Tuesday 5 October 2010

A Black Swan Flies In.

Baltic Dry Index. 2478 +26
LIR Gold Target by 2019: $3,000.

"Every normal man must be tempted, at times, to spit on his hands, hoist the black flag, and start slitting throats."

H.L Mencken

For more on the black swan scroll down to Crooks and Scoundrel’s Corner. Today we open with the IMF hinting that Club Med needs to devalue if it’s going to avoid the death spiral. But Club Med can’t devalue since they’re trapped in the Germanic Euro, having entered the currency union at the wrong exchange rate. Want to bet that this all goes disastrously wrong in the year ahead. I’ll stick with gold and silver. It’s looking more and more like the fiat Euro experiment is doomed.

Money has no country.

Jules Bertillon. A House of All Nations. 1938. Christina Stead.

IMF admits that the West is stuck in near depression

If you strip away the political correctness, Chapter Three of the IMF's World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time.

By Ambrose Evans-Pritchard Published: 8:00PM BST 03 Oct 2010

The IMF report – "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation" – implicitly argues that austerity will do more damage than so far admitted.

Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once.

"Not all countries can reduce the value of their currency and increase net exports at the same time," it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a "death spiral".

The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.

"A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes." Exactly.

Let us avoid the crude claim that spending cuts in a slump are wicked or self-defeating. Britain did exactly that after leaving the Gold Standard in 1931, and the ERM in 1992, both times with success. A liberated Bank of England was able to cut interest rates. Sterling fell. The key point is whether you can offset the budget cuts.

But by the same token, it is fallacious to cite the austerity cures of Canada, and Scandinavia in the 1990s – as the European Central Bank does – as evidence that budget cuts pave the way for recovery. These countries were able export to a booming world. They could lower interest rates, and were small enough to carry out `beggar-thy-neighbour' devaluations without attracting much notice. We were not then in our New World Order of "currency wars".

Be that as it may, it is clear that Southern Europe will not recover for a long time. Portuguese premier Jose Socrates has just unveiled his latest austerity package. He has capitulated on wage cuts. There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects. The trade unions have called a general strike for next month.

Mr Socrates has already lost his socialist majority, leaking part of his base to the hard-Left Bloco. He must rely on conservative acquiescence – not yet forthcoming. Citigroup said the fiscal squeeze will be 3pc of GDP next year. So under the IMF's schema, this implies a 3pc loss in growth. Since there wasn't any growth to speak off, this means contraction.

More.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8039789/IMF-admits-that-the-West-is-stuck-in-near-depression.html

In a sign of total desperation at the ineffectiveness of current policy, Japan has gone from virtual zero interest rates to actual zero interest rates. Somehow I doubt it’s going to make any difference. Nor will monetizing another 5 trillion yen make much of a difference, other than to weaken the yen in a competitive devaluation against China and America. As the great Nixonian error of fiat money starts to collapse, ever more desperate schemes will now get tried.

"Consistency is the last refuge of the unimaginative."

Oscar Wilde

Bank of Japan Cuts Rates to as Low as Zero Percent

By HIROKO TABUCHI Published: October 5, 2010

TOKYO — In a surprise move, Japan’s central bank lowered its benchmark interest rate to a range of 0 percent to 0.1 percent Tuesday, a tiny change from its previous target of 0.1 percent but a symbolic slide into an age of zero interest rates.

The Bank of Japan also said it would set up a temporary 5 trillion yen, or $60 billion, fund to buy Japanese government bonds, commercial paper and other asset-backed securities amid concerns over weakening growth in the world’s third-largest economy.

With the interest rate cut, the central bank effectively reintroduces a zero-interest rate policy for the first time since July 2006. The decision underscores concerns that a strong yen and persistent deflation threaten the country’s fragile economic recovery.

The dollar rose against the yen on the announcement, climbing 0.7 percent on the day to 83.90 yen from about 83.55 yen before the decision.

The unanimous vote to lower the key interest rate came after a two-day meeting of the central bank’s nine-member policy board. The Bank of Japan had been under increasing pressure from the government to take drastic steps to shore up the economy.

