Monday, October 31, 2011

And yet these bonds rally...

From August 3, this year.

MF Global Holdings Ltd. (MF) took the cult of the Wall Street chief executive officer to a new level with its sale of bonds that pay a higher rate if Chairman and CEO Jon Corzine quits to take a job from the U.S. president.
The futures broker sold $325 million of five-year unsecured notes, the company said today in a statement. The notes will pay an extra percentage point of interest if Corzine is named to a federal post and confirmed by the Senate before July 2013, New York-based MF Global said yesterday in a regulatory filing.
“That seems crazy,” said William Larkin, a fixed-income portfolio manager who oversees $500 million at Cabot Money Management Inc. in Salem, Massachusetts, and has 22 years of experience. “I’ve never heard of something like this.”

MF Global

...its not just its exposure (and the ramifications of European Banks who are in the same position), but with 17 billion or so in debt of its own, who is now holding an empty bag?

This is quite the haircut...


The Lost Decade...

...continues for Japan. Bridges to no-where, and now "back up" cities.

Japan is considering building a new city that would take over the functions of Tokyo if the capital was crippled by an earthquake or other natural disaster.

The plan is being put forward by a group of politicians from across the spectrum and comes nearly eight months after the north-east of Japan was devastated by a magnitude 9 earthquake and tsunami. Nearly 20,000 people were killed or are still listed as missing, while experts are still trying to bring the damaged reactors at the Fukushima Daiichi nuclear plant under control.

If the earthquake had struck closer to Tokyo - which seismologists believe is overdue for a major tremor - then the results could have been catastrophic, the politicians said.

The planned new city - given the less-than-inspiring title of IRTBBC, standing for Integrated Resort, Tourism, Business and Backup City - could be built on a 1,236-acre site now occupied by Itami Airport, which used to be the main gateway to Osaka but has been largely superseded by Kansai International Airport.

Sunday, October 30, 2011

Ring-Fencing... it comes. The academic and propaganda machines for INCREASED euro-area powers and fiscal "cooperation" (read: entanglement) are in full rapid-fire print mode.

To wit, from this paper:

The stronger the statutory base establishing national fiscal rules (that may vary between mere party coalition agreements and constitutional law), the lower risk premia will be. But also the enforcement mechanisms of the rules turn out to be important while the body in charge of the supervision of compliance with the fiscal rule appears to be somewhat less important. Our results thus show that rules become the more credible to market participants the stronger their binding character is, and the more
effectively they can be enforced.
Moreover, the results point to significant benefits in terms of interest rate cost on public debt.

Breaking moratorium...

...only to provide evidence of my position...When Time Magazine takes a break from celebrity worship and stating the obvious to opine on economic happenstance, its good to take a step back and calculate what is already priced in the markets...

Friday, October 28, 2011 Michigan...

...Consumer confidence ticking up. The seeds being planted and the popular media guiding ever so faithfully for the retail investor to go the other way and be bearish...its just so easy for the market mistriss to pick the pockets of the weakest hand and be on its merry way to the best October ever for equities.

The Hound heeds his master...

...and remains loyal.

Speaking on his way to Perth, Australia, for a Commonwealth summit, the Prime Minister also warned against the 17 Eurozone nations colluding to undermine the European Union's free market rules.

He said: "London is the centre of financial services in Europe. It's under constant attack through Brussels directives. It's an area of concern, it's a key national interest that we need to defend."

Mr Cameron said that he will fight to prevent closer integration of the Eurozone countries leading to anti-competitive regulations.

"As the 27 we need to make sure that the single market is adequately looked after."

"There are a lot of things the eurozone is doing together. Having more meetings alone, establishing machinery - it raises the question of could there be caucasing?"

Thursday, October 27, 2011

Final Post regarding the Paper Dragon

What has been obvious to readers here for 4 years is suddenly "news" all over the popular business media. Time to move on to future bubbles and valuation plays.

The Markets...

...are a discounting mechanism. I am currently inundated by calls and emails from people who cannot believe this rally was possible. As I said before, given the dismal projections the market had priced in, the news today was obviously welcomed.


...the great Euroskpetic opines on the EFSF. The terms imposed by the Paper Dragon will be most interesting to me. The larger question being what and where is the collateral for all of this activity?

