Wednesday, 20 October 2010

Crisis? What Crisis?

Baltic Dry Index. 2744 -12
LIR Gold Target by 2019: $3,000.

"We pay the debts of the last generation, by issuing bonds payable by the next generation."

Dr. Laurence J. Peter, author, The Peter Principle

Today, Germany caves in and agrees to pay for Club Med’s lifestyle. French strikers take the day off from rioting. But first this, China’s unexpected interest rate increase unnerved most markets triggering a big selloff. Just wait until the Fed is forced to start raising interest rates, as it will be one day. When that day comes expect a wipe-out in US bonds.

"Liquidation sometimes is orderly, but more frequently degenerates into panic as the realization spreads that there is only so much money, not enough to enable everyone to sell out at the top."

Charles P. Kindleberger. Manias, panics and crashes.

OCTOBER 18, 2010

China Sparks Wide Sell-Off

Sudden Rate Hike Spurs Fear of Drop in Giant's Growth; Emerging Currencies Pull Back

China surprised investors by raising interest rates Tuesday, sparking a world-wide sell-off in stocks, commodities and emerging-markets currencies as investors lowered their expectations for Chinese growth, which has been seen as a key driver of the global economy.

China's central bank announced it would raise key rates by a quarter percentage point, the first move since it cut rates in December 2008. While many investors had been expecting China to raise interest rates in coming months, the timing of the move was unexpected. It is viewed as the first in a series of interest rate increases.

----- Investors were split on the impact China's move will have on currency diplomacy. Tensions have been building as a result of the money flooding into emerging markets, driving up the currencies of countries such as Brazil and South Korea against the dollar.

Because China effectively pegs the yuan to the dollar, exporters in those countries have been losing competitiveness against China, their chief rival in the global markets. In response, many governments have been pushing back against the tide of money boosting their currencies.

Those issues were front and center Tuesday.

Brazil raised the tax on foreign investment in Brazilian bonds. And in Seoul, the South Korean finance minister said the government was considering reinstating a withholding tax on foreign investors' holdings in some Korean securities.

The impact of China's rate rise was also felt in the commodity markets, where Chinese demand plays a significant role in setting prices.

Oil prices suffered their biggest decline in eight months, losing more than 4% to $79.49. Gold, which set a record high last week, fell $36.10 per troy ounce, or 2.63% to $1335.10.

Stocks, too, took a hit, although the sell-off in the U.S. was also fueled by renewed concerns about the impact that home loan foreclosure problems will have on banks. The Dow Jones Industrial Average lost 1.5% to close at 10978.62.

Now more on Germany’s surrender to the French. Der Spiegel takes up the case.

"If power corrupts, weakness in the seat of power, with its constant necessity of deals and bribes and compromising arrangements, corrupts even more."

Barbara Tuchman, authoress. Tuchman's Law.

Berlin's Quest for Tough Euro Zone Rules Has 'Failed Spectacularly'


Germany has caved in to France on the reform of the euro zone's Stability Pact by agreeing to jettison plans for automatic sanctions against countries that breach budget rules. The EU is in danger of breaking its promise to get its house in order in the wake of the Greek crisis, say German commentators.

Europe's attempt to adopt strict new budget rules to prevent a repeat of the euro debt crisis has suffered a setback because Germany has given in to France on the key issue of imposing automatic sanctions against deficit wrongdoers, German commentators say.

Following talks between France and Germany, EU finance ministers meeting in Luxembourg on Monday agreed on a compromise under which ministers from member states will continue to have a say in whether fines should be imposed -- a level of political involvement that commentators fear could leave the reformed pact almost as toothless as the old one.

Germany had backed a proposal by the European Commission for an automatic process of sanctions to kick in at a certain point if countries persistently exceed the EU's budget deficit ceiling of 3 percent of GDP. France opposed that change, and got its way. In return, France agreed to a medium-term amendment of the EU treaty to allow the bloc to withdraw voting rights from member states that break the rules. But it will take years for the amendment to be agreed and ratified.

France, Italy, Spain, Portugal and Greece opposed the plan for automatic penalties, part of a set of proposals submitted by the Commission last month. Its aim had been to lessen the power of member governments to block penalties against themselves, as had happened repeatedly in recent years.

Until now, countries have routinely evaded punishment under the existing Stability and Growth Pact, the 1997 accord designed to underpin the euro by enforcing fiscal discipline in the bloc. Observers say the EU urgently needs tough and credible new rules, especially giving mounting concern over Ireland's deficit troubles.