More.

http://www.nytimes.com/2010/10/06/business/global/06yen.html?hp

In Greece it’s more of the same for next year, too. In a daring move for the tax and work shy Greeks, since China is going to buy up all of their new debt, wages won’t be cut any more, while taxes will be raised on the people wh never pay them! If China does in fact buy up Greek debt, at some point ahead China is going to take a loss when Greece wises up and leaves the Germanic Euro.

People who don't like scandals shouldn't be in finance.

Mouradzian. A House of All Nations. 1938. Christina Stead.

Greece Presents Austerity Budget for 2011

By NIKI KITSANTONIS and DAVID JOLLY Published: October 4, 2010

ATHENS — The Greek government, which this year has come under the tutelage of its euro-zone partners and the International Monetary Fund after it reached the brink of default, on Monday presented a draft austerity budget for 2011 that promised to raise more tax revenue while ending public-sector salary cuts.

According to the draft submitted to Parliament by Finance Minister George Papaconstantinou, the state aims to raise €5 billion, or $6.8 billion, from new tax measures, while it will cut spending by €1.5 billion.

Greece’s borrowing costs soared and the foundations of the euro were shaken after the revelation last October that the country had for years greatly understated the degree of its indebtedness. The Greek crisis in May led the I.M.F. and European officials to create a rescue fund valued at around €750 billion to help euro-zone members restructure their finances.

---- His 2011 plan includes a one-time tax on companies and an increase in the midrange value-added tax to 13 percent from 11 percent. It also includes the tax amnesty announced last month by Prime Minister George Papandreou that is meant to raise hundreds of millions of euros by encouraging citizens and businesses to settle 2.5 million unaudited tax filings stretching back over a decade. Debts would be paid off in installments in exchange for exemption from prosecution.

Officials have instituted a wave of tax increases over the past few months — including a four percentage point increase in the top value-added tax, to 23 percent — and a 20 percent cut to public-sector wages.

Mr. Papaconstantinou told the daily newspaper To Vima in an interview published Sunday that there would be no cuts to wages next year. Instead, he is focusing on raising revenue, an area in which Greece, with a reputation for tax evasion, has traditionally struggled.

http://www.nytimes.com/2010/10/05/business/global/05drachma.html?ref=business

Next, the gloves come off in Ireland. We can expect to a whole lot more of this as Ireland struggles to stave of sovereign default. Imagine, bondholders being asked to share in the austerity! God will fall out of heaven first!!

"For money, people fight and devour one another like spiders in a pot."

Honore de Balzac.

Roman Abramovich's Millhouse warns Ireland of legal action over Irish Nationwide bail-out

Millhouse, Roman Abramovich's asset management company, has lashed out at the Irish government and given warning of “huge reputation loss” and possible legal action if it continues to push it to foot part of the bill to bail out Irish Nationwide Building Society

By Simon Shuster in Moscow Published: 6:00AM BST 05 Oct 2010

The warning comes after Brian Lenihan, the Irish finance minister, said that subordinated bondholders of two state-controlled Irish lenders – Irish Nationwide Building Society, or INBS, and Anglo Irish Bank – should make a “significant contribution toward meeting the costs” of a planned government bailout.

Mr Abramovich’s asset management company, Millhouse LLC, would be among the first in line to shoulder INBS’s burden if Mr Lenihan gets his way.

In August 2009, Millhouse bought an unspecified amount of the £126m in subordinated bonds issued by INBS. The government guarantee on those bonds ran out October 1.

In a statement emailed to The Daily Telegraph, a spokesman for Mr Abramovich, the billionaire owner of Chelsea football club, said in Moscow that Millhouse was “extremely concerned” by the recent collapse in the value of these bonds, adding that Mr Lenihan’s statement “did not help the situation”.

“We bought [the bonds] because the Irish Government …promised to guarantee these bonds and promised to have a strategy for the bank. A year later, there is no guarantee and no strategy. We now believe that we have been misled and deceived,” the statement said.

