) confidence levels as well as the
speed and quality of capital formation and regulation. But it isn’t that easy. The markets are
comprised and dominated by dedicated investors – institutions that must allocate all their money into
markets no matter what the outlook, and by extrapolators – Pavlovian sages who can recite
conditional responses chapter and verse – why the market or economy should go in a certain
direction because “eight out of the last ten times this did that, then…” and who shame their flocks
(usually with a chuckle and wink) “not to buy into the notion that this time is different!”
Well, this time is different. You know that and we know that, but an expert can’t be an expert if he
doesn’t have expertise (real or perceived) and expertise regarding the current economic situation
can’t be extrapolated. It must be game-theoried and theoretically applied. It must be imagined, the
way a German patent clerk did while global academic institutional extrapolators did not.