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July 07, 2004

Reciprocal Folly
by John Mackenzie

As we move into July of 2004 the Global Financial terrain has begun to resemble a minefield.

Russian Oil Giant Yukos teeters on the abyss of a spectacular default as $1 billion in loans from creditors comes into question today, this ominous notice, after Friday's bill for $3.4 billion bill in unpaid taxes for fiscal 2001.

Yukos either coughs up $3.4 billion for 2000 tax arrears tomorrow or bankruptcy will be employed to stave off its creditors. The Russian courts have conveniently frozen all of Yukos, Lebedev and Khodorkovsk's assets.

Russia's Credit Trust Bank is now insolvent as self-liquidation for unspecified "Priority" payments are being made, yet the Bank's doors are closed, its account holders wondering if the two most recent bank runs in Moscow were an anomaly or something far more serious. Derivatives are mentioned quite curtly as potential source of ill-liquidity.

Markets here the U.S. remain remarkably quiet with what appears to be a lack of buying enthusiasm and liquidity. The Federal Reserve is certainly holding up its end of the bargain as today's Temporary Open Market Operations came in at $10 Billion in U.S. Dollars.

Now why on earth would our Statist Central bankers feel the need to pour such liquidity into the Banking System?

Let's poke around the Economic Landscape for a few road signs.

Reflation, after all, has been systematically ramped to new heights of excess, yet is failing to succeed as the metric of choice, "Stock Prices" have stalled since January of 2004 suggesting a bout of buyers remorse may be dead ahead. Sustaining the unsustainable appears to be in question. Can "They" or will Market forces assert themselves and manifest a rebalancing of large proportions in the form of more sellers than buyers.

Binging on Debt has managed to shift the economic focus to maintenance of America's Financial Economy, bringing an assundry of nosebleed levels in Housing, Bonds and Stocks to the very Zenith of absurdity.

The Fed's rampant Money and Credit creation implied a loss of control, a lack of systemic liquidity and palatable "Fear" on the part of the Federal Reserve. Alan Greenspan knows he's badly screwed the pooch., Debt for consumption, cannibalizing our Capital Stock was one of, if not, the worst bets in Financial History.

In turn, recognizing the looming disaster, Chairman Greenspan has resorted to "Unconventional Measures" in order to "Manage" the U.S. Economy. The "Command Economy" now represents something Mother Russia would embrace.

A favorite writer of mine, "Wyndsurf", has long referred to the Economic machinations of this Nation as the "Hedge Fund Economy". No truer words have served to describe the current state of financial affairs. Windy has been beating this drum for several years now and his accounts look to be about as accurate as any I've read to date.

Preserving growth and balance are Alan Greenspan's Job One. Simple Supply an Demand curves has become so utterly dislocated, their restoration will be difficult, if not impossible in the short to intermediate term.

Growth has come at the expense of Debt to GDP in excess of 300%.

Balance is where you find it. I find very little counterbalancing Chairman Greenspan's Secular and Systemic Bubbles.

The key metrics employed are indicating a collapse in consumer spending. It is not difficult to see the very nature of this "Credit Cycle" has run it's course. 0/0/0 financing on Autos, ARM's profligate the mortgage arena and Credit offerings are running rampant on revolving debt products from prime to sub-prime.

All the while the "Jobless Recovery" continues to lose far more jobs than anticipated by our statistical gurus at the BLS. Suggesting incomes are rising at this point is one of the more absurd distortions to reality one can concoct. In real terms, jobs are being created in an economic strata far below their former glory during the boom years of the New Economy.

Evidenced by the "Real Economy's" loss on 3 million jobs in manufacturing and adjacent to unparalleled outsourcing of tertiary jobs to the Far East, one must wonder just how fudged the "Hedonics" have become.

The Fed must now employ and tempt an ever increasing credit binge as consumers begin to restrain themselves against an increasingly difficult load of debt service. All the while, the Fed's own bull-horning has backfired badly. Their hawkish stance has only served to create additional confusion and delay. Very little was accomplished with the 25bip hike and rhetorical mismanagement, once again, has served to undermine confidence.

John Mackenzie

John Mackenzie manages private capital - Email: m2jrmfl@bellsouth.net

Copyright © 2004-2005 John Mackenzie

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