Millhouse also complained of discrimination, claiming that other investors in INBS received regular updates on the bank’s performance, while Millhouse did not hear anything from management.

Although Millhouse has denied reports that it was planning to take its complaints to court, the statement concluded that it was “fully prepared to vigorously defend our position using all possible legal avenues”.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8042534/Roman-Abramovichs-Millhouse-warns-Ireland-of-legal-action-over-Irish-Nationwide-bail-out.html

"Everything has been thought of before, but the problem is to think of it again."

Goethe

At the Comex silver depositories Monday, final figures were: Registered 52.26 Moz, Eligible 58.82 Moz, Total 111.08 Moz.

+++++

Crooks and Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

Today, the NY Time’s best reporter on the growing chaos in US real estate. Chaos, that just might be the black swan arriving that crashes the mortgage backed securities sector and sets off the “next Lehman”. With title insurance companies now refusing to insure property transferring under foreclosure sales due to clouded ownership, foreclosure sales have come to a sudden halt. But the issue is far bigger than just foreclosures. With ownership clouded at best, lost or missing at worst, who is left to sign off transfer of ownership when a performing mortgage gets paid off? By slicing and dicing and pooling mortgages, for more than a decade, a decade’s worth of US properties is now clouded. A decade’s worth of US properties looks like becoming unsalable, or at best only salable with a big discount or an indemnity to the purchaser.

“You can observe a lot by just watching".

Yogi Berra

Flawed Paperwork Aggravates a Foreclosure Crisis

By GRETCHEN MORGENSON Published: October 3, 2010

As some of the nation’s largest lenders have conceded that their foreclosure procedures might have been improperly handled, lawsuits have revealed myriad missteps in crucial documents.

The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions.

Problems emerging in courts across the nation are varied but all involve documents that must be submitted before foreclosures can proceed legally. Homeowners, lawyers and analysts have been citing such problems for the last few years, but it appears to have reached such intensity recently that banks are beginning to re-examine whether all of the foreclosure papers were prepared properly.

In some cases, documents have been signed by employees who say they have not verified crucial information like amounts owed by borrowers. Other problems involve questionable legal notarization of documents, in which, for example, the notarizations predate the actual preparation of documents — suggesting that signatures were never actually reviewed by a notary.

Other problems occurred when notarizations took place so far from where the documents were signed that it was highly unlikely that the notaries witnessed the signings, as the law requires.

On still other important documents, a single official’s name is signed in such radically different ways that some appear to be forgeries. Additional problems have emerged when multiple banks have all argued that they have the right to foreclose on the same property, a result of a murky trail of documentation and ownership.

---- Attorneys general in at least six states, including Massachusetts, Iowa, Florida and Illinois, are investigating improper foreclosure practices. Last week, Jennifer Brunner, the secretary of state of Ohio, referred examples of what her office considers possible notary abuse by Chase Home Mortgage to federal prosecutors for investigation.

The implications are not yet clear for borrowers who have been evicted from their homes as a result of improper filings. But legal experts say that courts may impose sanctions on lenders or their representatives or may force banks to pay borrowers’ legal costs in these cases.

Judges may dismiss the foreclosures altogether, barring lenders from refiling and awarding the home to the borrower. That would create a loss for the lender or investor holding the note underlying the property. Almost certainly, lawyers say, lawsuits on behalf of borrowers will multiply.

In Florida, problems with foreclosure cases are especially acute. A recent sample of foreclosure cases in the 12th Judicial Circuit of Florida showed that 20 percent of those set for summary judgment involved deficient documents, according to chief judge Lee E. Haworth.

More.

http://www.nytimes.com/2010/10/04/business/04mortgage.html?ref=gretchen_morgenson

If all the rich men in the world divided up their money amongst themselves, there wouldn't be enough to go round.

Jules Bertillon. A House of All Nations. 1938. Christina Stead.

The monthly Coppock Indicators finished September:

DJIA: +227 Down. NASDAQ: +321 Down. SP500: +221 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. September is the fourth down month in a row.

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