Whether it proves any more successful than past efforts over the past two years is far from clear. The package is a huge gamble. If it goes wrong, it may accelerate contagion to core Europe, hastening the denouement so feared by EU leaders.
The EU's €440bn bail-out fund (EFSF) will be leveraged "several fold" – perhaps to €1 trillion – chiefly by insuring the first 20pc loss of new bonds by Italy, Spain and other debtors. This creates a two-tier market, instantly downgrading old debt to lower status.
The plan will "probably" be buttressed by an off-books fund that uses EFSF seed money to rope in the International Monetary Fund, China, Japan and Russia.
French President Nicolas Sarkozy said he would call his Chinese counter-part Hu Jintao on Thursday to garner support.
Beijing will almost certainly impose terms, renewing its demand for open-door access for Chinese state firms investing in EU industry and for an end to Europe's veto on "full market status" for China under global trade laws.


The current rally based off of the positive GDP report and "solution" to the Greek problems is welcomed. The previous weeks of incessant reports regarding the destruction of Western Civilization were always far too dramatic to descend into reality.

But the European problem does remain, and they will have to determine if they want a United Europe or something different. My opinion on this has been fairly consistent; that the EU will mutate into "something else".

Any strategist who is either perma-bullish or perma-bearish will always enjoy periods of success, but risk having their emotional position percolate into their intellectual positions and thus disproportionately effect their logic. Guarding against a foolish consistency is something we all must strive to achieve.

Wednesday, October 26, 2011

Massive EU exposure... obviously effecting firms such as MF Global in the states...but in this late hour it is the Paper Dragon who is making the news. This is clearly in China's best interests to keep the lights on in the factories making all those "goods".

Oct. 26 (PTI) -- China has agreeed to invest in Europe's bailout fund, two senior EU diplomats told AFP today hours from a crunch summit on the eurozone debt crisis.

"China is in," said one of new plans to boost the European Financial Stability Fund (EFSF) with a spin-off investment vehicle to be used to prop up debt-laden nations.
"But not yet Brazil, Russia, India or South Africa," he added, referring to the four other countries in the BRICS group of emerging powers.
The diplomats gave no indication as to the scale of China's likely investment, although an EU official said EFSF chief executive Klaus Regling would leave for Beijing tomorrow, after the summit.

Monday, October 24, 2011

The Paper Dragon.

I have been warning against investment in China for some years now, so this next message will be brief.

The pace of decline in the Middle Kingdom is increasing in pace now. We must talk in terms of months and weeks instead of years when discussing the deflation of the biggest bubble in the history of the world.

As they say in New York: "I'm just sayin"

Must Read.

This is mandatory reading, and the memes and ideas presented will percolate among the popular press and augments some of the arguments on this blog regarding the Unites States relatively strong position versus competitor nations.

The Sword or the Crozier...

...another continuing series in addition to the "by cloth or gavel" posts on this blog.

Readers here will note that power, like nature, abhors a vacuum. The Catholic church has given opinion on world governance previously, and now feels free to opine on the optimal way to reform the global financial system.

the emphasized phrase below is quite troubling to anyone who understands how power mutates with time...and the myriad problems with defining what constitutes a "public authority with universal competence".

VATICAN CITY—The Vatican on Wednesday said it was preparing a series of proposals for reforming the global financial system that would include the creation of a “public authority with universal competence.”
A document entitled “For a reform of the financial system through the perspective of a public authority with universal competence” will be presented on Monday by the Vatican’s Pontifical Council for Justice and Peace.

Friday, October 21, 2011


...another meaningless term rightly relegated to the dustbin of history.

The euro-zone debt crisis is spilling over to emerging-market banks, signaling new risks for economies that had largely brushed off European troubles for the past two years, an industry survey found.

Across Asia, Eastern Europe, Latin America and elsewhere around the world, banks are tightening credit standards and facing an increase in bad loans, according to the survey to be released Friday by the Institute of International Finance, a global association of big banks.

Thursday, October 20, 2011

Prudential risk...

...much more on this phenomenon later. Global markets have assumed the free flow of capital, unconstrained by political pressures, for too long now.

The European banking crisis is spilling over into commodities trading with French banks, the main financiers of trading houses, reining in their lending.

BNP Paribas and a handful of other European banks, including Société Générale and Crédit Agricole, provide most of the credit lines that underpin the business of the publicity shy Swiss-based traders that dominate commodities markets.

Industry executives said that as the banks have to boost their capital buffers, credit to the trading industry is becoming scarcer and costlier, particularly in US dollars, the currency of the global commodity markets.

What is the point of independent ratings...

...if they can be censored? Rather, set the ratings and let the market set the clearing rate on the "informational content" of the ratings. I particularly appreciate the use of "ill thought out", as if political organizations can be trusted to provide objective, rational viewpoints.

