In This Issue
Fingers of Instability, Part I
Sub prime lenders, and real estate "ARM" ageddon
Global plunge protection teams, aka "Financial firefighters"
The clock is "Tic"king on the Dollar as the worlds reserve currency
Lobbing spitballs into the sun! Or Basking in It! Politicians, prepared and unprepared for the challenges of globalization, are yours a genius? Or an idiot?
Fingers of Instability, Part I
- Sub prime lenders, "ARM" ageddon unfolding
- Global plunge protection teams, aka "Financial firefighters"
- The clock is "Tic"king on the Dollar as the worlds reserve currency
- Lobbing spitballs into the sun! Or Basking in It! Politicians, prepared and unprepared for the challenges of globalization, are yours a genius? Or an idiot?
This is an enormously long Tedbits, and for that I apologize and thank you for your time.
But when you are done reading you will feel it was time well spent. I promise....
Fingers of Instability series foreword; this issue of Tedbits and a reoccurring theme in future Tedbits will deal with Fingers of Instability. This is a metaphor for the present structure of the Global financial systems as practiced by the Central banks and Government Financial officials around the world. I read a missive from a prominent newsletter writer sometime in the last 6 to 12 months and he described a computer study of Sand piles. In this study they piled on grains of sand on a pile one by one. It went on to describe how the mound could grow one grain at a time, and was stable and that as it grew areas of instability emerged and that once it got to critical mass as little as 1 grain of sand could spark a complete collapse of either the whole pile, a major portion of the sandpile, or just a small part of the pile.
This is an apt description of the global financial system in a fiat currency and credit world, where money and credit are being created at a breakneck pace (Average Global growth rate of 14% year over year according to the economist magazine) by every Central Bank in the world. As the worlds government authorities pile dollar after dollar, yen after yen, British pound after British pound, euro after euro, Yuan after Yuan, Ruble after Ruble, Rupee after Rupee, etc. on the global economic pile, selected "Bubble" investment areas of the world economies will grow and then collapse, as we are now seeing in US housing and sub prime lending markets. They must keep the game going in other asset classes and create "emerging bubbles" so these "STRONG HANDS" can step into the dog pile and take out the losers in that particular bubble collapse and keep the overall game going. I have also seen this referred to serial "BUBBLE BLOWING". Many analysts wondered where the next bubble would emerge. Now we know, and this situation has now moved beyond the shores of America, and is practiced everywhere.
The next part of the Sandpile it is the money being created by the Big Institutional Banks and Brokerages (that's what they used to be called, now they are poorly disguised hedge funds, look at their earnings) when they "INVENT" Derivative products that literally allow them to print money. Slicing and dicing things like commercial and residential mortgages, into instruments where the "devils" in the details. Most of these newly invented financial products are part and parcel of the holdings of every institutional and pension fund investor in the world. There are trillions of dollars in these investment vehicles/products. They know not what they hold, and have only the financial institutions mathematical models to inspire confidence in the underlying investment instrument and its creditworthiness. These "credit ratings" used to underpin the issuance of these products come from the likes of Standard and Poors, and Fitch and are bought and paid for by the Issuing Institution, and facilitated by enormous amounts of quantitative and probability analysis which is newly invented in the last 15 years. Many of the assumptions in these models are based on data from history, a history where bankers were not as irresponsible as the ones who currently lead the world's economies. We will see these mathematical models be tested in the securitized mortgage markets in the not to distant future and I bet you they are not as "ROBUST" and predictive as they have been presented to be. Its going to be interesting who they "pin the tail on the donkey" this time, as the players involved are also powerful investment interests pitted against one another!!! Of course it will be the little guy!!!
It is clear that words have little meaning to central bankers and government financial officials bent on growth at any cost, sacrificing the futures of later generations, for the votes of today's citizens. With runaway money and credit growth the appearance of a healthy, growing economies is in the headlines (the world is booming it doesn't matter where you look, The "BRIC'S" i.e. Brazil, Russia, India and China, the new EU and central Europe, America, the emerging world, even Africa is booming), while the seeds of collapse are being sowed on a wider and wider scale. The reckless expansion of credit and money is winked and nodded at by Populous Politicians around the globe as the honey pot of a "growing economy" is worth any price to them, as it provides the fuels for the next "RE"election cycle and government inspired idiocy (see corn based ethanol in the next Tedbits, the tea leaves are all in place and it is a nightmare, not the great solution it is advertised to be). Bio fuels are going to convulse the world of grains in all areas including human consumption, energy use and consumption, and meats etc. It will touch your pocket book in ways you won't appreciate. Don't miss it!
You have to learn to invest in the direction the wind is blowing and learn to take advantage of these fingers of instability as they emerge. You need to learn to make money in up, down and sideways conditions. As this experiment has a long way to go before the endgame emerges. Make money now, and do your homework, when the final explosions are on the near horizon, know where the exits are, be in liquid investments that will allow you to exit, and then initiate capital preservation and income strategies. In the wrong instruments and you will be killed, in the right ones and the opportunities are limitless.
What can you Bank on? You can bank on the global money printing and credit creation continuing. Asset based banking and economic management strategies such as those that evolved under Greenspan, are now the economic models that are in place around the globe. Widely employed by the developed and emerging world alike. Around the world politicians and central bankers liked what Greenspan did so much that they now are challenging even him for supremacy in recklessness. He has left the scene and the public is quite good at blaming those left holding the bag!!! And he has passed the hot potatoes to others. But because they are putting a super charger to his previous efforts, what was an anticipated "US collapse" because of these reckless policies are now postponed into the future! As all these new participants send their economies on the path to wealth creation through asset appreciation rather than growing economies and industries.
