Friday, January 30, 2009


In April of last year, I noted that lending standards have a highly influential impact on the macro picture. Note the Fed charts in the PDF link below.

That squeezing sound...

With global interest rate compression and all asset classes under pressure, the refusal of state insurance regulators to loosen capital requirements comes at a most unwelcome time.

U.S. life insurers denied looser capital requirements
Thu, Jan 29 16:18 PM EST
NEW YORK (Reuters) - State insurance regulators voted against a proposal to loosen capital requirements for the battered life insurance industry.

The National Association of Insurance Commissioners (NAIC), a group representing regulators in all U.S. states and territories, reached the decision on Thursday after weighing the proposal over nearly three months. It did not rule out taking up the matter again in the future.

"You need to be conscious of the message this will send to consumers," said NAIC president Roger Sevigny, ahead of a vote on the matter.

Many commissioners voted against easing capital rules, citing consumer rights, and that more time should be taken to consider such changes with financial regulation already under a microscope given the global credit crisis.

"The headline still will be that we diluted capital systemwide," said Eric Dinallo, New York insurance superintendent.

A group of regulators had voted earlier this week to recommend six of nine measures be approved, which could have given companies such as Prudential Financial (PRU.N), Hartford Financial (HIG.N) and Lincoln National (LNC.N) a boost at a time when credit is tight.

State regulators impose capital requirements on insurers to make sure money is set aside when policyholders have claims.

The changes had been called for by the American Council of Life Insurers (ACLI), a trade group, to revamp life insurers' regulatory capital requirements to eliminate redundancies in reserve requirements. The changes could have, based on ACLI's estimate, freed up about $25 billion to $30 billion in capital, or up to 7 percent of life insurers total adjusted capital in 2007.

Thursday, January 29, 2009

Tilting the axis... light of the arguments (and the modern Monroe Doctrine) I have repeatedly forwarded here.

Jan. 29 (Bloomberg) -- Brazilian President Luiz Inacio Lula da Silva is shunning the World Economic Forum in Davos this week and the chance to hobnob with business leaders and 41 heads of state. Instead, he’ll join more than 100,000 activists from around the world at an anti-capitalist jamboree in the Amazon.

Lula’s government is spending 78 million reais ($34.4 million) to bring groups from 59 countries to the 8th World Social Forum. They include a sex workers union from India and Belgians seeking to abolish the World Bank. Today, he’ll discuss the global financial crisis on a panel with Venezuelan President Hugo Chavez, one of the U.S.’s harshest critics, and Chavez’s presidential allies from Bolivia, Ecuador and Paraguay.

“He’s picked sides,” said Oded Grajew, a former businessman who organized the first Social Forum as a counterpoint to Davos in 2001 and has been a friend of Lula’s for 20 years. “Lula doesn’t want go to Davos and hear the same ideas that led the world into bankruptcy.”

Lula’s decision to attend the forum is a slap at the bankers whose “casino” mentality he cites almost weekly as bringing about a crisis in capitalism. It also helps shore up support among his leftist base, who heckled him at his last appearance at the forum in 2005 for allegedly governing on behalf of Brazil’s elites.

Monday, January 26, 2009

Secret organizations control everything.

No they don't.

In times of uncertainty, economic upheaval, and political instability, it is a dead certainty that we will be inundated with articles, books, opinions by pundits, and icendiary speeches which will assign the blame for the current malaise to shadowy organizations, back-room dealing, and cabal's of elites whose common threads are race, culture or (GASP!!) going to the same Ivy League University.

The authors of same are usually people who have not managed a large complex organization with many moving parts. Some of the authors even state that government is (paradoxically) inherently incompetent, yet assert that certain groups operating within government have super-human capabilities.

Apparently, these operatives can see the future and engineer outcomes (formerly) based on a massive amount of variables. They can rig elections, commit crimes with impunity, sell billions of dollars in securities without anyone knowing about it, destroy governments and enslave whole populations. These operatives can out-smart everyone...except the good and righteous people who see through the Wizard of Oz's pyrotechnics.

And so it goes. The authors and pundits ask rhetorical questions like "there was no credit crisis, so why was one engineered, and to whose benefit?" As if the answer to that question either solved a problem or assigned causality.

But this impetus for humans to assign causality is one of the strongest heuristic biases we unfortunately possess. In good times, humans over-assign positive causality and worship "genius" politicians and CEOs. These gilded people traversed the pitiful obstacles placed before them and triumphed. All manner of investigatory techniques are used to extract the good habits and lessons to be learned from these shining examples of human achievement. Which books did they read?, what schools did they attend? who are there heroes?, what religious practices do they endorse?, what pets do they prefer?

In bad times, these useless, avaricious, miscreant reprobates all collaborated to rob and enslave the general populace. All manner of investigatory techniques are used to demonstrate that these people are connected, have all been enriching themselves illegally, have no compunction or restraint in their immorality, and only seek to destroy the U.S.A. and move to the Caribbean. We need to know who their friends are, which books they read, which academic influences are communists, which school they attended.

Humans NEED explanations so violently that the lack of one causes them more consternation than the sober, objective and temperate pursuit of the truth (which usually lies between the two poles used for example in this post). Humans assign more value to causality that is quickly and easily understood than one that takes time and is more nuanced and complex. We see this everyday in the markets with the incessant news headlines attributing this or that down/up move to "X" event, only to learn months later that "Y" was the true cause.

Unfortunately, a more thoughtful investigation requires time, education, and no deadlines. The leisure class is a dying one these days...

probably too busy thinking of ways to ship us all off to Mars to their alien masters.

Saturday, January 24, 2009

Just wait until the axis shifts...

...from a northern hemisphere emphasis of the world.

The below article is interesting.

The "Obama Doctrine" will see the U.S. out-compete the Chinese in emerging markets. The option-value of U.S. security will be most felt in the emerging markets of the antipodes (Central and South America, Africa). Zambia's official language is English, it has a large HIV problem, 6 Billion in foreign debt, and its major export is copper. It lies landlocked in a continent where security is, charitably speaking, lacking. It is flanked by failed states (Zimbabwe and Angola). Investing in such a country without security and legal rule-sets opens up tremendous risk.

