Baltic Dry Index. 2378 +166
LIR Gold Target by 2019: $3,000.
"We will not have any more crashes in our time."
John Maynard Keynes. 1927
First the good news, the Baltic Dry Index is advancing again, having rallied some 600 points and is back to the level of the start of July. World trade starting to recover? A rush for available wheat and rice supply, given production problems in Eur-Asia and Canada? Ship chartering for a relief effort for Pakistan? A seasonal bounce? While I would like it to be the first, that seems improbable.
Yesterday the Bank of England’s King, added to the week’s earlier gloom from the gurus at America’s Fed. In the markets Goldilocks woke up and said this foods terrible and while I’ve been sleeping someone has stolen the roof! Thanks to the magic of the High Frequency Trading Programs of the great vampire squids, the US market was at the risk of a rout turning into another “flash crash” all day long. Up first, the Journal gives its take on yesterday’s action. Bear season has opened two weeks early this year it seems. Another 1987 style program trading event looms. Can the US market hold on till the traditional crash season arrives?
“Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else."
Lyndon B. Johnson.
AUGUST 12, 2010
Markets Swoon on Fears
Stocks Pummeled on Signs of Global Slowdown; Money Flees to Dollar and Yen
Investors around the world scrambled for safe havens as fears of a global economic slowdown grew.
The yen briefly touched a 15-year high against the U.S. dollar, the euro suffered its worst selloff in nearly two years, and global stock markets tumbled.
A day after briefly cheering the Federal Reserve's announcement it would buy Treasury debt to bolster the U.S. economy, investors Wednesday began fretting about the negative implications of the move: The world's biggest economy still needs extraordinary government help.
Data on Wednesday showed the U.S. trade deficit widened, and there were worrying economic signals out of China and Japan. All that fed investor angst. "It's pretty clear that economic gravity is setting in," said Talley Leger, portfolio strategist at Barclays Capital.
---- Market sentiment has soured quickly. It underscores just how jittery investors remain nearly two years after the collapse of Lehman Brothers Holdings Inc. sent markets world-wide crashing.
Just last month, stocks and other risky investments were rallying in response to solid corporate profits. There were also hopes that, with European sovereign-debt woes temporarily abated, the global economy could avoid a second dip into recession.
But the Fed's downbeat assessment on Tuesday seemed to bring the risks to the global economy into sharper focus. It followed a string of disappointing U.S. economic data, particularly in the labor market.
----- To the extent that there has been encouraging economic news lately, it has generally stemmed from international trade. The U.S., the euro zone and Japan could all benefit from growing trade. But with China showing increasing signs of slower economic growth, hopes of robust export-driven growth seem to be fading.
Underscoring that risk, the U.S. trade deficit in June was the widest since October 2008, the Commerce Department said. That implies slower growth in the U.S.
Next, the Bank of England boldly goes where few private economists are willing to tread. There won’t be a double dip recession in the UK, says the BOE’s Governor King. But he would say that, wouldn’t he, to misquote Mandy Rice-Davies. Besides, the BOE like all central bankers has form, when it comes to misleading the public and missing signs of trouble in the UK and global economy. I’ll bet he’s just flat out wrong and that the UK double dips at some point next year.
A large Bank is exactly the place where a vain and shallow person in authority, if he be a man of gravity and method, as such men often are, may do infinite evil in no long time, and before he is detected. If he is lucky enough to begin at a time of expansion in trade, he is nearly sure not to be found out till the time of contraction has arrived, and then very large figures will be required to reckon the evil he has done.
Walter Bagehot. Lombard Street. 1873.
Bank of England lowers UK growth forecast
The Bank of England has lowered its growth forecast for next year but said austerity measures announced in the Coalition’s emergency Budget would not derail the recovery
By Angela Monaghan Published: 2:11PM BST 11 Aug 2010
The economy will be growing by about 3pc year-on-year in the second half of 2011, according to the .Bank's August Inflation Report. This compares with the 3.5pc it was forecasting in the May report.
Mervyn King, the Bank’s governor, said Britain was facing a “choppy recovery”.