Globalization is the canvass, and the Global economic and financial system is the "Sandpile". As money moves around the globe with ease, seeking out returns. The smart holders of fiat money seek to own the "means of production", move out of paper currencies and move into assets that can withstand the relentless debasing the sovereign currencies are undergoing at the hands of Central Bankers and Politicians. The assets the smart money hold and buy just reprice in the debased currencies. It is why these private equity deals can get done with a estimated "4.5% return on equity" this paltry return is enough for a deal to get financed (As the Equity office property dogfight shows, ridiculous prices are justified in a investment where the currency may be losing purchasing power at a 18% compounded annual rate since 2002, this currency I speak of is the US dollar).
The money and credit machines are generating the constant theft of purchasing power of currencies in deposits, wherever they may be held, (savings accounts, money market accounts, Bonds, interest rate instruments of all stripes, etc.). The dollar is a good example of fiat currency over time; as one dollar now buys what 4 cents bought when the Federal Reserve was unconstitutionally mid-wifed in 1913, only now the process has accelerated. (Sound money was a central theme of the founding fathers of the United States; they prohibited the creation of a "fiat" faith based money system, they had seen numerous failed experiments with this throughout history and new these lessons well). In 1913 US politicians forgot these lessons with the creation of a foreign owned central bank (US Federal Reserve) and changed this forever.
But we can see this loss of purchasing power in any fiat currency you chose to look at. Just look at Gold versus any currency, it is the true picture of central bank and political irresponsibility. See this chart from the recent musings of John Mauldin, john can be reached at John@FrontLineThoughts.com.
This is the picture of the theft of your savings, it is also a powerful chart showing the first leg up in a bull market in gold, a corrective period in terms of time and price and finally signaling the next leg up in gold has begun. This is a competitive devaluation raceway, as the major economies in the world work towards protecting their local industries by making them currencies cheaper in relation to each other. In previous episodes of this it was limited to individual sovereign players, think; the German Weimar republic, Argentina, Zimbabwe, Cambodia or Viet Nam. Now it is common practice throughout the world. Take a look at gold in relation to all the major currencies around the world. Inflation at 3 to 5 % worldwide? This puts the lie to that government statistic; here is the real inflation rate in whatever corner of the world you reside. Once again this is from John Mauldins newsletter.
This loss of purchasing power is a stealth theft of money as it sits in the bank, the people of the world have placed there faith in their leaders, of course its misplaced as we can see from this chart, their leaders steal their money from them while it sits in the bank and savings accounts of their respective countries. These gains in gold are your losses of the purchasing of whatever currency you choose to hold, this is a picture of the true blended inflation rate, not the doctored numbers governments would have you believe. The politicians use the money they printed to fund their boondoggles and vote purchasing aka "social programs", and to prop up markets, buy votes with social program bribery, fight wars, pay interest on debt that can never be repaid, etc. This printing party is set to continue for many years into the future. It can't be withdrawn, ever! Easy money forever, or it's a disaster writ globally.
Do their citizens understand who is really paying these bills? They are!!! They just know that every time they go to the grocery store, restaurant, or pay for electricity they get a little less with each purchase, and it frightens them as the can't quite understand what's transpiring. Their paychecks are growing 3-5% but the dollars they receive lose purchasing power at an 18% rate, this is known generally as a road to poverty. They fail to know and understand the first lesson any beginning Economics student learns in the first day of class; "TANSTAAFL" there ain't no such thing as a free lunch, somebody always pays. This is one of the byproducts of the dumbing down of the electorates; it allows populous politicians to fool their most ignorant citizens. Of course these ignorant people comprise the majority of voters in their countries.
Globalization is the playing field as the fiat money zooms across the globe to secure its place in the future. Wars are now fought in the currency, financial and investment markets, and in the fields of "production" as money seeks its place in the future, and seeks to get grounded outside the reach of the money printers. This is the only way some of these private equity deals can make any sense. Because of this globalization of fiat money and credit creation, I believe wars will be fought less and less on the battlefields and more and more in the markets. The big money in the world will work hard to prevent wars between China and the US, or China and the EU, Russia and the EU or USA, as a trade war is just as damaging as a nuclear war. It is MUTUALLY ASSURED ECONOMIC DESTRUCTION just as sure as an atomic war is. As the life blood of a asset dependent economy is newly printed cash flowing into, underpinning and inflating assets of all stripes; stocks, bonds, real estate. If these funds do not arrive the asset bubble deflates and the loans that they are tied to go under water, taking down the lenders, aka the banking and financial system.
Remember Japan, it was just 16 short years ago when we witnessed an asset based economy come off the rails; it is now just barely emerging from its deflationary debacle (Bernanke's intimate knowledge of Japan and the great depression, both times where credit availability for even qualified borrowers evaporated, mean the sub prime mortgage debacle will not be allowed spread to other parts of the lending system). US and EU politicians are totally ignoring this recent lesson of history (as they attack the Yen and by extension the yen carry trade). Think of what would happen if this Japanese type of deflation and a liquidity crunch were to unfold on a Global scale, that's what teeing up if the central banks don't keep the international money and credit creation trains humming. If feeble-minded protectionist politicians in the United States and the European Union precipitate the choking off of these money flows we all will enter a deflationary depression of unprecedented scale. A Kondratieff winter! Hopefully someone will explain this to them before it is too late. We are now in a world of inflate or die. I promise you they will inflate.
The US government does not understand that physical force is on its way out the door. As it builds its military might and tries to beat their adversaries into submission with firepower and threats, while the true ammunition needed in this fight is financial in nature. The ammunition necessary for this fight is savings in the bank and sound monetary and economic practices. And in this respect the cupboard is bare. Trillions have been misspent by the government of the United States on a military buildup and regional wars (Afghanistan, Iraq, and soon IRAN), or on Socialist engineering programs in the EU. While the developed worlds adversaries pile up the savings in the bank to be deployed in strategic acquisitions, creation of industrial plants and equipment, Natural resources, and reciprocal marketing agreements. Agreements that do not dictate the politics and domestic policies of the sovereign counterparties!!!