And China will have domestic challenges. The Chinese mercantilist policies (and economic "miracle") were only sustainable given global demand. They stand on a very precarious ledge with little domestic demand, an artificially weak currency, and Trillions in foreign currency savings...and all of this cloaked in an opaque political system that is rife with corruption, cronyism, and secrecy.

This article is also quite interesting as it is clearly evidence that individual Chinese people are diversifying their business pursuits. The point being capital movement at home will likely soon be restricted.

“We don’t have the type of problems we had in the past… We can get Chinese investors. You know the Chinese and perhaps the Indians seem to be the only people to have money left to invest in the mines. Several Asians, including the Chinese, are interested in coming to Zambia to take any empty mines,” he said.

China, which has pumped billions of pounds in aid and loans into Africa in the last 10 years, has an estimated $2 trillion in foreign currency reserves which it plans to diversify away from Western economies and dollar-denominated funds.

Economists say it plans to use this war chest to buy up operations abandoned by western companies – a move which delights many African countries who say former colonial powers resent China’s presence because they see Africa as their own turf.

Over the past decade, a third of all new trade and investment in Africa has come from Asia, most of it from China with India a close second. Economists say that even though demand from these countries has fallen, it has not collapsed and demand from emerging economies will ensure prices recover and remain buoyant.

Friday, January 23, 2009

Review of fiat currency systems and national debt.

The below remarks by Mr. Schiff beg the question of whether or not the premises he relies on to formulate predictions are correct. Being right for the wrong reasons (thus destroying any chance of future generality) is a terrifying prospect for policy makers and economic theorists.

And so today I respond to this notion that foreign nations "fund" American national debt (or the corollary "what if no-one buys our debt??) in an era of floating, fiat currency.

I am not advocating a monetary system here, only recounting what I see as true. The government has sole control over our monetary system. This does indeed make me somewhat nervous given the history of same. I am also not discussing geo-political concerns, which are of paramount importance in my opinion on all economic matters...this is only a little discussion on monetary economics.

First off, its been a brave new world since 1971. The gold standard set limits to bank reserve multiplication and money supply. This is no longer the case with the current "modern" system.

The U.S. does not need to borrow, tax, or do anything of the kind in order to spend. That statement itself throws people off when I try to explain current monetary economics. The U.S. dollar is a currency of the Federal government's creation. It spends in that currency. It does not have to "get" dollars from anywhere or anyone in order to spend them.

But what happens when government issues Treasuries?. It simply offers banks and foreign countries an opportunity to exchange cash (and non-interest earning reserves) for interest-earning Treasuries. It inures to our benefit if countries do not wish to earn interest on their reserve assets. The Fed spends, adds reserves to the banking system, then "borrows" if it wishes to drain the reserves.

So our (wonderful and benevolent) Federal Government spends (literally creating money by crediting bank accounts), then taxes and we are left with the remainder.

Thus, if China, Japan, OPEC members, et al., decided no to buy our debt, what would really happen? Recall that Real goods and services are leaving said countries. We have been getting those real goods and services, and providing the world's only reserve currency. In order for the trade surplus to balance, we tacitly agree to later export our goods and services at whatever prices we wish. We have benefits and they have costs, promises, and the peace of mind that comes with holding 2 Trillion dollars in U.S. securities that only decrease in "value" when panicked holders sell them.

In other words, they are in an epic Gordian knot. If we did not design this knot, then we should have because it near-guarantees the continued reliance on the dollar and the international security that only the U.S. can provide. This is the greatest non-military victory in the history of the world. One wonders if Nixon realized the power he granted to the U.S. when leaving the Gold standard. It also has the added benefit of (hopefully)ensuring relative peace during harsh economic circumstance.

Of course, with our military being 20 times as effective as the next 8 countries combined...

The World Won't Buy Unlimited US Debt
2009-01-23 02:27:40.359 GMT

By Peter Schiff

Barack Obama has spoken often of sacrifice. And as recently as a week ago, he
said that to stave off the deepening recession Americans should be prepared to
face "trillion dollar deficits for years to come."

But apart from a stirring call for volunteerism in his inaugural address, the
only specific sacrifices the president has outlined thus far include lower
taxes, millions of federally funded jobs, expanded corporate bailouts, and
direct stimulus checks to consumers. Could this be described as sacrificial?

What he might have said was that the nations funding the majority of
America's public debt -- most notably the Chinese, Japanese and the Saudis --
need to be prepared to sacrifice.
They have to fund America's annual trillion-dollar deficits for the
foreseeable future.

These creditor nations, who already own trillions of dollars of U.S.
government debt, are the only
entities capable of underwriting the spending that Mr. Obama envisions and that
U.S. citizens demand.

Thursday, January 22, 2009

Lessons in creditility, part II...

...Swiss Style.

Now read these two Lessons in credibility posts and ask yourself "in what currency would I place investments?"

What a difference between Central Banks.

ZURICH, Jan 20 (Reuters) - The Swiss National Bank is ready to pull out all stops to avoid deflation and may use unlimited foreign exchange interventions and even a temporary fixed currency regime, the SNB Vice-Chairman Philipp Hildebrand said on Wednesday.

Following are key sections from his speech held in German. (The speech abstracts were translated by Reuters and are not official SNB translations):

"Real deflation has to be avoided at all costs."
"Avoiding deflation is conceptually more difficult than the fight against inflation."
"A central bank has instruments at its disposal to supply the economy with liquidity and stimulate it if necessary even with short-term interest rates close to zero."
"The further use of instruments is not without risks. The national bank will carefully asses if and to what degree they will be used. We remain committed to a policy that sticks to the goal of price stability and communicates clearly and openly. This means:
-- "The national bank states publicly and clearly: Deflation is just as undesirable as inflation.
-- "The national bank can and will continue to provide liquidity -- as much and for as long as needed.
-- "The national bank will reduce this extra liquidity as soon as it is no longer needed, i.e. before it can create inflationary effects."

"We are well aware that the road we are taking decisively in fighting this historical crisis has long-term risks. At the same time we are convinced that the risks attached to not taking this road would be much bigger."

Wednesday, January 21, 2009

Lessons in credibility...

...or the lack thereof.

The below remarks by Mr. Trichet (who has been less than prescient concerning the scope, severity, trajectory, and solubility of the crisis in the EU) are laughable.

Re-defining economic terms does not escape the problem...nor does it serve to convince anyone that a united pan-European solution will present itself.

