Thursday, 4 November 2010

600 Billion For Tulips.


Baltic Dry Index. 2542 -58
LIR Gold Target by 2019: $3,000.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Ben Bernanke. November 3, 2010.

Yesterday the Fed made its long awaited announcement on its latest round of funny money. It seems like the long suffering American people can expects some 75 billion a month until the Fed gets to 600 billion, plus another 250 billion of retiring investments will be reinvested. To long bond traders it was a disappointment, to everyone else about as expected. Combined at roughly half the amount of QE1 which failed, absolutely no one, probably not even the Fed themselves expect QE2 to work in a 14 trillion dollar economy. It will of course, undermine the dollar’s value, and crude oil rose back above $85 a barrel. All interest now focuses on today’s supporting QE2 action by the Bank of England. Stay long precious metals.

In essence the Fed’s High Priest is betting that a new stock bubble will make American’s feel wealthy again, so that they’ll all rush out and start borrowing and spending again, bidding up real estate prices along the way. Voodoo economics never resurrected the Japanese economy in 20 years of trying, it will generate some more massive book profits to the bailed out banksters, who will no doubt move it out of the dodgy banks as fast as possible via bankster bonuses. The central banksters allowed fiat currency casino capitalism to distort the system to the point of destruction, now they’re out of all policy

options except trying to devalue the currency and trigger inflation. Ominously for them, the Baltic Dry Index has started falling again and is now back to languishing in the mid 2000s. The outlook for 2011 continues grim. The currency wars go on.

Below, mainstream media picks up on what LIR readers have been well aware of for years, the fiat dollar reserve standard is failing, and the Fed’s actions and US deficits will just make it fail faster.

"It is inherently extraordinarily difficult to know whether an asset's price is in line with its fundamental value. It's not obvious to me in any case that there's any large misalignments currently in the U.S. financial system."

Dr. Ben Bernanke. November 16, 2009

Fed's $600bn gamble risks throwing away America's biggest asset

Apparently, there's been an election in the US. The BBC tells us that America's wholly unsurprising verdict on the past two years is frightfully important and signals the end of the Obama dream, whatever that may have been; it was never entirely clear.

By Jeremy Warner, Assistant Editor Published: 7:35PM GMT 03 Nov 2010

Barely able to disguise his horror at the result, Mark Mardell, the Beeb's North America editor, solemnly pronounced that the hope Obama raised when elected president had turned out to be "too audacious for the times".

It didn't seem to occur to him that Obama's drubbing was not so much a case of haplessly falling victim to economic circumstance but was in fact largely down to incoherent legislative experiment, blind disregard for the deficit and chronic mishandling of the economy. Americans had reasonably expected better.

Obama's punishment will make little if any difference to the mess the US economy finds itself in and in any case is something of a sideshow against the latest high risk policy initiative the Federal Reserve is visiting on an already battered nation. The Hill can't act, but the Fed still stands ready and willing at the roulette wheel.

The fresh $600bn (£372bn) infusion of quantitative easing announced on Wednesday may or may not provide a lift for beleaguered domestic demand – both Goldman Sachs and HSBC have said much more is needed to escape a real or imagined liquidity trap – but one thing it certainly does do is further debauch the currency. Never before has dollar hegemony been so much under threat.

By flooding the world economy with yet more freshly minted dollars, America further undermines faith in the greenback as an internationally reliable store of value and is thereby squandering an economic and geo-political asset of huge importance to the nation's history.

The dollar's reserve currency status means that America can borrow at will in its own currency from the rest of the world, and at favourable rates to boot. This privilege is being recklessly thrown away. Every time the Fed prints more dollars to fight the domestic recession, it further devalues that debt. The lenders are understandably getting restless.

As is now becoming steadily more apparent, dollar hegemony was a major underlying cause of the crisis, for it allowed America to go on an unrestrained borrowing binge; the developing world is ever more minded to think its demise part of the solution.

The Fed is taking a massive gamble with America's long term future by blindly pursuing further monetary stimulus; it may take time, but the dollar's all powerful reign on the world stage is drawing to a close.

Like it or hate it, the dollar reserve standard was behind the G-20s prosperity, even if it did all end in casino capitalism, conspicuous over consumption in the west, irredeemable, unpayable debt, banksterism, and the greatest real estate mortgage and securitisation fraud in the history of the world. Now comes the aftermath and no one has any real idea of what to do. Irredeemable fiat currency is the problem. Out of control central banksters propping up dead crony banks is the problem. Corrupt politicians unwilling to tell the truth to their electorates is the problem. The Fed and Bank of England’s remedy is to simply move the problem into next year by making it bigger. I expect a full blown dollar crisis to hit at some point next year and the crisis to lead to the remonitisation in a settlement sense , of precious metals. The trigger, in my opinion, will be the realization that rampant fraud in America’s real estate securitisations, has rendered the securities virtually worthless, since the title to the underlying properties has now become broken. No one knows who the real note holder is anymore, nor if some of the alleged owners haven’t already been paid off with the CDS bailout of AIG. When the scale of this disaster sinks in it will be every bit as bad as the collapse of Amsterdam’s tulip bubble, the South Sea bubble and the Mississippi scheme of past history.

While the USA timebomb continues ticking into next year, Ireland’s timebomb is all set to detonate. Below, the market is now betting Ireland has to restructure.