Anyone who lives in the United States or the European Union and watches politics knows Fascism is afoot. The Patriot act was passed to "combat Terrorism and other purposes." Well those "other purposes" are no less than the enslavement of the public by the politicians. Quietly in small amendments to other legislation the Congress and president have instituted the mechanisms and beginnings of capital and currency controls, into every aspect of the American financial system, ie Banks, Brokerages, etc. Every person who works in these industries are now the cops of the coming US and EU police states. The money laundering regulations have removed any shred of financial independence and privacy from regular everyday life from honest taxpaying citizens worldwide. We are all criminals now, until proven innocent. Would someone please tell me how many terrorists have been stopped through these regulatory actions? In a twelve trillion dollar US economy and a 50 trillion dollar world economy how many millions have been removed from terrorists hands, at a cost of how many 10's billions in compliance costs. These regulations are nothing more than capital and currency controls being put in place for when the "You know what" hits the fan.
In Europe it is the Corporative Social model (a unholy alliance of entrenched politicians, Union bosses, and Corporate executives aligned against their own citizens interests and the forces of having to compete for domestic business from outside competitors), which stands for high taxes (harmful tax competition), bloated economic intervention by the state and their social programs, government decisions of who the economic winners and losers will be, destroying entrepreneurs, risk taking and the creative destruction they foster, instead they are fostering a mantra of dependence on government in every action. Both efforts in the US and EU have been successful as they are the children of the politics of FEAR.
Do you really believe these policies prepare us for the challenges of Globalization? It just puts the politicians in position to grab more power and enslave their populations when their political solutions (as opposed to practical ones) to problems fail and take our economies with them!! Freedom everywhere is being sacrificed to "protect the citizens", but the real question is who are the terrorists? Osama Bin Laden or the politicians?
Enough already? Ready for some fingers of instability? Also known as bubble opportunities? And potential pitfalls!!!
Sub prime lenders, and real estate "ARM" ageddon
I started writing about this unfolding debacle when the bubble that is the US housing market was making its highs in late 2005 (see Tedbits archives). I have written previously that predatory lending practices in the mortgage industry were no different than a 28% interest rate in buying a used car from a vulture used car operation. These dealers suck in the buyer at an inflated price for a purchase the buyer can't really afford. These people/buyers desperately want what they see others have, a home or car. The dealers/financing operations then wait for the buyer to either pay, or miss a payment. Then they quickly repossess the car and resell it to the next pigeon.
Well in 2003 through 2006 the mortgage industry flush with liquidity from Alan Greenspan, decidedly lowered lending standards, if you could breath, you could borrow. No income verification. 100% financing? Interest only? Piggyback loans? Buy an inflated appraisal? Etc. You name it and they offered it. No problem. Predatory lending practices writ large. Any hopeful fool could borrow money in hopes of hitting the "jackpot" in the roaring real estate market. Combine this with every newspaper and financial news service in the US extolling the virtues of the "can't miss" investment in the housing boom, and you have a recipe for asset inflation, which is what Greenspan wanted, and reckless borrowing for inflated asset values by the unprepared man on the street. A fool's paradise, just as all markets are at their tops. A toxic cocktail for borrowers and lenders alike. Can anyone say mal-investments? Mis allocated capital? Artificial demand? Do I hear the distant drumbeat of the NASDAQ Tech bubble circa 2000?
Well, over 20 sub prime lenders have blown up since November 2006. The holders of these gimmick and adjustable rate mortgages are now faced with increasing payments and the door is shut to refinancing, as they are now no longer qualified due to increased lending standards and plummeting housing asset values. The Wall Street Journal reports that that these and other gimmick loans "accounted for 47% of total loans issued last year. To put this quote in perspective over 1 trillion dollars of new mortgages were issued last year (38% of the total gimmick loans were for 100% financing), preceded by record mortgage issuance in 2004 and 2005. At the start of the decade these gimmick loans were less than 2% of the total mortgage loans". What percentage of the loans in 2004 and 2005 were these bombs? A goodly portion I promise you. The Sub prime mortgages total 13% or $1.28 trillion (including fixed rate sub prime mortgages) of the $10.03 trillion dollar mortgage market. As Federal Reserve Bernanke chairman recently quipped "Several credible reports say we are facing a tidal wave of defaults and foreclosures, which could strip these families of their major, if not their only source of wealth and long term economic security." This is a statement from a man who is not prone to hyperbole or hysterical prognostications, he wouldn't have repeated it if it had no merit. He doesn't repeat rumors he is preparing us for the reality that he knows is on the way.
Now this morning we hear that Freddie Mac is now throwing gas on this fire, as they are now announcing that they will not purchase and guarantee ARMS or subprime mortgages where the buyer does not qualify for the loan at the normalized interest rate. In effect if the initial rate is 6 percent but it can adjust to 10, then the buyer must be qualified to make the payments at 10% or they will not purchase the paper. Fannie Mae is sure to follow. It is now being reported that all subprime loans are virtually unable to be served, and that one notch above this credit rating are also at a standstill. Loan requirements are rising as we speak. GMAC mortgage book is about 58 billion dollars and over 70% is in subprime mortgages can you say catastrophic losses for this behemoth financing company. Liquidity crisis anyone?