European Central Bank President Jean-Claude Trichet played down the threat of deflation and said suggestions that countries could leave the euro zone in wake of the financial crisis were "unfounded".

"There is presently no threat of deflation," Trichet told a committee of the European Parliament on Wednesday.

"We are currently witnessing is a process of disinflation, driven in particular by a sharp decline in commodity prices." "It is a welcome development," he said, adding that the fall in energy, and other prices should help boost struggling economies.

The ECB chief also rebuffed suggestions that some countries may be looking to quit the euro zone after the recent financial turmoil.

"I think these rumors are unfounded about the euro," he said.

With the global financial crisis forcing governments to pump money into rescue and economic stimulus packages, question marks have been raised over their ability to pay for the plans.

Markets have begun pricing in the once the unthinkable -- that the euro zone might break up.

Foxes, henhouses...

...and point/counterpoint.

"Although the tax disclosures provided a bump in Geithner's confirmation process, he appeared to have wide support from both parties.

Grassley said he recognizes that many in Congress view Geithner, who worked closely with the outgoing administration on financial bailouts as head of the New York Federal Reserve Bank, is "possibly the only man for the job of healing the recession before us and a very fractured economy."

"To some, he is not only the best choice, he is the only choice," said Grassley."

...and the rejoinder:

By embracing Geithner, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG’s resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.


Sunday, January 18, 2009


And no EU leadership promising immediate action. Its every nation for itself, and devil take the hindmost. This is not what Jean Monnet had in mind.

Europe had "catastrophic" 4th quarter says EU's Verheugen
Sun Jan 18, 2009 7:21am GMT
BERLIN (Reuters) - The European economy is sliding deeper into recession and the fourth quarter of last year was "catastrophic," European Union Industry Commissioner Guenter Verheugen said on Sunday.

"The figures the European Commission will present next week will, unfortunately, show that we have slipped deeper into recession," Verheugen told German radio DeutschlandFunk.

"The last quarter of 2008 was catastrophic in every respect."

It was unclear whether he was referring to the euro zone or the wider European economy. The European Commission is due to present its forecasts for the euro zone next week.

Saturday, January 17, 2009

The euroskeptic's most virulent article yet...

...highlighting one of the themes presented here for over a year.

"Mexico's Tequila drama in 1994 was triggered by a combination of the Chiapas uprising, a current account haemorrhage, and bond jitters. The dollar-peso peg snapped when elites began moving money to US banks. The game was up within days.
Fixed exchange systems – and EMU is just a glorified version – rupture suddenly. Things can seem eerily calm for a long time. Politicians swear by the parity. Remember John Major's "soft-option" defiance days before the ERM blew apart in 1992? Or Philip Snowden's defence of sterling before a Royal Navy mutiny forced Britain off the Gold Standard in 1931.
Don't expect tremors before an earthquake – and there is no fault line of greater historic violence than the crunching plates where Latin Europe meets Teutonia."

No comment...

...regarding the proximity to Government, etc.

FUNDS.—The President and the heads of Federal departments and agencies shall manage and expend the funds made available in this Act.

On another note, I applaud the defense spending. The option value of holding the world's most capable military is very, very far in the money during times of political and social upheaval.

Friday, January 16, 2009

Nationalization on the Emerald Isle...

Say goodbye to Basel II. When the government is the bank, a different set of rules applies.
Ireland to nationalise Anglo Irish Bank
January 16, 2009 - 9:39AM
The Irish government announced Thursday that it would nationalise Anglo Irish Bank, saying a planned injection of public money was no longer enough to secure the troubled bank's future.

"The government has today decided, having consulted with the Board of Anglo Irish Bank Corporation plc, to take steps that will enable the bank to be taken into public ownership," Finance Minister Brian Lenihan said in a statement.

He said the 1.5-billion-euro ($US1.97 billion dollar) plan announced last month to recapitalise the bank will not go ahead, because its funding position had weakened since then.

Lenihan also said a loan scandal had caused "serious reputational damage".

B of A

With a finite amount of TARP funds (and a similar scarcity of political patience), taking as much "assistance" as possible (in the form of capital injections, guarantees on assets, etc.) is a great way to destroy your competition.

Thursday, January 15, 2009

The "reliability" of the Paper Dragon's Economic releases...

For anyone who reads this blog (search "Paper Dragon" and see previous articles), it should not be news that Economists are "questioning" China's wonderfully smooth growth records.

However, the financial media is now starting to ask questions about annual GDP growth figures that are (warning: slight exaggeration ahead) as smooth as Madoff returns.

All this "growth" and the Yuan does not appreciate. GDP and economic releases are and always have been an engineering problem (input X figures to achieve Y) for political regimes similar to China's system.

Economists at odds over China data reliability
By Geoff Dyer in Beijing
Published: January 14 2009 17:10 | Last updated: January 14 2009 17:10
Ask a Chinese official about the prospects for the economy this year and the response will be short and crisp – “8 per cent”. Some aim a touch higher, while a few others talk vaguely of risks. But none departs from the party line of uninterrupted high growth.

The target of 8 per cent is to assure Chinese citizens that the authorities have the situation firmly under control. Yet given the obvious and sharp slowdown in the economy in recent months, this confident prediction has reopened a debate about the credibility of Beijing’s growth statistics.

Since China’s ability to weather the international financial crisis will help determine the depth of the global recession, investors all over the world are asking whether they can rely on official statements about the performance of the economy.

Few economists doubt the underlying trend of high growth in recent decades in China, but many believe that the authorities play down the volatility of the economy – under-reporting growth in boom periods and over-reporting in the years when activity is weak.

The suspicion was underlined on Wednesday when the Chinese statistics bureau announced that growth in 2007 had been revised up to 13 per cent from 11.9 per cent – the second significant revision of the gross domestic product figures for that year. The reliability of statistics will be at the fore again next week when last year’s fourth quarter GDP figures are released, a period for which most indicators suggest there was a rapid slowdown.

Wednesday, January 14, 2009

Hastening the Obama Doctrine

In addition to Cubazuela, Mexico is on the radar for domestic "disequilibrium". I have maintained repeatedly that an antipodean emphasis (emphasizing Latin America and Africa) will punctuate the President-elect's foreign policy. This emphasis will be similar to the Monroe Doctrine and will provide a very clear signal to the rest of the world as to what regions are off-limits.

