Baltic Dry Index. 1826 +25
LIR Gold Target by 2019: $3,000.
"For more than two thousand years gold's natural qualities made it man's universal medium of exchange. In contrast to political money, gold is honest money that survived the ages and will live on long after the political fiats of today have gone the way of all paper."
Hans F. Sennholz
We open today with the consensus view that the EU “stress test” for banks was a whitewash. About as real as the scripted team orders end to yesterday’s German Grand Prix. Unlike yesterday’s Formula 1 race, which doesn’t really matter to the world which Ferrari driver the team scripts to win, fixing the stress tests of EU banks really does matter when reality doesn’t go according to the fixers script. Would you buy a used car from EU banksters? Below, the Telegraph and the WSJ cover the EU joke. But who will be laughing when Club Med falls off a cliff, and the tax and work shy Greeks demand even more hard working German’s cash? Euros anyone?
"Gold would have value if for no other reason than that it enables a citizen to fashion his financial escape from the state."
William F. Rickenbacker
Bank stress tests 'too little, too late' says City
Markets delivered a clear thumbs down to the European bank stress test results last night as a case of "too little, too late".
By Harry Wilson, Banking Correspondent Published: 9:00PM BST 23 Jul 2010
News that just seven out of the 91 banks stress-tested by European regulators had failed led analysts to slam the result, saying it was unlikely to provide the market with the comfort it had been looking for.
"We would view this as not a sufficiently conservative set of tests," said Robert Law, co-head of banks research at Nomura. "We do not think this will provide a positive catalyst for the market."
Stephen Pope, chief global equity strategist at Cantor Fitzgerald said: "I see nothing stressful about this test. It's like sending the banks away for a weekend of R&R."
Of the seven banks to fail the test – which required a financial institution to maintain a Tier 1 capital ratio of more than 6pc – five were Spanish, one German, and one Greek.
In total the banks will need to raise €3.5bn (£2.7bn) to reach the minimum Tier 1 capital ratio required.
This figure is far below even the most conservative estimates of most banking analysts, who had expected European banks to face pressure to raise tens of billion of euros to bolster their financial positions.
US law firm Allen & Overy described the test as a "failure" and said banks that had only just passed would now be under pressure from the market to improve their capital ratios.
"There is little evidence that the tests have been applied consistently and there is a lack of credibility, making this a wasted opportunity," said Richard Cranfield, chairman of Allen & Overy's global corporate group. "One assumes those banks that have failed will be rescued or recapitalised."
The results provoked a short-lived rally in the euro against the dollar. However, the single currency fell back as criticism of the tests grew with the publication of further details on the methodology.
JULY 26, 2010
Europe's 'Stress Tests' Relied on Mild Assumptions
LONDON—Europe's "stress tests" were intended to gauge the ability of large banks to weather an economic storm. But the exams relied on some surprisingly docile economic assumptions.
In some of the 20 countries that conducted the tests, regulators figured that property values would keep rising or hold steady in a worst-case economic scenario.
In other cases, unemployment rates in a double-dip recession crept up by as little as 0.1 percentage point from the tests' so-called benchmark scenario, which is based on current economic conditions.
Real-estate values and unemployment rates are generally good proxies for the ability of individuals and businesses to repay their mortgages and other loans. Keeping those variables stable therefore shields banks from losses that would otherwise erode their capital cushions.
The softness of some of the tests' economic assumptions is likely to fuel further doubts about regulators' surprisingly upbeat conclusion that only seven of the 91 tested banks would be short of capital in an economic and financial crisis.
The worst-case scenario envisioned in the tests was a mild recession, with the overall euro-zone economy shrinking 0.2% this year and 0.6% next year, compared to actual forecasts of a mild recovery.
But even in the theoretical recession, the jobless ranks wouldn't swell much. For example, the 16 euro-zone countries that participated in the stress tests have an average 10.7% unemployment rate this year under the tests' benchmark scenario. In an adverse environment, regulators estimated that the rate would inch up to 10.8%.
The euro-zone's biggest jump came in Spain, whose unemployment rate would rise to 20.3% in the adverse scenario, compared to 20% today.
When it comes to property values, estimates for each country were devised by that country's bank regulator. In Austria, the tests assume that in a recession, property prices will rise 2% this year and 2.7% next year—exactly the same outcome as under the benchmark scenario. Poland's stress tests assumed real-estate prices would remain flat.
http://online.wsj.com/article/SB10001424052748704719104575389251817348376.html
Over on the other side of Eur-Asia, Chinese banks are also in trouble. A $250+billion hit is looming by the end of the year. Bloomberg suggests that about a fifth might be coverable by banks raising new capital, over to the Chinese government for the rest? Our world built on fiat money is disintegrating. Brought down by all the corruption and internal contradictions fiat money spawns.
"Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money."
Daniel Webster
Chinese Banks See Risks in 23% of $1.1 Trillion Loans
July 24 (Bloomberg) -- Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.