And who is holding the bag? Most of these loans were securitized and sold to investors reaching for yield, and who sold them to the investors? Merrill Lynch and Co., J. P Morgan Chase and Co., Citigroup, HSBC bank, etc. These securities were widely popular as they paid interest of almost 4% above the regular mortgage backed securities. They were also sold into pools of derivatives products, such as swaps, Collateralized debt obligations and all sorts of new era, "highly" rated financially engineered investment products. These product offerings were the source of some of those record profits we have seen the last several years by the banks and big financial firms There will be billions and billions of lawsuits by the buyers of these products, as they unwind to the detriment of all involved. These investment products were also the backing for the condo construction boom coast to coast, as easy money went into Real estate Mal investments across the nation. Look at sub prime lending indexes they are in freefall, the spread on this debt has widened by over than 900 basis points (9 percent) since October.
How do you play it? Get liquid and preserve your creditworthiness. Then wait, and wait some more, wait for the inevitable fire sales where the Return on investment is easily identified and sky high, they will spew out these properties out before this is over, discounts of up to 50% or more can be anticipated. Hundreds of billions of real estate already financed, built, bought and sold will come back available before it is over. Homes and Condo projects available for hefty discounts, discounts that will easily allow for financing that are easily paid for by rents. This is the definition of a good real estate investment. All these bankrupt home and condo owners will need a new place to live. (Editors note, how much do you want to bet that some of the trillions dollars held in deposit accounts by foreign investors comes into the country and buys these distressed properties? Chinese, Middle east, Japanese, and Russian landlords anyone?). It's a better bet than holding a dollar bill!! Will our politicians allow this money to be spent or will they demagogue the subject ala "Dubai ports world" or "Unocal"? That's another story for another day.
The Federal Reserve will forcefully see to it that borrowing is not interrupted for creditworthy buyers (to prevent the debacle from spreading to other parts of the financial system and creating a tsunami type ultimate liquidity crisis that spreads to the rest of the asset backed financial system, rest assured that Bernanke will do ANYTHING to prevent this); the donkey will be the little guy, and the small mortgage lenders. They will be sacrificed, SO SORRY!!! For the front line lenders that allowed this to transpire, the congressional meat grinder lies directly ahead, but many will already be broke. They will make an example of some of these sub prime lenders executives, "poster boy" type show trials so to speak, ala" Ken Lay", "Jeff Skilling" of Enron and "Bernie Ebbers" of World com infamy. The really big money at Citigroup, Merrill lynch and JP Morgan Chase which (encouraged the reckless behavior by the small lenders in a reckless drive for products) will lean on their elected representatives to steer the debacle into someone else's backyards. Just as Fannie Mae and Freddie Mac have done!!!
Global plunge protection teams, aka "Financial firefighters"
A powerful wave of Asset diversification announcements has commenced. New Government Sponsored investment entities like Singapores Government Investment Corporation, and Tomasek Holdings. China, South Korea, Dubai, Russia, Japan, Venezuela, Brazil are just a few of the countries that are moving aggressively to cut their holding of dollars, which they are choking on and have no hope of redeeming for their present value. So they are going to try and spend them. There are trillions of dollars sitting in these central banks and they are at risk to the depredations and depreciation foisted upon them by the Mandarins of Washington DC. In an asset dependent world these dollar holdings need to find a new home, official inflation statistics would have you believe inflation is running at 3 to 5 %, if you look at international currencies priced against gold (see chart above), the purchasing power of "paper" faith based currencies is declining at an 18% compounded annual rate since 2002.
As bubbles emerge in their own economies they must be prepared to do the same type of financial firefighting the Federal Reserve has become so adept at. It doesn't matter which market you speak of, the Shanghai composite stock index market (up 200% in a year and a half), the Sensex in India, the Bovespa in Brazil, Japanese Nikkei 225, Dax 30 in Germany, The Russian Stock market, to name a few are all are exploding higher from the injection of funds caused by central banks when they buy dollars from their domestic exporters. Other asset markets are exploding as well in these countries; real estate, mining, manufacturing, etc., all these sectors and more are fetching astronomical valuations and sums.
As we go to press the Shanghai stock market is having the worst one-day drop in 10 years, a drop of almost 9%, and this is reverberating around the world. Shanghai is up almost 200% in a year and a half. This market is very small in capitalization versus the tsunami of cash trying to enter. Some ill-advised comments by a finance minister (these emerging market administrative people don't quite yet realize how to measure their words as they are now heard around the world), combined with a tightening of liquidity during the Chinese New year are providing a catalyst for this emerging finger of instability. Global plunge protection teams are busily at work in all the financial capitals of the world to prevent this from becoming a systemic event.
The Foreign Central Banks buy these dollars to prevent runaway appreciation of their domestic currencies versus the dollar. The worldwide supply of dollars dwarfs their domestic currencies in size, as they sell and export to the US there is constant bid to their domestic script and a constant offer of dollars. If they don't step in and "sterilize" these inflows of dollars into their currencies, their currencies would be skyrocketing against the dollar destroying their domestic manufacturing and export industries.
For example China had a trade surplus of 223 billion dollars with the US in 2006, since the Yuan was trading at about 8 to the dollar that means they printed 1.784 trillion Yuan and released it into the Chinese economy. Add to this the more than 100 billion dollars recently raised in IPO's by the biggest banks in China, this translates to over 1 trillion dollars in new lending in a fractional banking system (for every 1 dollar in reserves they typically can lend out 10). Savings and capital are the seed corn of wealth creation, as any Austrian economist will tell you. When the US exports 875 billion dollars a year that number as economic stimulus is doubled for the receiving country (first the receiving central bank prints Yuan, yen, rupees, rubles, reals or whatever to sterilize the upward pressure on their currency as I illustrated above, the recipients of the domestic script put the money in the bank, and the banks that receive the deposits now have funds to lend at a ratio of 10 to 1, so 875 billion dollars becomes 8.75 trillion dollars of stimulus to their economies).