(U.S. shipment of 3,000 tons of ammunition to Israel is certainly a clear signal, but that is another story entirely.)

The United States (warning: untested metaphor following) "phylogeny" will have us regress in times of environmental stress. I have outlined the protectionist leanings (and the press has certainly been revisiting the Smoot-Hawley act recently) and Keynesian reductionism. The foreign policy formation will follow the economics.

EDIT: Readers also are directed to the currency swap facilities the FED has engaged with the Mexican central bank...and not a word from the Fed about its 30 Billion investment.

SECOND EDIT: List of Mexican Credit Default Swaps on Sovereign debt (sovereign CDS have a U-shaped distribution of maturities that are linked to the instrument)

Again, no word from the fed about hedging the exposure. I have outlined its lack of concern in previous posts. (Thanks to my friend, GZ, for pointing this out for me)

Mexico CDS:
W 01/14 329.901
T 01/13 309.429
M 01/12 311.340

F 01/09 295.165
T 01/08 304.193
W 01/07 295.670
T 01/06 277.731
M 01/05 278.660

F 01/02
T 01/01 292.604
W 12/31 292.604
T 12/30 295.178
M 12/29 292.371 PASO - Mexico is one of two countries that "bear consideration for a rapid and sudden collapse," according to a report by the U.S. Joint Forces Command on worldwide security threats.
The command's "Joint Operating Environment (JOE 2008)" report, which contains projections of global threats and potential next wars, puts Pakistan on the same level as Mexico. "In terms of worse-case scenarios for the Joint Force and indeed the world, two large and important states bear consideration for a rapid and sudden collapse: Pakistan and Mexico.

Putting the "G" in...

Greece’s Sovereign Credit Rating Cut to A- by S&P (Update1)

By Maria Petrakis

Jan. 14 (Bloomberg) -- Greece had its sovereign credit rating lowered one step by Standard & Poor’s, which cited the country’s weakening finances.

The rating was cut to A- with a “stable” outlook, S&P said today in a statement from London. Greek stocks and bonds fell after the announcement.

“The ongoing global financial and economic crisis has, in our opinion, exacerbated an underlying loss of competitiveness in the Greek economy,” S&P said.

Greek 10-year bonds erased gains after the decision, with the yield on the benchmark 10-year note rising to 5.38 percent. The ASE Index extended losses, falling as much as 5.5 percent, the most in more than two months.

Tuesday, January 13, 2009

Putting the "P" in PIGS

...and this will hit the "B" in "BRICS" as well...

2009-01-13 15:55:28.133 GMT

Monday, January 12, 2009

Putting the "S" in PIGS

Divergence of Iberian and Mediterranean peripheral economies in the Euro area continues. How long until the core countries are forced to placate an angry populace?

The prospects of a "Good Euro" and "Bad Euro" and/or continued pressure for policy measures up to and including seceding from the Maastricht treaty and Euro area are more probable, especially in this environment of competitive devaluation, blatant mercantilism, etc.

"Ever-closer Union" indeed...

By Victoria Richards
Jan. 12 (Bloomberg) -- Spain’s long-term sovereign ratings
may be cut by Standard & Poor’s Rating Services which cited
“significant challenges” facing the Spanish economy.

T-Formation Redux

Its playoff season for American Football. Most of the remaining teams have similar playbooks. Run the football, play excellent defense, and dominate the other team physically. Perspicacious readers will also note this philosophy translates well to Rugby Union, where my favorite team, the SA Springboks, employ a similar style pejoratively referred to as "subdue and penetrate". It also explains their success despite a relative lack of "talent" compared to the more flashy teams such as the New Zealand All-Blacks.

[For my foreign readers, who find American Football hopelessly complex, a "playbook" is simply a set of instructions given to players to outline their responsibilities and actions during a football play. There is no other sport that requires a textbook size set of instructions, but complexity breeds innovation as very small differentials can be exploited.]

So Football evolves. For example, the "T-Formation", which was employed to great effect by The Chicago Bears in the 1940s (and even features in the Chicago Bear's fight song, still sung today), is now extinct. The forward pass and modern offenses have relegated such run-heavy formations to the scrap heap of history. (Read "The Blind Side" by Michael Lewis for a wonderful exposition on how the free agent market for players reinforced the importance of the forward pass in the NFL)

So on to Russia...

With few policy options available on the fiscal side, devaluing the Ruble (despite persistant claims that Russia would never do such a thing) is an interesting move. We will see continued aggression, either militarily (such as its Georgian expedition) or economically (such as the Ukraine) in order to smooth over this decision. This is what happens when you have former KGB officers running a "democracy". They run their offenses by old playbooks.

Unfortunately for rank and file proletariats in Russia, this means Putin will seek to increase his power using draconian, lack of due process means. These actions also set a worrying precedent for other countries in the region, which will closely observe any Western reaction and adjust their playbooks accordingly.

UPDATE 1-Russia devalues rouble on 1st trading day of 2009
2009-01-11 08:41 (UTC)
MOSCOW, Jan 11 (Reuters)
- Russia started the first trading day of 2009 with another mini-devaluation of the rouble on Sunday, making its 13th such step in two months as the country grapples with low oil prices and the possibility of a recession.

By 0751, the rouble had weakened to 35.30 versus a euro-dollar basket, extending losses of around 17 percent sustained in 2008 and moving beyond the 34.80 mark seen as the previous central bank support level.

An official at the central bank confirmed the rouble's trading band had been widened.

'For the next month or two the trend is clear, the population will continue to buy foreign currency, with everyone buying themselves a small slice of Russia's gold and forex reserves,' said Maxim Oreshkin, analyst at Rosbank.

'The pressure is coming from the real economy.'

On Sunday, the rouble weakened beyond the 30 mark versus the dollar for the first time since late 2003 and held near a record trough versus the euro set at the end of 20088.

The rouble downtrend started in late summer due to rising risk aversion over Russia's brief war with Georgia and fuelled by falling oil prices and broad flight from emerging markets.

Russian companies and citizens, mindful of the 1998 currency collapse, picked up the baton and started converting their money into euros and dollars, thus further pressuring the rouble. In November, retail rouble deposits fell 4 percent.

Thursday, January 08, 2009

Euro backed into a corner...