BRUSSELS (Reuters) - The European Union's executive may ask for powers to censor credit ratings for countries in crisis, its financial reform chief said on Thursday, describing a ban as one way of stopping fallout from "ill-thought-out" ratings.

The proposal, which officials cautioned may be impossible to police, would be the most stringent curb yet on rating agencies and highlights frustration in France, which was this week warned by Moody's that its top rating was under threat, and Germany.

Tuesday, October 18, 2011

Das is right again...

...The great Satyajit Das, one of the few macro-economists worth listening to (I am partial to him because he does not feel compelled to window-dress economic arguments in usesless mathematical models that hopelessly conflate variables) lays out the Paper Dragon's problem in a recent Bloomberg interview:

China’s Ponzi

Pressley: Chinese state-controlled banks are meantime on the hook for bad loans to state-owned companies. Is that a Ponzi scheme?

Das: It is. I do a simple piece of mathematics. The Chinese say they’re growing at about 10 percent. But they’re pumping the system full of bank debt equal to 30 percent to 40 percent of gross domestic product. Of that, a third to a quarter isn’t coming back.

If one-third doesn’t come back, they’re losing 10 percent. The state-owned companies’ production shows up as GDP. Are they growing at 10 percent, or do the losses mean they’re growing at zero? Are they converting capital into income? Isn’t that what the U.S. did when it borrowed against home equity to fund growth?

Monday, October 17, 2011

Even the NY Times has figured it out...

...what I have been stating for years. The massive leverage and inflation pressures in China are no longer easily concealed by Communist Party. Its downhill, mit großer Geschwindigkeit, from here. I say that in German because comparisons to the Weimar era are not overblown at this point.

Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.

Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people.

This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement.

Sunday, October 16, 2011

Balance Sheet expansion... the Fed a near certainty at this point. I have pointed this out in the past as a friendly warning, but now it appears massive additional asset purchases are inevitable.

IMF power grab

...extracting the maximum amount of concessions and promises of further "responsibility" while posturing as the only grown up in the room.


The downside is if an agreement is not reached, the IMF will have made so many enemies that it can effectively surrender its charter.

The key is ECB guarantees...something that should have been done a year ago.

PARIS — European officials working to address the region’s financial
crisis have rejected key recommendations from the United States and
the International Monetary Fund, casting doubt on whether an emerging
plan will be as broad or fast-acting as hoped.

As crisis negotiations continued this weekend, European officials said
they had reached general agreement on a response they were confident
would restore faith in European banks and government finances.

The detailed plan to be agreed on by European officials next weekend
“will be decisive,” French Finance Minister Francois Baroin said
Saturday as he concluded a two-day session with finance ministers from
the Group of 20 major economic powers.

But the plan excludes the open-ended use of the European Central Bank
as a guarantor of government debt
and the swift infusion of public
capital into banks that U.S. and IMF officials say could be critical
to restoring confidence in the euro region. Both were central elements
of the effort to shore up the U.S. financial system three years ago.

Right on time...

...the Obama Doctrine is now "fully operational".

The vacuum is obvious. Operations will move towards Africa as I have written extensively in the past.

Saturday, October 15, 2011

Just One Fix

Another round of talks to "fix" the Euro. The entire world can feel the fear emanating from Frankfurt and Brussels.

(Reuters) - The world's leading economies pressed Europe on Saturday
to act decisively within eight days to resolve the euro zone's
sovereign debt crisis which is endangering the world economy.

In unusually direct language, finance ministers and central bankers of
the Group of 20 major economies said they expected an October 23
European Union summit to "decisively address the current challenges
through a comprehensive plan".

French Finance Minister Francois Baroin, who chaired the meeting, said
Berlin and Paris, the leading euro zone powers, were well on the way
to agreeing a plan to reduce Greece's debt, stop contagion and protect
Europe's banks.

Non-euro countries highlighted the damage the European crisis was
already doing to their economies and underlined the urgent need for
action by the 17-nation single currency area.

"Europe needs to get its act together because unless the crisis is put
to an end, it will start to affect emerging economies which have
enjoyed strong growth," Japanese Finance Minister Jun Azumi said.


Analogies to the present economic situation in China is an exercise I leave for readers here.

The Sword or the Crozier

The religious concept of Jubilee is being bandied about among intellectual types. Debt cancellation in this form is a rational response from a group of organisms seeking to avoid predators.

Jubilee would be an interesting strategy from the Catholic church as well given the power vacuums created by the collective incompetence politicians to contain and repair current economic duress.