The central banks are then left holding the dollars in their reserve holdings, reserve holdings which they recycle and invest into US treasuries, agency bonds, investment grade corporate's etc. (bond market conundrum solved, LOL). They do this to protect the purchasing power of their current holdings from inflation and hopefully create a little return. But now that Central Bank recycling back to the US is coming to an end (see next Tedbit), and the money is now going into securing natural resources, energy supplies, manufacturing infrastructure, public infrastructure, communication infrastructure, etc. and the stock and bond offerings of these industries. These are the gargantuan seeds of a great new middle class in their respective countries.
Talk about fiscal stimulus, is it any wonder that these countries have runaway asset markets and their economies are booming. Some are in hyperbolic rises, rises which will have the inevitable setbacks, before the "FIAT" money just steps in again to buy, buy, buy. Add this buying pressure to the upward bias of their economies and currencies created as they get their financial systems and external obligations in order (see last edition of tedbits, "Sea Change, the wealth of the world is Rotating"). Now they are going to use this Central Bank money to support and add more fuel to their own newly created "asset backed" wealth economies they themselves have recently imported from the US. And conversely US future wealth creation is being destroyed and exported to those countries, every dollar they receive from the US is one less dollar available for fractional lending on savings and capital formation in the United States.
These finance officials are doing this to ignite the engines of their domestic economies and create growing demand at home, and to protect their Central Bank reserves from the inevitable demise of the dollar as the world's reserve currency. The demise of the dollar will happen slowly over time unless somebody yells fire in the theatre, as these central bankers wish to engineer their withdrawal with as little loss to the purchasing power of their dollar holdings as they can. The engineering and implementation of the withdrawal has commenced, and its up, up and away for anything that's priced in fiat paper....and because of this change in stance....
The clock is "Tic"king on the Dollar as the worlds reserve currency
Gruesome news for holders of Dollars and the citizens of the United States. The latest shocking US Treasury international flow of funds data into the Country for the month of December 2006. Net foreign inflows were a rather paltry $15.6 billion dollars. This is the weakest reading in over five years, but five years ago the trade deficit was only in the 100 to 200 billion-dollar range and this low number easily supported the financing needs of the economy. Now it is over $875 billion dollars a year (through the first 3 quarters of 2006) and requires $3.5 billion dollars per business day to finance the US economy. So the worm is turning, our lenders are turning elsewhere to spend and invest their dollars, if we wish to regain this capital inflow we must begin to pay more to our creditors. Can you say lower bond prices and higher interest rates?
They are waking up to the fact that a 4.5%-5% yield is relatively paltry in the big theme of things especially when the dollar is being printed like toilet paper. You can say the same for US investors as well as inflows to foreign stock funds are dwarfing inflows into domestic stock investments, this is a sure sign that even domestic investors are waking up to the shenanigans in Washington DC and seek to have their stock and bond investments in booming foreign stocks and denominated in strong foreign currencies. Cumulatively the poor countries of the developing world hold about $2.5 trillion dollars of excess foreign exchange reserves (see the last edition Tedbits entitled Sea Change), excess in that that is the amount over dollar holdings in excess of those that would be required to pay off $550 billion dollars of external debt obligations. Dennis Gartman of the Gartman letter, of www.thegartmanletter.com is reporting that "Central bank publications in London is reporting that nine out of ten central banks in the world see reason and scope for further diversification of their reserve assets into higher yielding "non traditional" assets including stocks and commodities". They are choking on dollars!!! And they want out. As are the citizens of the US, as the 2.36 trillion dollars in Money market accounts will readily attest, and as the heavy flow of funds into overseas markets signals.
I remember last year when Ex treasury secretary Larry Summers was speaking in India to an International Bankers convention and he challenged them to seek higher returns on their reserve accumulations. I was shocked at the time that an ex senior US treasury official would utter such words, "diversify out of dollar based fixed income instruments", I am sure he received many angry phone calls from GW and company. You remember Larry don't you? He is the guy who was fired for leaking the news that a proposed war with Iraq would cost 200 billion dollars when the administration was touting 40 billion price tag, now the price is approaching 1 trillion dollars (You really have to wonder how those dollar printing presses can keep up? LOL). It is this constant debasement that is most frightening for us all. Since that time talk has accelerated on this subject as finance officials and central bankers from Asia and around the world have telegraphed their intentions to diversify their reserves (see previous Tedbit) through their public discourse. And now are demonstrably doing so!!!
The United States has had a negative savings rate for over 2 years now, a situation not seen since the great depression. If the inflow of capital to finance US deficits moderates even a little, the monetary inflation from the Treasury can only be expected to accelerate, as the Federal Reserve becomes the lender of last resort to prevent a surge in interest rates and a collapse of the US bond markets. We may also be seeing in this December TIC s data the first shot across the bow by our biggest lender China. In early December Treasury Secretary Hank Paulson led a huge contingent of Cabinet officials Such as Commerce Secretary Carlos Gutierrez, Labor Secretary Elaine Chow, and many other Highly placed administration officials. Strangely enough they were accompanied By Federal Reserve Chairman Bernanke. You don't see this very often as central banks everywhere wish to always be though of as "independent of politicians." He delivered a speech about currency policy as "trade subsidy" for exporters. The Chinese were insulted, and angry. They just like every other country in the world are trying to generate growth and jobs for their citizens. Their people have families as we do, is it a crime to want to grow and prosper, to have what we have? No. It is the natural nature of humans to want to grow and progress. China has the right to conduct policy in the best interests of their citizens, and in china that is a tricky task as they are managing 1.3 billion people as they move out of the fields and into the global economy. A very very challenging task.