About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.
Commission Chairman Liu Mingkang said this week borrowing by the so-called local government financing vehicles may threaten the banking industry. The nation’s five-largest banks, including Agricultural Bank of China Ltd., plan to raise as much as $53.5 billion to replenish capital after the sector extended a record $1.4 trillion in credit last year.
-----Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn’t being used for viable projects.
“The issue is symptomatic of the way the stimulus package was rolled out in 2008,” said Nicholas Consonery, Asia specialist at the Eurasia Group. “It is difficult for local governments to finance these projects. It is written under the Chinese constitution that local governments cannot offer their own debt.”
Only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said.
Calls to the banking regulator’s press office in Beijing after business hours weren’t answered.
-----The government has been grappling with how to rein in the credit-fuelled stimulus before it leads to overheating, according to a July 14 report by Fitch Ratings analyst Charlene Chu. Lending hasn’t slowed as much as official data suggests because Chinese banks are shifting loans off balance sheets by repackaging them into investment products that are sold to investors, the report showed.
“The growing popularity of this activity is increasingly distorting credit growth figures at an institutional and system level,” Chu wrote. “Consequently, Chinese banks’ loan loss reserves and capital are more exposed to credit losses than current data suggests.”
Chairman Liu said in April that inspectors would visit banks in the third quarter to check on loan reports that had to be submitted by the end of June. Those reports showed the banks had 7.7 trillion yuan of outstanding loans to the local financing vehicles at the end of last month, the person said.
http://noir.bloomberg.com/apps/news?pid=20601087&sid=aeDIAJ0xKAcE&pos=2
With so much uncertainty around, and the world’s biggest debtor already in a spat with its biggest creditor China, over US plans to sell new armaments to Taiwan, you might have thought that this wasn’t the moment to go upping the ante, when Uncle Sam needs to borrow trillions more from the Middle Kingdom. Well nobody thinks like that in Washington. Over the weekend in Hanoi, the Obama administration thought that this was the perfect time to take another large slap at China. Below, the WSJ covers the story. Almost the equivalent of China trying to dictate outcomes in the Gulf of Mexico. I doubt we will wait long to see a Chinese riposte.
JULY 24, 2010
U.S. Takes On Maritime Spats
Clinton Plan Would Set Up Legal Process for Asian Nations to Resolve Claims in the South China Sea
HANOI—The Obama administration is working to establish a formal legal process to resolve disputes between Asian nations over claims in the South China Sea, a move that could raise new tensions with China.
U.S. Secretary of State Hillary Clinton pushed the initiative Friday, according to U.S. officials, during a meeting of the 10 members of the Association of Southeast Asian Nations, China and more than a dozen other countries.
Mrs. Clinton said the U.S. has grown increasingly concerned about the competing claims for territory in the South China Sea. China and Southeast Asian countries like Vietnam, Malaysia and the Philippines have historically tussled over the region's waterways, islands and atolls.
The dispute has raised concerns that an increasingly powerful Chinese military could seek to dominate Asian waters. Tensions have risen as Chinese companies have increased exploration efforts in the region to look for new deposits of energy and minerals.
Mrs. Clinton said Washington is seeking to work with Asean nations, China and other countries to develop an international mechanism to resolve the disputes. She said the process should be institutionalized through Asean and based on the international law of the sea.
-----U.S. officials traveling with Mrs. Clinton acknowledged Friday that Beijing expressed opposition to Washington's moves during the deliberations in Vietnam. They said Chinese officials told this week's forum that Beijing believed any disputes involving the South China Sea should be solved on a bilateral basis and not include the international community. "The Chinese don't want this process internationalized," said a senior U.S. official traveling with Mrs. Clinton.
Vietnamese, Philippine and Malaysian officials have voiced their concerns to Washington about China's increasing aggressiveness to laying claims to places like the Paracel and Spratley islands, U.S. officials said. They said that at least 12 Asian countries pushed Friday at the Hanoi meeting for a dispute mechanism to be established.
Chinese officials couldn't immediately be reached for comment.
We end for today leaving the last word to the Telegraph. In the past the death of fiat money has always been traumatic.
"As fewer and fewer people have confidence in paper as a store of value, the price of gold will continue to rise."
Jerome F. Smith
The Death of Paper Money
As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.
By Ambrose Evans-Pritchard Published: 7:05PM BST 25 Jul 2010
Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).
The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.
People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.
"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".
Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.
Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.
As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.
As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory MEP Adam Fergusson -- endorsed by Warren Buffett as a must-read -- it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.
Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding.
------Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to undertand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.
Foreigners with dollars, pounds, Swiss francs, or Czech crowns lived in opulence. They were hated. "Times made us cynical. Everybody saw an enemy in everybody else," said Erna von Pustau, daughter of a Hamburg fish merchant.
-----Corruption became rampant. People were stripped of their coat and shoes at knife-point on the street. The winners were those who -- by luck or design -- had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor, though the Reichstag later passed a law linking old contracts to the gold price. Creditors clawed back something.