Ireland is running out of time

By Ambrose Evans-Pritchard Economics Last updated: November 3rd, 2010

Ireland has been desperately unlucky.

The bond crisis is snowballing out of control before the country has had enough time to let its medical, pharma, IT, and financial services industries (don’t laugh, some of it is doing well) come to the rescue.

Yields on 10-year Irish bonds surged this morning to a post-EMU high of 7.41pc.

Yes, Ireland is fully-funded until April – and has another €12bn in pension reserves that could be tapped in extremis – but that is less reassuring than it looks. The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke.

Once a confidence crisis takes root in this fashion it starts to contaminate everything, as we are seeing in punitive borrowing costs for Irish banks.

The uber-strong euro does not help. Under the IMF’s rule of thumb, currencies should fall by 1.1pc to offset every 1pc of GDP in fiscal tightening, ceteris paribus. Given that Ireland is going through the most wrenching fiscal squeeze ever conducted in a modern economy – though Greece is catching up – it needs a devaluation to match. Instead, the euro has risen by 18pc against the dollar since June. (less in trade-weighted terms).

UCD professor Karl Whelan, a former Fed economist, told me this morning that there is a “reasonably high probability” that Ireland will have to turn to the EU-IMF even though this will be resisted until the bitter end as a horrible humiliation.

The Fianna Fail government has one last chance to avoid tutelage. He advises draconian cuts of €7bn when the 2011 budget is unveiled in coming days, rather than the €3bn previously agreed.

“Yields on government bonds have priced in a high likelihood of default. If this continues, Ireland may not be able to continue borrowing on the sovereign bond market,” he said in an article posted on The Irish Economy website, a good source for anybody following this Gaelic tragedy.

He rebuts the oft-repeated claim (including by me, I confess) that Ireland had shown admirable courage in getting a grip early. “They have taken far too long to admit the scale of the fiscal problem that we are facing”

His UCD colleague Colm McCarthy said Dublin has until January or February at the latest to return to the bond markets after suspending all auctions when yields exploded. “The €1.5bn not borrowed in October plus the €1.5bn not borrowed in November represent borrowing postponed, not borrowing avoided,” he said in the Irish Independent.

“What if the re-entry to the bond market doesn’t work? The amount required is not offered or the rate of interest demanded is just too high to be affordable. In either case early resort to a bailout would be unavoidable.”

“There’s danger in just shoveling out money to people who say, ‘My life is a little harder than it used to be, at a certain place you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’”

Charlie Munger. With apologies to European banksters and pension funds everywhere.

At the Comex silver depositories Wednesday, final figures were: Registered 51.31 Moz, Eligible 59.15 Moz, Total 110.46 Moz.


Crooks and Scoundrels Corner.

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

Today, tulips = RMBS. RMBS = Amsterdam tulips. Value = ???

“With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”

Dr. Ben Bernanke. November 2005.

The enormous mortgage-bond scandal

Oct 13, 2010 11:21 EDT

You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

I mentioned this back in September, and I’ve been doing a bit more digging since then. And I’m increasingly convinced that the risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

The key firm here is Clayton Holdings, a company which was hired by various investment banks — Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch, Lehman Brothers, Morgan Stanley, Deutsche Bank, everyone — to taste-test the mortgage pools they were buying from originators.

Here’s how it would work:

First, the bank would put in a winning bid for the pool of mortgages, with the intention of slicing it up into mortgage bonds and selling those bonds off to investors at a profit.

After submitting the winning bid, the bank would commission Clayton to take a closer look at a representative sample of loans in the pool. Clayton controlled as much as 70% of the market for this service, which is known as third-party due diligence. But Clayton’s not at fault here, and the problem is likely to apply no matter who performed this service.

The size of the representative sample would vary according to the size of the loan pool; it could be anywhere between 5% and 35% of the loans in the pool. Essentially, Clayton would go back to the loans, one by one, and re-underwrite them after the fact, checking that the originator’s underwriting standards were in fact being upheld.

---- Look at the first line. Clayton reviewed 1,280 loans on behalf of Citigroup in the first quarter of 2006. Of those, it accepted 554 outright: they lived up to the originator’s underwriting standards. It also waived another 144, on the grounds that there were mitigating factors (a large downpayment, say). And it rejected 582 for a rejection rate of 45%.

This kind of information was valuable to Citigroup: it showed them that the quality of the loan pool was much lower than you’d think just by looking at the ostensible underwriting standards.

Armed with this information, Citigroup would do two things. First of all, it would take those 582 rejects and put most of them back to the underwriter. Essentially, they said, the loans weren’t as advertised, and they didn’t want them. But Citi would still keep some of them in the pool.

But remember that Clayton had tested only a small portion of the loans in the pool. So Citi knew that if there were a bunch of bad loans among the loans that Clayton tested, there were bound to be even more bad loans among the loans that Clayton had not tested. And those loans it couldn’t put back to the originator, because Citi didn’t know exactly which loans they were.

If there had been any common sense in the investment banks, that would have been the end of the deal. But there wasn’t. Rather than simply telling the originator that its loan pool wasn’t good enough, the investment banks would instead renegotiate the amount of money they were paying for the pool.

This is where things get positively evil. The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren’t going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

"the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."

Henry Paulson. March 13th, 2007

The monthly Coppock Indicators finished October:

DJIA: +204 Down. NASDAQ: +289 Down. SP500: +196 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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