But the bigger question that US policy makers failed to consider is who is subsidizing who? Approximately 70% ($770billion) of Chinese central bank reserves are held in US treasuries and dollar based fixed income instruments. Think about it 70% of the US trade deficit with China is lent directly back to the US, as is the deficit with the Middle East, Japan, etc. This is called vendor financing in a Globalized world. This Tics data is a signal that era may be coming to and end. Hilary Clinton today on CNBC talked about the deficit and foreign holdings of US sovereign bonds and was hinting at trying to control this or restrict foreign holders of dollars from buying these bonds. These stupid words are heard around the world. This is a bomb like statement for the dollar, after politicians from both sides of the isle prohibited foreign holders of dollars from spending their dollar holdings in the scandalous Dubai ports world and Unocal demagoguery, now she is going to stop them from spending them on US treasuries, thereby saying you can't spend your dollars in the United States! Well the dollar is in for a nuclear winter if this is not quickly rebutted. Is this woman insane? Terribly ignorant, naïve and uninformed on the global financial system? Yes to all of the above! If the only exit from their dollar holdings is buying foreign assets from interests outside the country. To other people who then must hope the US will allow them to spend the dollar proceeds. The second round of selling in the US stock markets emerged immediately after these foolish statements were uttered. Was this the first wave of liquidation of US assets by the smart money, before the tsunami of liquidation by foreigners commences? Why would anyone outside the United States accept dollars in payment if they can't spend them? US asset prices will collapse if foreign dollar holders even get a whiff of this. The US dollar is like all currencies now, a "faith based" faith that the US government will accept them for all claims as tender, "public and private" if they lose faith in the spend ability of the dollars they hold they become worthless. She should have thought about this ten years ago. The stupidity of these statements is almost incomprehensible.
I remember back when John Connelly was Treasury secretary and he said to the international community during a previous dollar crisis that the dollar was our currency and their problem. Well, Johns passed away and so has that thought, the dollars days as the reserve currency of the world is now passing away as well. Do to irresponsible government in Washington, DC. It is past the point of no return. Slowly but surely you will see reserves go into countries with strong balance sheets and balance of payments. The Euro zone may be printing money and credit but at least they have a population that saves money and have healthy export surpluses. As do all of Asia, the Middle East and Russia. Any well educated and rational investor understands that the United States is broke and going deeper into debt daily, the true budget deficits are hidden as the Mandarins of Washington steal the Medicare and social security surpluses, and hide "emergency spending" (the war in IRAQ, and Katrina, etc.) off the balance sheets. The dollars demise as the reserve currency has begun, will it be a long drawn out affair? Very Probably! But the politicians in the US are winding up to start a trade war with our biggest lenders? So it could get accelerated in the blink of an eye as a lesson in the "law of unintended consequences". This TIC s report is but the first salvo fired across the bow of the Demagogues In Washington DC. Will they get the message? Watch and weep!!!!
Lobbing spitballs into the sun! Or Basking in It! Politicians, prepared and unprepared for the challenges of globalization, are yours a genius? Or an idiot?
Money now is international, trillions of dollars flow all over the world in the blink of an eye to gather business and investment opportunities wherever they may be. And since the governments around the world are printing great big gobs of it, it is always looking for a place to land other than in the bank. The money is so big and powerful that nothing will get in its way. But that doesn't stop sovereign politicians from trying, and that is a finger of instability, a wild card, as the power of the purse and tax is being withdrawn from domestic politicians around the world. If the policies they implement are not realistic in a Global world, the money just gets up and leaves. The source of all these new Anti money laundering laws are a poorly disguised attempts to control and eventually tax these borderless investors. They are the seeds of currency and investment controls for the politicians and countries least prepared to coupe with globalization.
This is why US and European manufacturers, don't build plants domestically anymore. How else can you explain the enormous amounts of cash building up on corporate balance sheets (at record highs and growing), going into buy backs and M&A. It no longer pays to make capital investments in the developed economies. The laws, high taxes, burdensome, expensive micro management regulations, and mandates have smothered their ability to compete in markets beyond their domestic borders. And the markets outside their borders are rapidly dwarfing the domestic opportunities. So these businesses simply put their current and future capital investments into countries whose policies allow them to compete on the global playing field. And it doesn't matter anymore whether it is a manufacturer of things, i.e. cars, refrigerators, computers, etc. or the providers of services. As the Internet and inexpensive, instantaneous global communications has now enabled services to be an international commodity as well.
Some politicians and countries are set to be the winners, as the policies they implement are supportive of Global competitiveness. These Politicians see the big picture, they are far sighted and preparing their countries for a great future. What are these winning policies? Low flat taxes (not million words of market distorting complexity, social engineering, and political paybacks), less government regulations (or countries that are removing them on a daily basis), wages and benefits set by the marketplace (not the politicians), low barriers to the import and export of goods and services, and few barriers to foreign direct investment, both outbound and inbound. Development of educational systems that actually prepare the students to think, solve problems and compete. Easy immigration policies so the best and brightest from around the world can vote with their feet, and join the dynamism and career opportunities emerging in these present and future winners in the race for success, wealth creation and prosperity.
Two examples these wealth creation caused by these immigrations in the past and present are the United States where the wealth of the nation was built from immigrants moving to US shores till the mid twentieth century, Greeks, Englishmen, Irish, German, Polish, Chinese, South Americans, Indians, Asians, Spanish, etc., people yearning to be free and work hard to create wealth for themselves and their future generations. These people started small businesses and worked at entry-level jobs, but over lifetimes built incredible generators of Wealth and Jobs for the great middle class we have today. God knows I am the Grandson of Greek immigrants, my grandfather a restaurateur, my father a manufacturer, me in finance and my brother started an medical data firm. This country has been good to us and we have built businesses and employed people. Now the US spends much of its time and energy attacking these entrepreneurial hard working people, building border fences and restricting knowledge workers with H1 visa programs, thereby preventing the best and brightest from coming to the United States to help us build for the future. I am not advocating or supporting illegal immigration in any way. I believe an orderly and lawful means for the easy and effective immigration must be in place for those that wish to work within the law, pay taxes, and improve the future for us all.