A conspiracy theory took root that the inflation was a Jewish plot to ruin Germany. The currency became known as "Judefetzen" (Jew- confetti), hinting at the chain of events that wouild lead to Kristallnacht a decade later.
While the Weimar tale is a timeless study of social disintegration, it cannot shed much light on events today. The final trigger for the 1923 collapse was the French occupation of the Ruhr, which ripped a great chunk out of German industry and set off mass resistance.
Lloyd George suspected that the French were trying to precipitate the disintegration of Germany by sponsoring a break-away Rhineland state (as indeed they were). For a brief moment rebels set up a separatist government in Dusseldorf. With poetic justice, the crisis recoiled against Paris and destroyed the franc.
The Carthaginian peace of Versailles had by then poisoned everything. It was a patriotic duty not to pay taxes that would be sequestered for reparation payments to the enemy. Influenced by the Bolsheviks, Germany had become a Communist cauldron. partakists tried to take Berlin. Worker `soviets' proliferated. Dockers and shipworkers occupied police stations and set up barricades in Hamburg. Communist Red Centuries fought deadly street battles with right-wing militia.
"We need only take our heads out of the sand to see clearly that interventionism not only has failed to provide the promised something-for-nothing, but has led to all sorts of undesirable consequences. Indeed, many are just beginning to realize that we are moving towards disaster even though we have been on a wrong heading for decades."
Leonard Read
At the Comex silver depositories Friday, final figures were: Registered 52.80 Moz, Eligible 57.56 Moz, Total 110.36 Moz.
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Crooks and Scoundrels Corner.
The bent, the seriously bent, and the totally doubled over.
Today, a story bad and sad enough to turn a “Wee Wee Free” churchman to drink. The residents on the Scottish Isle of Muck, I am not making this up, have been ordered to stop drinking their spring water after thousands of years of use. Apparently it’s too Mucky, no really, and all 35 islanders reveling knee deep in Muck, must now go into £15,200 debt to install ultraviolet cleaning systems, to purify the water before adding a splash to their flask of Talisker. Muck lies just to the south of Rum Island not too far from Eigg and Canna. Too much Rum and Eigg, with not enough Mucky water, gave rise to the local expression “no Canna do.” Forcing Mucky Scotsmen into debt! What will the banksters think of next!
Isle of Muck residents ordered to stop drinking spring water
The inhabitants of a remote Scottish island have been ordered to end centuries of tradition by drinking bottled water instead of drawing it from the natural springs that surround their homes.
By Simon Johnson Published: 12:09PM BST 25 Jul 2010
New health and safety guidelines mean the water supply that has sustained the residents of Muck through the ages is no longer deemed safe to drink.
Officials have told the Hebridean island’s 35 inhabitants they must import mineral water from the mainland and are offering taxpayer-funded grants for a new treatment and purification system.
But angry residents complained no one has become ill after drinking water from the island’s eight natural springs, which are fed by rain clouds rolling across the Atlantic.
Lawrence MacEwen, whose family have owned the tiny isle since 1896, said: “All the houses on Muck are served by reliable springs of a quality at least as good as can be bought in bottles.
“But that is not good enough for our environmental health, who are insisting that all our water is treated before it reaches the houses.”
A Highland Council spokesman said a number of water supplies on Muck failed the most recent test sampling, with bacteria levels higher than new Scottish Executive-set limits.
Residents have now begun complying with the rules and can apply for an Executive grant of £15,200 to install ultraviolet bacterial cleaning systems, which should be operational within the next fortnight.
http://www.telegraph.co.uk/news/newstopics/politics/scotland/7909021/Isle-of-Muck-residents-ordered-to-stop-drinking-spring-water.html
http://en.wikipedia.org/wiki/Free_Presbyterian_Church_of_Scotland
"The first requisite of a sound monetary system is that it put the least possible power over the quantity or quality of money in the hands of the politicians."
Henry Hazlitt
The monthly Coppock Indicators finished June:
DJIA: +269 Down. NASDAQ: +460 Down. SP500: +290 Down.
The bull market (or bear market rally) that commenced on Nasdaq on 30/4/09 at 1717 has ended. (30/5/09 SP 500 at 919, 30/5/09 DJIA 8500.) While the indicators can flip flop at market turns, this action is rare on the slow monthly indicators.
Help the LIR fight Banksterism, the EU, and for sound money.
If you can, help the LIR stay around and make a difference. Please make a donation at the PayPal link on the website or better still become a sponsor for what looks like an exciting 2010. Capitalism not banksterism. Many thanks to all who have helped.
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Sunspots – A 22 year colder world? (From 2004?)
Spotless Days July 25
Current Stretch:0 days
2010 total: 35 days (17%)
2009 total: 260 days (71%)
Since 2004: 803 days
Typical Solar Min: 485 days
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