Supporters of tough reforms had their chance to impose them in the spring, when the bloc was in the throes of the Greek debt crisis and there was a greater sense of urgency. They missed that opportunity, say commentators writing in Germany's newspapers on Tuesday.

Business daily Financial Times Deutschland writes:


Meanwhile back across the Atlantic, the inmates aren’t just in charge of the asylum, they have been put in charge of the Fed, the too big to fail banks, the legal system, the currency, and the high frequency trading programs that are busy destroying US stock markets. From early next month, they likely get control of the Congress too. Stay long precious metals. Last time inmates got hold of the levers of State, we got Stalin, Hitler and Mao. Below, the real story behind fraudclosuregate and the 65 million clouded real estate titles. Thanks to the banksters greed, in the rush to cut corners securitizing mortgages, to generate telephone number bonuses, hundreds of billions of dodgy RMBS will likely enter litigation for years ahead, overhanging the originating banks and their successors, with a whole army of skeleton’s ready to appear once discovery gets underway.

"There is no expedient to which a man will not go to avoid the real labor of thinking."

Thomas Alva Edison.

Oct. 19, 2010, 5:22 p.m. EDT

NY Fed, investors pressuring B. of A.

Big bank asked to repurchase billions of dollars in home loans

SAN FRANCISCO (MarketWatch) — Bank of America Corp. has been hounded for months by demands to repurchase billions of dollars in home loans backing mortgage securities. On Tuesday, the Federal Reserve Bank of New York emerged as one of the sources of this pressure.

The New York Fed is part of an investor group that owns more than 25% of the voting rights in over $47 billion of residential mortgage-backed securities issued by Countrywide Financial, the home loan giant that Bank of America /quotes/comstock/13*!bac/quotes/nls/bac (BAC 11.80, -0.54, -4.38%)  acquired in 2008.

On Monday, the group wrote to Countrywide Home Loan Servicing and Bank of New York Mellon Corp. /quotes/comstock/13*!bk/quotes/nls/bk (BK 25.99, -0.63, -2.37%)  , the trustee of the mortgage securities, saying they haven’t been serving the loans backing the securities properly.

The investors asked Bank of New York to demand the repurchase of loans that were originated “in violation of underwriting guidelines,” according to a statement Monday by Kathy Patrick of law firm Gibbs & Bruns, which is representing the group.

The seller of any “ineligible or predatory” mortgages should also pay the cost of modifying them for homeowners, or buy those loans back from the pools of collateral backing the securities, she added.

Below, some of the reality behind the Fed’s pressure. Even so, my guess is that the lawyers will file to get at least as far as discovery. My guess is that at that point the banksters will start to cave in Goldman Sachs style. Still 500 million here, 500 million there, and pretty soon we’re talking another TARP bank bailout.

October 19, 2010

PIMCO, NY Fed Pressuring BofA to Repurchase Dud Mortgages (Empty Threats Edition)

As dramatic as this headline sounds, there is much less here than meets the eye. In addition, either the article that discussed this development is confused, or the underlying legal pressure is not well framed.

First, let’s get to the report, which certainly sounds serious. BusinessWeek reports that PIMCO, BlackRock, and the New York Fed are pushing Bank of America to repurchase the delinquent mortgages underlying $47 billion of bonds:

----- Note several things before we go any further: first, this is NOT litigation, it’s a mere nastygram. Second, this is almost certain to be a new strategy in a effort mounted by an investor group (presumably now identified to turn up the heat on BofA) which so far has gotten nowhere. An unidentified group tried pressuring the trustee of a similar amount of bonds to direct the repurchase of loans gone bad. The trustee said it wasn’t going to do anything. So now the same line is being tried on the servicer, Countrywiide, this time alleging that it is Countrywide’s responsibility to buy back the loans.

Also observe that the argument is that the Bank of America Countrywide unit violated its servicing obligations:

Countrywide also hasn’t met its contractual obligations as a servicer because it hasn’t asked for repurchases itself and is taking too long with foreclosures, either because of document or process mistakes or because it doesn’t have enough staff to evaluate borrowers for loan modifications, Patrick said. If the issues aren’t fixed within 60 days, BNY Mellon should declare Countrywide in default of its contracts, she said.

This part verges on comical. As much as we support the idea of having more servicers do loan mods (and having an investor group push for loan mods vitiates one of the servicer excuses, that investors will protest), this legal strategy looks barmy. First, Countrywide can demand repurchases only in the case of origination defects. Even though those arguably took place, given the recent revelation in FCIC testimony that pre-sale examination of many subprime pools revealed that the a significant portion of loans fell short of the stipulated standards, that fact set does not map into a neat or lucrative legal action. This is considered to be what is called a representation and warranty breach; they are costly to fight and don’t produce large settlements because the plaintiffs have to argue their case on a loan-by-loan basis and prove each default was the result of bad underwriting, not expected losses (remember these were risky loans) or bad luck (much higher than expected unemployment). The cost of loan-by-loan analysis means any litigation is very expensive and burdensome to win.