We see plenty of evidence that the ECB is simply not ready to ascend to a leadership position in the global economy. Trichet (and the ECB institutional structure) is completely reactionary in an economic environment that demands far more decisiveness than EU political will can generate, and is likely beyond the skill-set of career technocrats.

It should not be long until the joint populace of the EU demands that the ECB removes its head from the sand and follows the rest of the G20. My thesis of the "great rate compression" continues unabated.

And it is obvious which country is ahead of the cycle. 8 (Bloomberg) -- European confidence in the economic outlook fell to the lowest on record and unemployment rose to a two-year high, adding to pressure on the European Central Bank for more interest-rate cuts.

An index of executive and consumer sentiment dropped to 67.1 in December from 74.9 in the prior month, the European Commission in Brussels said today. That is the lowest since the index started in 1985. Separate data showed euro-area unemployment rose to 7.8 percent in November from 7.7 percent a month earlier.

European companies are cutting jobs and reducing investment in order to weather the first recession in the euro region’s 10- year history. A combined rate cut of 1.75 percentage points since early October and billions of euros in stimulus measures have failed to reverse the slide in confidence and data today confirmed the economy contracted for two straight quarters last year.

“It’s a real shocker,” said Martin van Vliet, senior economist at ING Bank in Amsterdam. “Today’s worse-than-expected data make an even more compelling case for the ECB to cut rates significantly further from here.”

Another brick in the wall...

More media waking up to the dangers of protectionism and the (hopefully) temporary primacy of governmental control of all G20 economies.

I will be posting something soon regarding the prospects for the U.S., which are excellent relative to its competition. These are times when macro factors control everything.
By Ambrose Evans-Pritchard
Last Updated: 6:52AM GMT 07 Jan 2009
Comments 22 | Comment on this article
The new wave of radical Democrats sweeping into Capitol Hill are insisting on a "Buy American" clause in the $750bn (£503bn) fiscal package being prepared by President-Elect Barack Obama.
The $17bn bail-out of General Motors and Chrysler last month was already a step across the Rubicon towards a protectionist industrial policy, even if that was not the motive. The EU is exploring a World Trade Organisation complaint over "illegal state aid." But the latest Buy American move is much more explicit.
"This is quite dangerous," said Peter Sutherland, chairman of Goldman Sachs International and a former director-general of the General Agreement on Tariffs and Trade (GATT). "The US is the key to keeping a one-world trading system, but there is always the tendency to go for protectionism in a recession, and this is the worst one I've ever seen."
Hans Redeker, currency chief at BNP Paribas, says the US risks setting off a collapse in discipline across the world. "The US has a leading role so this could set off a huge response in other countries," he said. "There is already talk of a €100bn (£91bn) fund in Germany to save its industry from being sold off cheap."
French president Nicolas Sarkozy has proposed a "strategic investment fund" to fend off "predators" – a euphemism for sovereign wealth funds from Asia and Russia – hoping to snap up France's crown jewels. "We will intervene massively whenever a strategic enterprise needs our money," he said.
Nationalist measures are becoming ever more brazen in emerging markets. Indonesia is resorting to special "licences" to choke off imports. Russia has reacted to the collapse in oil prices by imposing tariffs of 30pc on cars and 15pc on farm machinery. India and Vietnam have imposed duties on steel.
Pascal Lamy, the WTO chief, is so worried he has taken to displaying portraits of Willis C. Hawley and Reed Smoot at his Green Room in Geneva, evoking the arch-villains of the Smoot-Hawley Tariff Act that set off the trade wars of the Great Depression. The Act was forced upon a disgusted President Herbert Hoover in June 1930. This is the pattern in democracies. Lawmakers – with a constituency base – are the first to push for protection...

Wednesday, January 07, 2009

This is a good thing...

Note how the article cites "shareholder revolt" and other external pressured finally caused the offending admission. India should be proud that capitalism is working. Fraud will always exist, and no other system does as well as capitalism at ferreting it out.

This is the markets forcing discipline upon a company that was engaged in fraud. Markets are very good at doing this. Of course, reading the news one is bombarded with outliers and vivid examples. (recalling one of my professors, Richard Thaler's use of the term "availability bias", where the observer imputes a higher probability to an event given the extremeness of said event) Madoff certainly comes to mind, but that is the kind of event that no-one could have stopped given the people involved.
Satyam, which means “truth” in Sanskrit, plunged in New York trading, after earlier dragging down India’s benchmark index, in a scandal described as “horrifying” by markets regulator C.B. Bhave. Raju’s reign unraveled in the past month as a shareholder revolt blocked the asset purchases, a World Bank ban kept Satyam from bidding for orders and four directors quit.

“This is a black day for India, the software sector and corporate governance claims,” Arun Kejriwal, founder of Kejriwal Research & Investment Services, said in Mumbai. “If at all there’s an event that could be the biggest setback for corporate India, it is this.”

Reclaiming the satellites, cont.

Russia tightening the screws...although it would be a mistake to conclude that it is operating from a position of strength.

Like the Secretary of Defense, Robert Gates, has said (regarding how Prime Minister Nikita Khrushchev was embarrassed that then President Dwight D. Eisenhower's plane was bigger than his). "I mean, this is pretty deep-seated stuff, and so trying to avoid touching on one of Russia's insecurities is almost impossible,".

January 8, 2009
Ukraine Says Russia Shuts Down All Gas Supplies to Europe

PARIS — All gas supplies to Europe via Ukraine were shut down Wednesday as the pricing dispute between Russia and Ukraine escalated. The European Union called for an immediate solution to the crisis.

The cutoff showed the first signs of hitting the European economy as the Hungarian unit of the Japanese automaker Suzuki said it was halting production because of restrictions on industrial users of gas. The Hungarian news agency MTI quoted a spokeswoman as saying Suzuki hoped to restart production Monday.

The Ukrainian gas company Naftogaz accused Gazprom, the Russian gas monopoly, of halting all transshipments at 7:44 a.m. Wednesday. But in Berlin, Aleksandr I. Medvedev, Gazprom’s deputy chief executive, told journalists that it was Naftogaz, the Ukrainian company, that had closed a fourth pipeline, ending all transshipments to Europe.

“Unfortunately, the situation is continuing to deteriorate,” Reuters quoted Mr. Medvedev as saying. “Yesterday night, Ukraine completely shut down all export pipelines to Europe via Ukraine.”