The second example would be the people now immigrating to the UK, Spain or Ireland where they are happy to have the "Polish Plumber" (the bogey man used extensively by populist politicians in France, Germany and central Europe) join with them in building a future. Most of these immigrants don't want welfare, they want jobs, and will work cheap to get onto the first rung of the economic ladder which served early immigrants to the United States so well. The UK, Ireland and Spain have embraced these new immigrants from around the world and combined them with good government policies and guess what? The sky is not falling, unemployment is not rocketing higher, and their economies are not caving in. Their economies are thriving; employment and wealth creation are skyrocketing!!! Who are the countries that are set to thrive? Countries such as Ireland, Singapore, Viet Nam, the new parts of the EU, Spain, Hong Kong, China, India, Brazil, Singapore, UAE/Dubai, Switzerland, Panama, to name a few. These countries are basking in the sun of Globalization, growing wealthy from it.
Then there are the politicians who are living in the past glories of their respective countries, and pushing their economies further and further from the policies necessary to thrive and create wealth. The majority of their most recent constituents, are ignorant, poorly educated, have a dependence on government mentality, have no knowledge of history and what were the sources of the previous wealth generation of the wealthy societies in which they live in, believe they are entitled to prosperity by birth not hard work, fearful of competition as they are poorly educated, misinformed by the media and unprepared for it.
These populations are electing what else? Pandering populous politicians promising sugar-plums and visits from the tooth fairy. Politicians who are constantly adding to the torture of their citizenry on a daily basis, with laws and policies attacking the most productive (the wealthy, those bastards who steal from us all) parts of their societies (entrepreneurs, manufacturers, small businessmen, etc) with high taxes, disincentives to hard work, and penalties for saving and investing, thereby destroying the seeds of future wealth generation for their countries and their constituents. Creating laws where the government is always clawing a bigger share of a contracting economic pie. Contracting because their economies are only growing in terms of their doctored economic and inflation statistics, measurements that are massaged so much, that now they are almost unusable in gaining insights, formulating good economic policies and guiding future policy decisions. They have lied to their citizens and the world with these massaged economic numbers for so long now that the political and financial leaders now believe their own lies! It is all government economic statistics; they are all completely bankrupt statistical manipulations.
Spending all their efforts passing laws and attempting to create barriers against the inevitability of having to compete in the emerging Global economic system (spitting into the sun). And as anybody knows, once these laws and regulations are passed they are almost impossible to be removed. Antique laws written 40 or 50 years ago, still on the books, never reviewed, repealed or revised. They are permanent. Permanent barriers to future wealth creation and the future. These laws destroy the potential future capital formation of plants, equipment and the jobs for the next generation. They tax and discourage savings, entrepreneurial risk taking, and encourage consumerism and debt creation. Debt that is a call on future income!!! Who owns this debt? A good question to ponder.
The governments and unaccountable "bureaurats", er bureaucrats in the US, France, Germany, Italy and the EU Commission in Brussels do not understand these things at all. They are attacking capital formation and wealth creation relentlessly. Those who fail to learn from history are doomed to repeat it. And history is repeating right now in so, in so many places. These Ignorant Politicians and their respective citizenry are the dinosaurs of the past. The past before Globalization was an irresistible force. They will lob their barriers to entry at the rest of the world, blow big holes in their respective economies, but they will eventually fall as the emerging world are their Bankers and lenders. They don't yet realize they are captive to their lenders. The golden rule will triumph over all "he who has the gold rules".
Politicians in most of the developed world are absolutely unprepared for Globalization, and are using the media and the politics of fear to cover up their poor stewardship, and their lack of foresight of the economies they control. The Developed world in Europe, United States and Japan have fumbled the ball by devising political solutions to challenging problems to the future, rather then practical ones. These developed countries are now captive to that portion of their citizens who will vote for something for nothing. Democracies and republics have one fatal flaw and that is the ability to vote themselves the public purse. It was the downfall of the last great empire of Rome and will be the downfall of the Central EU and the United States in particular. These politicians live in years past when their economies were the envy of the world, now because they failed to promote policies that prepare for the future, they are living in the past and are doomed to repeat histories lessons. (See coming edition of Tedbits; "Attack of the Locusts" LOL. Although it's not funny) Their citizens who elected them will be their victims.
In Conclusion, most of you know me as a perma bear, now that has changed. The world is changing and the playing fields are shifting. Big ups and big downs as the fingers of instability rotate. The opportunities are as enormous as the pitfalls. There is too much money needing to find a home, and lots more rolling hot of the presses right behind it. LOL.
Blowups will happen along the way (Think NASDAQ 2000, housing bubble etc.) as the money and credit train rotate from asset class to asset class creating bubbles to be bought and sold and are opportunities both long and short. Bubbles where the early entrants to an asset class make fortunes, and the late ones are handed their heads. The same old story of markets going from strong hands (smart money), to weak hands (dumb money), then back to strong hands (smart money).