“The UK recovery is likely to continue, but the overall outlook is weaker than that presented in the May Report, reflecting the softening in confidence, the persistence of tight credit conditions and the faster fiscal consolidation,” he said
However, despite the downgrade, the Bank remained more optimistic on growth than City economists and the Office for Budget Responsibility, which was created by the Government to produce forecasts free from ministerial interference.
In the in the Coalition government's austerity Budget the OBR predicted 2.3pc growth in 2011 and 2.8pc growth in 2012.
The Bank is not predicting a double-dip recession in the UK, instead giving clear backing to the scale of tax rises and spending cuts announced by the Government as it attempts to reduce the nation’s £155bn deficit.
http://www.telegraph.co.uk/finance/economics/7938951/Bank-of-England-lowers-UK-growth-forecast.html
Next, look out below. The US economy’s green shoots recovery is looking more and more like a mirage.
GDP much weaker in second quarter, economists say
Aug. 11, 2010, 1:49 p.m. EDT
WASHINGTON (MarketWatch) -- Growth in the U.S. economy from April through June was probably much softer than first estimated by the government, private economists said Wednesday after updated trade figures for June were published showing higher imports.
"The markets might face their biggest downside economic surprise of this recent growth slowdown yet in the form of a downward second quarter gross domestic product revision, which today's U.S. trade deficit figures suggest will be a whopper," wrote analysts at Action Economics.
Instead of growing at a 2.4% annualized pace in the second quarter, real gross domestic product will likely be cut almost in half to a 1.3% annual rate, according to economists surveyed by MarketWatch.
----- Government economists had expected the deficit to widen but the June data surprised everyone.
The report was "spectacularly terrible," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. See full story.
The June trade deficit rose to $49.9 billion from $42 billion, well above the consensus of $42.5 billion.
http://www.marketwatch.com/story/whopping-downward-revision-for-q2-gdp-seen-2010-08-11
Back on the wrong side of the Atlantic, bad signals were flashing again for Europe’s good PIG. Is it all over for the EU’s Greece and Hungary? Below, the Governor of Ireland’s central bank joins Governor King in “he would say that wouldn’t he”.
Irish debt under fire on fresh bank jitters
Ireland’s borrowing costs have begun flashing warning signs again on fears the full damage from the country’s banking crisis has yet to surface.
By Ambrose Evans-Pritchard, in Dublin Published: 11:24PM BST 11 Aug 2010
Spreads on Irish 10-year bonds reached 297 basis points over German Bunds on Wednesday amid reports the European Central Bank (ECB) is intervening to shore up Irish debt, a reversal of the bank’s plans to withdraw emergency support. The euro fell almost three cents against the dollar from $1.32 to $1.29.
Patrick Honohan, governor of Ireland’s central bank and a member of the ECB’s council, dismissed the bond jitters as yet another spasm by jumpy and emotional markets.
“The spreads are a setback for our hopes of a narrowing to reflect the fiscal credibility of the country. I don’t look at them every day but at this level they are ridiculous,” he told The Daily Telegraph, speaking at his office in the heart of Dublin.
----- The latest jitters stem from the escalating costs of Ireland’s rescue of Anglo Irish Bank (AIB). The European Commission revealed this
week that it had approved government support worth €24.3bn (£20bn) for the bank, significantly higher than estimates by Dublin earlier this spring.
Dr Honohan fumed at the mere mention of AIB, which brought the country to its knees two years ago in much the same way the Icelandic banks crippled their host state.
“They were egregious, in a league of their own,” he said. “If it hadn’t been for them the losses would have been manageable. The net cost to the Irish state of recapitalising the banks is €25bn, or 15pc to 16pc of Irish GDP. It is nearly all the result of AIB.”
----- Under Ireland’s rescue programme the viable core of AIB’s business will be cut from the wreckage and relaunched as a new entity. Bad debts are already parked at Ireland’s National Asset Management Agency (NAMA) at an average “haircut” of 50pc.
Antonio Garcia Pascual, at Barclays Capital, said the NAMA strategy initially won plaudits but is increasingly viewed by markets as “a very costly approach”. There are growing doubts over the exposure of Irish banks to British property.
Fergal O’Brien, chief economist for the Irish Business and Employers Federation, said another threat is creeping up on the banks. They issued tracker mortgages during the boom at rates that are now underwater. “This has become a big problem. The banks are locked into loss-making contracts,” he said.