Jose Manuel Barroso, the president of the European Commission, called Prime Minister Vladimir V. Putin of Russia and the Ukrainian prime minister, Yulia Timoshenko, to urge that they quickly restore the flow of gas, a spokeswoman for the commission said in Brussels. The spokeswoman said Mr. Barroso told the leaders that it was unacceptable that Europe be a hostage to their dispute. Mr. Barroso also suggested the European Union was willing to send observers to monitor the flow of gas to Europe, if requested.

The shutdown left Slovakia, the Czech Republic, Austria, Hungary and Romania with no Russian gas supplies amid a bitter cold snap across much of the continent. European Union countries have access to some other sources of gas — including Russian gas from other pipelines, and gas produced in Britain, Norway and the Netherlands — but the loss of the Ukrainian pipeline puts the European Union under pressure to push for a solution.

The cutoff began Tuesday, causing shortages from France to Turkey. Gazprom said Ukraine was siphoning off for itself supplies destined for Europe, and that Russia would reduce shipments by an equivalent amount. Russia had already halted all supplies to Ukraine for domestic use, saying its western neighbor was not paying enough for the fuel.

Gazprom is seeking to raise the price Ukraine pays for gas to $450 per 1,000 cubic meters from $179.50 last year. It also wants to collect what it says are fines for late payments on previous shipments.

In Vienna, the Austrian gas company OMV said Wednesday it was no longer receiving any Russian gas, after its deliveries fell 90 percent Tuesday.

Viktor A. Yuschenko, the Ukrainian president, called for immediate talks in Moscow to restart the flow.

The European Commission said Tuesday that the situation was “completely unacceptable” and called for the immediate restoration of the gas supply. Europe depends on Russia for 40 percent of its imported fuel.

Gazprom officials in Moscow did not immediately respond to requests for comment. Wednesday is the Orthodox Christmas holiday.

While each side blamed the other for the scope of the latest drop in gas shipments, Russia’s prime minister, Vladimir V. Putin, had personally announced Monday evening on state television that he was ordering a sharp reduction in gas flows, saying Ukraine was siphoning gas from the pipelines without paying.

For Mr. Putin, the escalation comes at a perilous time, as slumping energy prices threaten the fiscal health and political stability that have underpinned his popularity at home.

Some analysts of Russian politics had expected Mr. Putin to become more conciliatory as energy prices fell. Instead, he has taken a hard line in seeking to raise gas prices in Ukraine and perhaps create panic-buying on the international market, where prices of natural gas and oil, Russia’s leading exports, have fallen sharply in recent months.

“They’re still playing hardball, when they have to realize the rules have changed,” Marshall I. Goldman, a senior scholar in Russian studies at Harvard and the author of the recent book “Petrostate: Putin, Power and the New Russia,” said in a telephone interview. “It happened so quickly that I don’t think they’ve had time to realize the implications.”

With temperatures plunging, European leaders expressed mounting concern. Some countries announced rationing for industrial customers to reserve enough heating for residential buildings.

A spokesman for the European Commission said that the cut had come “without prior warning and in clear contradiction of the reassurances given by the highest Russian and Ukrainian authorities,” adding, “This situation is completely unacceptable.”

The cutoff appears to have multiple aims.

Ukraine has angered Russia by seeking membership in the North Atlantic Treaty Organization, as has Georgia, a country Russia fought a brief war against last summer.

Mr. Putin is also under heavy pressure domestically. Oil and gas exports provide about 60 percent of the Russian budget; oil prices, meanwhile, have fallen by about two-thirds since their peak last summer.

The effects are rippling through the economy. The ruble is being devalued, Russian companies are facing bankruptcy and the government’s huge budget surplus will turn into a deficit next year if prices do not rebound, analysts say.

At the same time, Russia’s relations with the West slumped to post-cold-war lows after Russia sent troops into Georgia in August.

Even as Russia will need foreign investment to offset dwindling energy export revenues, options are dwindling for attracting investors to a country that even in the best of times had a poor track record of property rights.

“The Russian elite mind-set right now is a residue of petro-confidence slamming into the financial crisis,” said Cliff Kupchan, a director at the Eurasia Group, a global risk-consulting firm based in New York. “So in my view, they’re confused about whether to seek help from the international financial system to solve their problems that way or continue a bare-knuckled approach to the world.”

Gazprom is seeking to raise the price Ukraine pays for gas to $450 per 1,000 cubic meters, from $179.50 last year.

It also wants to collect what it says are fines for late payments on previous shipments.

Ukraine has in turn demanded that Gazprom pay more to transship gas to Europe.

Executives of Gazprom blamed Ukraine. In an announcement on Monday, Mr. Putin and Gazprom’s chief executive, Aleksei B. Miller, said they would cut 65.3 million cubic meters of gas supplies for Europe. In fact, the reduction totaled about 240 million cubic meters, according to Gazprom.

Company officials said that they had intended to ship more fuel on Tuesday, but that Ukraine had blocked export pipelines. Ukrainian energy officials denied this.

“We are shocked that we’re not in the position to bring gas to the border of Ukraine because they shut down the pipelines,” Mr. Medvedev, a deputy chief executive of Gazprom, said at a news conference in London on Tuesday. “There is no reason to blame Russia or Gazprom.”

Oleh Dubyna, the director of Ukraine’s national energy company, Naftogaz, said he would fly to Moscow on Thursday to resume negotiations.

Gazprom’s spokesman, Sergei V. Kupriyanov, said the company was “ready to begin negotiations at any moment.”

A compromise may be harder to find this year, Thane Gustafson, an expert on Russian energy at Cambridge Energy Research Associates of Massachusetts, said in a telephone interview from Washington. “We’re talking about two sides that are under extreme constraint,” he said.

Among the pipeline routes that were affected the most was the so-called Western Balkan route, affecting supplies to Romania, Bulgaria, Macedonia, Greece and Turkey, said Ferran Tarradellas, a spokesman for the European Union energy commissioner, Andris Piebalgs.

Substantial cuts could also affect Slovakia, Hungary, Slovenia, Italy and Austria, Mr. Tarradellas said.

In Turkey, flows of gas through a pipeline that runs from Ukraine stopped completely on Tuesday morning, said the country’s energy minister, Hilmi Guler. The pipeline is a major source of gas for Turkey, which imports nearly all its energy.