In addition, Countrywide did not make the reps and warranties about the loans, so its liability is going to be far less than the liability of the originator. However, the legal strategy appears to be to demand Countrywide put the breached loans (assuming a breach) back to the seller and, when they fail to do that, to sue them for breach of contract.

The odds are high that Countrywide was the seller of the loans – they issued many deals themselves.

The absurdity of this strategy is that they are asking Countrywide as servicer to put the loans back to Countrywide as seller.


Who would want to be the owner or lender to US banks with this hanging over them? Later today, Britain gets its own austerity package. Will events across the Channel transfer to London? Stay long precious metals in case they do.

“We have reason to believe you have committed an offence."

City of London. 1960s parking ticket.

At the Comex silver depositories Tuesday, final figures were: Registered 52.19 Moz, Eligible 58.76 Moz, Total 110.95 Moz.


Crooks and Scoundrels Corner.

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

Today bad boy China again. This time allegedly cutting off the USA and EU fromvital supplies of rare earth elements. A real embargo or posturing for the upcoming G-20 summit? A flexing of muscles to get proper respect from the world’s biggest debtor, or has the new Emperor finally turned and got sick of playing second fiddle to an increasingly suicidal USA? Time will tell, although whatever the reason, it’s a timely reminder to the west to start making strategic funding available to get some western mines into production to break China’s monopoly. Use defensive tariffs, if need be, should China adopt predatory pricing later to try to drive out other competition.

"Anytime you don't want anything, you get it."

Calvin Coolidge,  30th President of the United States of America.

China Said to Widen Its Embargo of Minerals

By KEITH BRADSHER Published: October 19, 2010

HONG KONG — China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted shipments of those materials to the United States and Europe, three industry officials said on Tuesday.

The Chinese action, involving rare earth minerals that are crucial to manufacturing many advanced products, seems certain to further intensify already rising trade and currency tensions with the West. Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare earth supplies is the latest sign from Beijing that Chinese leaders are willing to use their growing economic muscle.

“The embargo is expanding” beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.

They said Chinese customs officials imposed the broader restrictions on Monday morning, hours after a top Chinese official summoned international news media Sunday night to denounce United States trade actions.

China mines 95 percent of the world’s rare earth elements, which have broad commercial and military applications, and are vital to the manufacture of products as diverse as cellphones, large wind turbines and guided missiles. Any curtailment of Chinese supplies of rare earths is likely to be greeted with alarm in Western capitals, particularly because Western companies are believed to keep much smaller stockpiles of rare earths than Japanese companies.

China experts said on Tuesday that Beijing’s assertive stance on rare earths might also signal the ascendance of economic nationalists, noting that the Central Committee of the Communist Party convened over the weekend.

Officials at the media relations office of China’s commerce ministry did not respond all day on Tuesday to e-mail or telephone calls seeking confirmation of the expanded embargo.

A few rare earth shipments to the West have been delayed by customs officials in recent weeks, said industry officials in China, Japan and the United States, but new restrictions on exports appear to have been imposed on Monday morning.

Industry executives said there had been no signal from Beijing of how long rare earth shipments intended for the West would be held by Chinese customs officials. Nor is it clear if occasional shipments are still being allowed out of the country, or if all shipments have now been suspended.

Word of the blocked shipments emerged from industry officials on Tuesday after an official China newspaper reported earlier in the day that Beijing planned next year to further reduce its annual export quota for rare earths.

The signals of a tougher Chinese trade stance come after American trade officials announced on Friday that they would investigate whether China was violating World Trade Organization rules by subsidizing its clean energy exports and limiting clean energy imports. The inquiry includes whether China’s steady reductions in rare earth export quotas since 2005, along with steep export taxes on rare earths, are illegal attempts to force multinational companies to produce more of their high-technology goods in China.

Despite a widely confirmed suspension of rare earth shipments from China to Japan, now nearly a month old, Beijing has continued to deny that any embargo exists.

"The international monetary order is more precarious by far today than it was in 1929. Then, gold was international money, incorruptible, unmanageable, and unchangeable. Today, the U.S. dollar serves as the international medium of exchange, managed by Washington politicians and Federal Reserve officials, manipulated from day to day, and serving political goals and ambitions. This difference alone sounds the alarm to all perceptive observers."

Hans F. Sennholz

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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