----- The budget deficit seems stuck at 14pc of GDP, and unemployment has risen to 13.7pc. The severity of the slump is eating away at the tax base. Critics say the country is chasing its tail.
Under the deflation, nominal GDP has contracted by almost 20pc. Yet the debt stock has risen. Ireland is uncomfortably close to a debt-deflation trap along the classic lines described by Irving Fisher in the 1930s.
Dr Honohan said the tax take is a lagging indicator. Revenues are “undershooting a little” but there is nothing yet to worry about. Asked about the risk of a Fisherite deflation spiral, he waved his hands in protest and said the country was at no risk of being pushed “head over tail downwards” by the discipline of EMU membership.
We must protect the position of the American dollar as a pillar of monetary stability around the world.
In the past 7 years, there has been an average of one international monetary crisis every year. Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them.
In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation's currency is based on the strength of that nation's economy--and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.
I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Richard M. Nixon 1971.
http://www.youtube.com/watch?v=iRzr1QU6K1o
At the Comex silver depositories Wednesday, final figures were: Registered 51.08 Moz, Eligible 59.51 Moz, Total 110.59 Moz.
+++++
Crooks and Scoundrels Corner.
The bent, the seriously bent, and the totally doubled over.
No crooks today, just worrying signs from Hungary, that economic decline is accelerating. Another country seems to be about to enter “the death spiral.”
OTP Second-Quarter Net Falls 35% on Record Provisions
Aug. 12 (Bloomberg) -- OTP Bank Nyrt., Hungary’s largest lender, said second-quarter profit fell 35 percent as provisions for bad loans soared to an all-time record.
Net income declined to 27.4 billion forint ($125.4 million) from 42.2 billion forint a year earlier, the bank said in a statement on the website of the Budapest Stock Exchange today. That missed the 38.1 billion forint mean estimate of 11 analysts surveyed by Bloomberg. Provisions for loan losses jumped to 96.1 billion forint from 54.5 billion forint in the previous quarter.
“The single most important challenge for net profit has been stemming from risk cost developments,” the bank said in the statement. “While general conditions showed signs of improvement in many countries across the group, the portfolio quality deterioration accelerated; as a result all-time high provisions had to be made.”
OTP, which has subsidiaries in nine countries in Central and Eastern Europe, increased provisions as recession made it harder for borrowers to repay loans. The company is counting on a recovery to support loan demand this year. Economic recovery has so far showed a clear positive sign only in Russia, where loans rose 7 percent in the first half.
Provisions of 151 billion forint in the first six months of the year provide a “comfortably high” 74 percent coverage for loans that are 90 days overdue, according to the bank. The ratio of these loans rose to 12.4 percent of total loans from 10.7 percent in the first three months.
Goodwill Impairment
Net profit for the period was also hit by goodwill impairment at OTP’s Montenegrin unit as a deteriorating economic environment forced OTP to provide capital for its subsidiary in June.
Net-interest income, the difference between what the bank pays on deposits and charges on loans, was boosted primarily by a 22.6 billion forint increase on fair-value adjustment gain on foreign-exchange swaps.
http://noir.bloomberg.com/apps/news?pid=20601095&sid=a_mqwOF2iipQ
Another weekend, and economic storm clouds are gathered everywhere. The death of the Great Nixonian error of fiat money, seems closer than ever. The next Lehman is lurking out there, hiding behind smoke and mirror accounting, still pretending to the regulators that all is well. For now the Fed says it is going to hold its balance sheet steady. If its deeds live up to its words, US stocks will lead global stock markets into protracted broad based retreat. If that happens, the next Lehman will not be long in becoming apparent. The monthly Coppock indicators suggested that our recent stock rally was an unsustainable error, now correcting. Time to mull things over in yet another high summer weekend. Time to implement a defensive strategy for Bear Season. Have a great weekend everyone. Check with the weekend blog for updates.
“A people that values its privileges above its principles soon loses both."
Dwight D. Eisenhower.
The monthly Coppock Indicators finished July:
DJIA: +264 Down. NASDAQ: +427 Down. SP500: +275 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. July seems to have confirmed June’s reversal and end of the bull market.
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