Several other sources, including the Blue Stream pipeline, which carries gas to Turkey from Russia under the Black Sea, were unaffected, however.

David Jolly reported from Paris, and Andrew E. Kramer from Moscow. Reporting was contributed by James Kanter from Brussels, Dan Bilefsky from Prague, Sabrina Tavernise from Istanbul, and Ellen Barry from Moscow.

Monday, January 05, 2009

The opposite is equally likely.

When there are "strong" conclusion arcs presented by journalists, politicians and (most of all) academics, I always make time to question assumptions, introduce counter-factual scenarios, and attempt to determine if an opposite conclusion can rest on the same premises.

A good example of this is contained in the below article. The history of China has several examples of periods characterized by rapid international engagement, followed by economic success, followed by a disillusionment, followed by a "re-boot" (typically achieved through violence) to more traditional political and economic structures. There is a non-zero probability that China will simply replay the early 1900s (or the late 1800s, the early 1600s, the late 1500...etc.).

Again, I believe the compass of the United States influence will point towards the antipodes. China will certainly be a power, but not to the extent the current meme suggests.

China key to U.S. foreign policy success

U.S. President-elect Barack Obama, asked about his foreign policy priorities when named Person of the Year by Time magazine, listed nuclear proliferation, climate change and global poverty as well as Iraq, Afghanistan, Iran, the trans-Atlantic alliance, Russia, the Israeli-Palestinian conflict — and then, almost as an afterthought, "managing our relationship with China and the entire Pacific Rim."

In a way, this is good since it reflects the relatively calm state of that relationship, with no crisis that needs immediate presidential attention.

But the next president must recognize that China is not just a relationship to be managed. It is perhaps the key relationship that the United States must sustain if Obama is to achieve success in virtually all his other foreign policy priority areas.

In the 21st century, there is no relationship more important to the U.S. This does not mean that Washington can give up its network of alliances in Europe and in Asia. Those alliances are important. But Washington must give greater recognition of China's role in the coming decades.

It also does not mean that the U.S. should no longer stand up for democracy and human rights. In fact, the inauguration of Obama and the shutting down of the Guantanamo detention center should help restore Washington's moral stature and put it in a stronger position to support human rights around the world since it should no longer be accused of hypocrisy.

Sunday, January 04, 2009

Heads we win, tails you lose.

From whose perspective?

The Banks:
We will lend you money. You will partially fund the liability with a sinking fund. We will manage the sinking fund. If you lose money in the sinking fund, you must pay us for the loss. We will collect fees as a percent of assets in the meantime (the ultimate scaleable and compounding fee structure). This is called risk socialization with private gain. We will see you on the slopes.

Milan (and other Italian municipalities):
We will borrow money. We agree to your terms as they sound like good ideas and we love your suits. If we lose anything, we will claim ignorance of said terms. We will sue. Jurisdiction will be in Italy. This is called politicization of liability. We will see you on the slopes.

"Investment bankers, many based in London, spotted a major opportunity in the 1990s. Italian cities and regions wanted to borrow money. In order to avoid ballooning debt, the central government required local authorities to put away a percentage of the loan every year in a "sinking fund" so that when it was time to repay the full sum, they would be able to do so.
Investment banks offered to manage the sinking funds. While the funds initially had to be invested in Italian government bonds, the criteria were widened to include other government debt within the European Union. This could include debt from countries seen as more likely to default, such as Greece, as long as it was triple-A rated.
The banks took a fee to manage the sinking funds. They argued to the Italian authorities that as well as saving the money to repay their initial loan, they might also make some money from the investments. Many did when the global economy was booming.
All of the contracts were different. But critics have said some contained a sting which was not properly understood by some of the Italian authorities.
While the local authorities only earned a return on the money they put aside, the value of their total loan was at risk. The banks could invest all of the money the authority had borrowed through bonds. If everything went well, the bank would pay a return based on the incremental amounts the local authority was putting into the sinking fund, and keep the rest as profit.
If things went badly, it was the local authority which would have to pay for the loss – and then also have to pay off the bond when it became due."

Saturday, January 03, 2009

"Buy American"

More rhetoric and leanings towards protectionism (if not mercantilism as well). If such provisions are enacted in the fiscal spending bill, we can expect more instability from major (surplus) trading partners. I will post something soon about the history of China and its "tendency" to expropriate all foreign owned property, close up shop, and wait another few hundred years to emerge to the outside world.

We KNOW that markets provide better information to consumers regarding their consumption decisions given various budget constraints. We KNOW that markets are more egalitarian (read: "fair") than top-down decisions rife with special interest manipulation.

Given the sheer size of the fiscal stimulus bill, we once again see that our elected officials hold sway over incredible portions of public wealth...and access to those officials, for the express purpose of influence, is absolute power.

I would quote Lord Acton here...but you probably have done that already.


"President-elect Barack Obama’s advisers are looking at including a “buy American” provision in the economic-stimulus legislation that the incoming administration has made its first priority.

“We are reviewing the buy American proposal and we are committed to a plan that will save or create 3 million jobs, including jobs in manufacturing,” said Jen Psaki, a spokeswoman for Obama’s transition team."

Friday, January 02, 2009

We are not a business...we are an "INSTITUTION!"

More billions "invested" coupled with acronyms...vaguely reminds me of military spending. This time its 20 Billion under a "Targeted Investment Program" or "TIP". This obviously extends my government's fascination with acroynms and the power of legitimacy they think it confers upon any amount of spending. I also note the copious use of the word "institution" as opposed to "business". Now an Institution clearly needs to be rescued as it is a public good. Assuming the antecedent anyone?

Anyway, I enjoy lists. So the "Treasury will consider the following" list is especially interesting. Is this an exhaustive list? How will the Treasury weigh the various factors? Who will oversee the process of including more entities in the "TIP"? And why was "Because they are friends and/or past, current, or future business partners with senior members of the Treasury and/or FED" NOT included as one of the factors?

As I have said before, access to government officials is the out-performing asset for all financial institutions. The mushy language (the list items are all discretionary) only confirms this.