Long-term bull markets in Commodities, raw materials, energy and precious metals are just turning up from a solid intermediate to long-term correction in terms of time and price. Next Leg up directly ahead. The money around the world is creating huge capital investment and infrastructure opportunities throughout the emerging world, as it enters the competitive race to the top economic heap of this thing called Globalization. Think of 3 billion people emerging on the buy side of the commodities and raw materials necessary to build out their homes, factories and infrastructure. Most commodities off to a good start this year; the technical patterns we see in gold are mirrored across the commodity board. These people are also gold and silver bugs, having been through many previous inflationary banana republic fiat currency situations in their recent histories. Dennis Gartman (www.thegartmanletter.com ) reports that year over year gold demand in Dubai is up 40% and that most of this new demand is from India. They emerging market populations are big savers "the seed corn of wealth generation" and have lots of the money in the bank and are making the strategic acquisitions to secure the fuel and raw materials necessary for the future growth of their economies.
We are in World War III, but it is being fought in the international financial and currency markets, import/export markets and factory floors around the world as 3 billion people join the fray. While many in the emerging world are concentrated on economic growth and lifting 3 billion people out of poverty with the policies that project the soft power of good business to the rest of the world. The developed world tries to stop their advance by legislating barriers to the emerging worlds ascension to the global marketplace. And to prevent their own descent into poverty. These politicians will fail, and ruin their countries present and future prospects through their shortsighted policy prescriptions.
Think of China where 1.3 billion people have seen their income quadruple in 15 short years, tanking Chinese GDP from 10th to 4th in size. Lifting 100 s of millions of people out of poverty and on the road to creating a middle class. The Chinese economy is still growing at a 10% compounded annual rate. This is being repeated in emerging economies around the world. Their citizens are becoming more educated at a rapid rate, and they are hard working and industrious. In China the regular workweek is 6 days a week and 10 hours a day. Lazy? Nefarious? Cheaters? No way! They have families just like we do, they just want to get we have attained through good thinking, hard work and capitalism. Things the developed nations are forgetting on a daily basis. They like the gains in income and quality of life, and will work hard or harder to keep the momentum going. In China "to get rich is glorious". I promise you this same thought is widely held throughout the emerging world. They are ready to compete with the developed world in every respect. And it is not a crime to want to compete with us. Is it?
The developed world in general focuses on sustaining the bread and circuses of government "provided and regulated everything", high taxes, attacks on capital (don't miss the coming Tedbits entitled "Attack of the Locusts"), attacks on manufacturing, removing privacy in anything financial (for tax and control purposes of course, not fighting terrorism or crime) and social engineering thru taxes. Dumbing down and installing socialism and dependence on government mentalities in their citizens through the educational systems, etc. They are busily tearing up the roots of their previous successes.
The US trying to beat others brains out, fighting and threatening wars globally, wasting a trillion dollars on wars and building the military rather than spending and investing the money preparing the economy and its citizens for the emerging economic battlefields of globalization.
The EU in Brussels, and in the Capitals of France, Germany, Italy, and central Europe, unelected, unaccountable bureaucrats and populous politicians are busily installing endless distortions and regulations (think Global warming, a power hungry politicians dream "do I see Al Gore here?", fear mongering writ wide, a wonderful excuse for reducing freedom, economic activity and higher taxes everywhere, think 35 hour work weeks with no loss of pay, think about carbon taxes on automobiles, gas, airline travel, ridiculous communications expenses in the EU, ever try to use a cel phone or roam there, the charges are unbelievable and very very expensive, these are but a few of the barriers to productivity and competitiveness writ wide on the continent. etc.) to manipulate their citizens social behavior through government inspired tax and regulatory policies, a prescription for a great life right? NO! Trying to shield their economies from globalization? Trying to stop through pieces of paper, regulations and legislation the competition they must meet to create wealthy, healthy, and prospering economies in the future.
Globalization is where business models and government policies go to thrive or die. The right models and policies foster huge wealth creation and prosperity, the wrong ones end in impoverishment and reduced living standards.
The wild cards are the politicians leading their respective countries, some see the future and tackle the challenges and embrace it as an opportunity. Creating and implementing the policies that build incredibly wealthy economies, and prosperous futures for themselves and their constituents.
Others are afraid of it and "refuse to" or "are too stupid to" or "to power hungry to" do the right things for the futures of their constituents. Or they could start trade wars to escape and postpone the inevitable policy changes that must be done. Creating the seeds of the coming crisis that is sure to follow these poor policy decisions. Increasing poverty lies directly ahead for these groups. And when these politicians try to impose their will and bad policies on their trading partners, they must be resisted at all costs.
These of "fingers of instability" on the road to globalization will occur over and over again in markets that are out of control because they got ahead of themselves as the gushers of money send them to unbelievable valuations and then get cracked like housing, Condos and sub prime mortgages now, the stock market in 2001-2003, etc. but these are only opportunities. Rotating Bubbles with fingers of instability as the different asset classes inflate and deflate on a worldwide scale.... They're cracking a stock market in Shanghai this morning, and by extension the rest of the world. And so it goes. Until we reach the one-grain of sand that collapses the whole sand pile, which is our global monetary and financial system. Don't miss the next edition of Tedbits where we cover the dominoes of "unintended consequences" that are unfolding in the corn based ethanol political boondoggle. A real government inspired horror show that will echo into many markets and pocketbooks across the world. We also cover a looming "finger of instability" known as stock indexes. The tealeaves are there for all to see. It is a huge opportunity, both long and short in many many markets. What's the object of these ramblings? Why, what else to "MAKE MONEY?"
If you are looking for ideas and guidance in diversifying your portfolio of investments and capturing these opportunities in an orderly manner as these things unfold please give me a call or contact me through the website www.TraderView.com. I dedicate myself to creating and maintaining alternative investment portfolios for clients; portfolios that have the potential to capture these opportunities (in up, down and sideway markets), and avoid the pitfalls of the shifting sands of the global economy as it unfolds. Carefully assembled custom tailored packages with well-targeted risk reward parameters; portfolio plans which are formulated with the things I write about firmly in mind.
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