Again, organizations with centralized decision making enjoy a premium over more democratic societies in these situations. Unfortunately, tyrants will gain power.


...always a powerful tool of government. The power to re-define is the power of creation and destruction. Eminent domain law is full of these types of appropriations and taxes.

October 13, 2011|By Hal Dardick and David Heinzmann, Tribune reporter
When Mayor Rahm Emanuel trotted out his city vehicle sticker fee hike, he billed it as a modest $15 increase aimed at those who drive SUVs and trucks that cause the most damage to city streets.

What the mayor didn't highlight is a change he's pushing in how those large passenger vehicles are defined. Instead of setting the bar at 4,500 pounds, as it is now, Emanuel wants it set at 4,000 pounds

EU Banks: Stress tests only valid...

...if they guarantee a positive result.

Oct. 13 (Bloomberg) -- The European Union’s top banking regulator risks worsening the sovereign debt crisis with a new round of stress tests as policy makers push the region’s lenders to raise capital levels, Germany’s banks said.

Finance Minister Wolfgang Schaeuble should stop the European Banking Authority from using stricter capital definitions under future Basel III rules to test the strength of lenders today, according to a letter to Schaeuble from Germany’s five banking associations. The Oct. 12 letter, a copy of which was obtained today by Bloomberg News, also was sent to the head of Germany’s Bundesbank and financial regulator BaFin.

Wednesday, October 12, 2011

Movement of labor...

...and why history and time are against China. These types of demographic pressures in that kind of society justify the use of phrases like "inevitable collapse".

Labor can neither leave nor arrive in any serious measure.

Tuesday, October 11, 2011

Et tu, Slovakia?

Oct. 11 (Bloomberg) -- Slovak lawmakers failed to approve an overhaul of Europes bailout fund, toppling the government and leaving the euro areas second-poorest member with the need to repeat the vote to pass the mechanism.
Smer, the largest opposition party, which didnt back the legislation today, will support the changes in a second vote, ensuring it will pass, party leader Robert Fico told reporters in the capital Bratislava. While no date has been set for a new vote, Finance Minister Ivan Miklos said the revamped European Financial Stability Facility will likely be passed this week.

Monday, October 10, 2011

Property Bubble in the Middle Kingdom?

Now who would have guessed this might happen?

Sept. 23 (Bloomberg) -- The squeeze on China’s property market may be reaching a “tipping point” that drives growth lower just when exports are under threat from a global slowdown and investor confidence is plunging, said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc.
Land transactions in 133 cities tracked by Soufun Holdings Ltd., the country’s biggest real-estate website, fell 14 percent by area in August from a month earlier. Prices of new homes declined in 16 of 70 cities last month compared with July, according to government data.
Property construction is a mainstay of investment that last year drove more than a half of economic growth while land sales contributed 40 percent of revenues earned by local authorities that have amassed 10.7 trillion yuan ($1.67 trillion) of debt. A funding squeeze on developers risks a “domino effect” as companies needing cash cut prices, forcing others to follow, Credit Suisse Group AG said yesterday.
“We’re reaching a tipping point where land sales are dropping much faster than before, developers are losing more access to bank financing, and housing prices are showing weakness,” Nomura’s Zhang said in an interview in Beijing yesterday.

Financial Repression

This paper by Rogoff and Reinhardt has professionals discussing the likely trajectory of Government action during the crisis.

I have argued previously that mercantilism and RealPolitik is back, and this paper certainly does not dissuade me from this position.

Even more interesting will be the timing of these measures. I can certainly see the benefits of advocating the Great Repatriation then immediately imposing capital controls and other regulatory requirements to ensure the newly repatriated capital remains sequestered in the U.S. (or any other country choosing to exercise "financial repression" as an option against capital movement).

About that "strong dollar" policy...

...the "strong dollar" policy that has always been bandied about by the Fed and Treasury execs is being conspicuously undercut. These types of remarks cannot be said without some sort of tacit or explicit approval. Its also somewhat notable that they were said in that Bulwark of monetarism, my alma mater.

This leaves us with nominal exchange rates and structural adjustments. From this perspective, the weakness in the US dollar contributes to the adjustment. And structural policies, as necessary as they are, will not work quickly enough. If we are going to continue to reap the benefits of substantial global trade and global finance, the world needs to move to reduce the large and persistent current account imbalances that have now been with us for too long.

Sunday, October 09, 2011


One of the hallowed concepts in Economics is the notion that Savings=Investments. This follows from the sacrosanct accounting identity Y=C+I+G, which means in English "output equals consumption plus Investment + Government Spending".