Washington, Jan 02 2009 January 2 - The Treasury Department today announced
guidelines for its new targeted investment program, under which $20 billion has
been invested in Citigroup.
Citi remains the first and only participant of this program, and has
confirmed receipt of the $20 billion investment Wednesday.
Under the Emergency Economic Stabilization Act (EESA), Treasury is required
to release details on the investment program. The guidelines will apply to any
future participants though Treasury did not indicate that any were currently
under consideration.
In determining whether an institution is eligible for participation in the
program, Treasury will consider the following:
-Whether destablization of the institution could directly or indirectly
threaten the viability of creditors and counterparties.
- Whether the institution is at risk of a loss of confidence and how much
stress is caused by unstable or illiquid assets.
- The number and size of other institutions in similar situations or the
number of those that would be destabilized by the institution being considered
for the program.
- The extent to which the institution's financial position could potentially
cause disruptions in credit markets, destabilize asset prices, increase
uncertainty or weaken the overall economy. &nbs p;
- The extent to which the institution can access capital elsewhere.
As with other investments through EESA, Treasury may invest in any
instrument it deems a troubled asset and will require institutions to provide
Treasury with warrants or other considerations to protect taxpayer interests.
Participating institutions will also be required to cap executive compensation
and possibly limit expenditures.

Its best to think before you act.

Below these remarks lies one of the more depressing articles in market history.

We see that the SEC has something called an "office of economic analysis". One wonders what they analyze. One only had to call any slightly sophisticated (on that note, I wrote about this on September 17, 2007) market participant and ask them what the ramifications would be.

And notice the tone..."it could have been much worse...we could have ignored everything and declared the equivalent of Martial Law on the markets and shut them down, so we should be thankful". Ah yes, what a master minister Mr. Cox is turning out to be.

Beyond that, the Treasury and Fed should be asked why they created "intense pressure" for the SEC to enact the short-selling rule. Who put pressure on the SEC to temporarily re-write existing rules...and for whose benefit?

By Rachelle Younglai

WASHINGTON (Reuters) - Under fire for regulatory missteps, top U.S. securities regulator Christopher Cox defended his agency's record but acknowledged some regrets over how he handled the worst financial crisis in decades.

The Securities and Exchange Commission has been lambasted by lawmakers and others for not doing enough to prevent the 2008 collapse of Bear Stearns and Lehman Brothers, interfering with markets and failing to detect the alleged $50 billion fraud at Wall Street financier Bernard Madoff's firm.

Cox, a Republican and former California congressman, said the SEC's focus has been customer protection and broker dealer regulation and that the agency "performed that traditional role superbly."

However, Cox said he had some regrets over a drastic action the agency took as markets were hurtling downward in September. For a few weeks, the SEC stopped investors from making bearish bets on financial stocks like Morgan Stanley (MS.N) and Citigroup (C.N).

The SEC's office of economic analysis is still evaluating data from the temporary ban on short-selling. Preliminary findings point to several unintended market consequences and side effects caused by the ban, he said.

"While the actual effects of this temporary action will not be fully understood for many more months, if not years, knowing what we know now, I believe on balance the commission would not do it again," Cox told Reuters in a telephone interview from the SEC's Los Angeles office late on Tuesday. "The costs appear to outweigh the benefits."

Less liquidity in the markets was one of the unintended consequences, experts have said.

The SEC imposed the temporary ban under intense pressure from the Federal Reserve and Treasury Department which insisted it was crucial to the short-term survival of these institutions, Cox said.

A few weeks after the temporary ban was lifted, global markets were again dropping precipitously, U.S. banks were begging the SEC to reinstate its short-sale ban and there was talk of shutting the markets down.

Cox said the chief executive of one major U.S. investment bank even urged suspension of normal trading rules across the entire U.S. market, likening the situation to how Abraham Lincoln suspended habeas corpus during the Civil War and Franklin Roosevelt sent Japanese-Americans to internment camps during World War Two.

The chief executive said, "that is how America made it through such crises, and we couldn't be too focused on maintaining the rule of law," Cox said. "That was advice we rejected."

Cox said he spoke to the White House, the chief executives the New York Stock Exchange and the Nasdaq, strongly urging them to keep the U.S. markets open.

Markets were never shut down and Wall Street investment banks weathered the market turmoil largely by transforming themselves into commercial banks.

It has been a rough year for Cox, who was recruited by the George W. Bush administration in 2005 to heal a fractious agency.

Initially, Cox managed to propose and adopt rules with little dissent from the agency's four other commissioners. He focused on modernizing the SEC, set a timetable for companies to submit financial reports with XBRL or interactive data, and reached agreements with the SEC's foreign counterparts to improve international enforcement.

Under Cox's watch, the agency also brought the second-highest number of enforcement actions in 2008 since a record in 2003 when staff dealt with fallout from the high-profile implosion of Enron.

However, his tenure as SEC chief will be colored by his handling of Wall Street's meltdown.

Cox said he tries to keep the criticism in perspective.

"If you know that you are doing everything you can to improve conditions for investors and markets ... if you know that the team of professionals that is working on the mission is first-rate, that is ample comfort against what are sometimes hastily drawn conclusions by others."

Collectivist Zombies

More of a rant today as vacation was no panacea for markets...

Pope Benedict, in his Christmas address from the Vatican, stated the following:

“In each of these places may the light of Christmas shine forth and encourage all people to do their part in a spirit of authentic solidarity,” the Pope said. “If people look only to their own interests, our world will certainly fall apart.”

While I certainly cannot disagree about the spirit of Christmas, I would vehimently disagree with this notion the world being a better place if only people ignored their self-interest.

Going beyond the impossibility of such a situation given human nature (and ignoring definitional problems of what "self-interest" means), it is extremely dangerous when people DO consider something more important than their self-interest. Collectivism, promulgated by nations, organizations, etc., has a far better chance to make the world "fall apart" than individuals cooperating with other individuals in the furtherance of their several selfish interests.

Subordination of self interest leads, by definition, to individuals acting for the furtherance of other people's goals, without due compensation or contract. Given human nature, this is not good.

And readers here will see where this is going. Economic conditions determine behavior. When conditions are bad (as they are now), deviation from self-interest can turn whole populations into Zombies. The human need for social interaction with like-minded individuals is, thank goodness, very strong...but this need can be subverted in difficult economic times to the great advantage of nations who have unstable populations, weak neighbors, and a need to place blame on someone "else" for their current predicament.