Much has been said about the "I" variable of the above, and I will spare the reader from the supposedly rigorous math involved. Suffice to say that just because something is logical in a strict sense (and much of mathematics is error-testing for logical sufficiency) does not necessarily mean it is instructive or even true.

Variables that attempt to convey the complexity of economic systems have always been well, insufficient. A variable containing millions of other variables that fluctuate individually and in concert with still other variables (while also being effected by that strange economic "gravity" of "confidence") is not very useful in forecasting.

And yet there persists this knee-jerk response when economic issues to simply say Savings equals Investment, and thus everything is copasetic.

I think this is wrong-headed. Investment happens over long time periods involving uncertain payoffs whilst saving happens immediately with known amounts. Equating a benefit from the future with an asset now compresses time in an unsettling and academic way.

Reality is far more complicated than that. The above identity not very useful anymore, if it ever was.

Brookings makes its move.

Its the Legislative branch's fault.

This must please the Executive Branch, which has been on a tear in the power grab created in the wake of the Financial Crisis.

Saturday, October 08, 2011

The Great Repatriation...

...a continuing series...


Friday, October 07, 2011

More Facepalm...


Thursday, October 06, 2011

Another "Facepalm" moment.


Tuesday, October 04, 2011

First steps... re-establishing the empire.

MOSCOW (Reuters) - Russia's Prime Minister Vladimir Putin said he wants to bring ex-Soviet states into a "Eurasian Union" in an article which outlined his first foreign policy initiative as he prepares to return to the Kremlin as the country's next president.
Putin said the new union would build on an existing Customs Union with Belarus and Kazakhstan which from next year will remove all barriers to trade, capital and labor movement between the three countries.
"We are not going to stop there and are setting an ambitious goal -- to achieve an even higher integration level in the Eurasian Union," Putin wrote in an article which will be published in Izvestia newspaper on October 4.
Putin said last month he would run in the March 2012 presidential election and his current public approval ratings show that he is set to win.
Putin's initiative comes as Russia nears the end of its 18-year-old negotiations to join the World Trade Organization. In the article Putin made no secret of his skepticism about the global trade watchdog.

Monday, October 03, 2011


...on the ISM Manufacturing Index is greater than the 50.6 from last month. Modest improvement that will hopefully succour this market.

There has been so much in the popular press detailing the "End of Days" and various similar scenarios...always a good time to consider the other way.

Sunday, October 02, 2011

The Euroskeptic...

...bringing out the big rhetorical guns. Readers here will note the same issues with a more pragmatic outlook, but whatever.

The self-correction mechanism is jammed. China holds down the yuan
against the dollar through a dirty peg. Germany and its satellites
hold down the D-mark against Club Med covertly through the mechanism
of EMU.

This outcome in Europe is not deliberate (I hope); it is not a German
plot; it is the unintended effect of a currency union created by
ideologues against Bundesbank advice, and which has calamitous
implications for German foreign policy and for Latin social stability.

My sympathies go to the hard-working citizens of Germany, Spain,
Italy, Portugal, and Ireland for being led into this impasse by
foolish elites.

A global system biased towards export dumping has had unhappy effects
on the US, UK, and Club Med. These countries have faced a Morton’s
Folk over recent years: an implicit choice between job losses at home,
or accepting credit bubbles to mask the pain.

They chose bubbles. That was a mistake. This strategy of buying time
cannot safely be repeated because fiscal woes are already near
"boiling point", in the words of the BIS. “Drastic improvements will
be necessary to prevent debt ratios from exploding," it said.


...are not working. One of the disadvantages of democracy is crisis management; Politicians and Representatives simply lack the concerted overwhelming power necessary to control situations that quickly unravel. More on this phenomenon in the context of global power transfers later.

Greece will miss deficit targets set just months ago in a massive
bailout package, sources said citing a budget draft being adopted by
the cabinet, in a setback in Europe's efforts to stave off the
country's bankruptcy.

The dire forecasts come while inspectors from the International
Monetary Fund, EU and European Central Bank, known as the troika, are
in Athens scouring the country's books to decide whether to approve a
loan tranche, without which Greece could run out of cash this month.

Saturday, October 01, 2011

EU reality

This article written by one of my former professors details much of the problems occurring in the EU area. As I have maintained since the beginning of this blog, all options save dissolution are suboptimal

The article draws comparison to the TARP program instituted by the Treasury during the last financial crisis...a good point and it is instructive to think of the present situation as a card game where no one wishes to show their hands, all of which are bad. Germany has the chips, but may be more inclined to walkaway from the table.