Dodgy and Dodgier

– Hmmm. Curiouser and curiouser? Not really. Try dodgy and dodgier.

– Things are indeed getting weird. The day after Bernanke holds a press conference on monetary policy saying he’s a tad confused as to why the economy hasn’t really responded to an historic amount of monetary stimulus, the price of oil (and gold) tanks.

– Why is this weird? Well, following Bernanke’s speech yesterday, oil prices actually increased while earlier gold nearly breached US$1,560 an ounce. Gold then drifted lower throughout Asian and European trade but when the US futures market opened (last night Australian time) it got hit for six, falling nearly $20 in less than 30 mins.

– Futures volume was huge – meaning a whole bunch of manufactured paper gold hit the market out of nowhere. If you’re new to this game it might sound preposterous. But if you’ve been watching loosely for a few years, these tricks are pretty standard.

– More importantly, if you’re looking to protect your wealth with physical metal ownership, the price correction is just another opportunity to accumulate – courtesy of a bumbling ruling class that is inadvertently biting the hand that feeds it. Read more»

Of Wealth and Incomes

Why Americans are so unhappy with this economic recovery.  

The Federal Reserve is ending its second round of quantitative easing this month, and Chairman Ben Bernanke was asked recently if he thought the $600 billion in bond purchases had worked. Yes, he replied, because the stock market had risen sharply in value. 

Then this week Mr. Bernanke was asked why the economy was lagging. “We don’t have a precise read on why this slower pace of growth is persisting,” he said, in a rare and revealing case of modesty. Maybe we can shed a little light, and in a way that also explains why so many Americans feel so unhappy about this economic recovery.

 Mr. Bernanke was right about stock prices, which as the nearby chart shows (via the S&P 500) began a steady climb following the chairman’s QE2 announcement at Jackson Hole at the end of last August. Mr. Bernanke was attempting to promote what economists call “wealth effects,” or an increase in spending that accompanies an increase in perceived wealth. Watching their assets rise in value, the argument goes, Americans will consume and invest more.

 At least until the recent market correction, this part of Mr. Bernanke’s strategy seemed to be going well. If you owned stocks, you had reason to feel better about the economy and your own financial circumstances. Read more»

Bankers Declare War on Commodities

Some may suggest that my choice of subject for this commentary is misplaced, given that the “reason” why the oil market plummeted yesterday was the big oil-dump of 60 million barrels by the International Energy Agency (IEA). My reply to that is that the response of all of the commodities markets to that news demonstrates conclusively that the bankers are attacking all commodities.

Furthermore, half of the 60 million barrels came from the U.S.’s “Strategic Reserve” – and as we all know, no government serves the interests of the international banking cabal more slavishly than the U.S. government. Once we look at this development in detail, the motivations become completely transparent. Read more»

Jim Grant Debunks Bernanke and the Fed on Bloomberg TV

James Grant, editor of Grant’s Interest Rate Observer, talks about the outlook for Federal Reserve monetary policy and the consquences of the central bank’s policy of quantitative easing. [...] Grant speaks on Bloomberg Television’s “InBusiness with Margaret Brennan.”  (Click Read more for video)   Read more»

Why Your Money-Market Fund Could Be Hit by Greek Default

Some of the safest, plain-vanilla investment accounts in the U.S. could be challenged if Greece defaults on its sovereign debt. 

Forty-four percent of mutual fund assets in the U.S. are invested in the short-term debt of European banks, according to a report from Fitch.

 A separate report from Moody’s noted that 55 percent of those holdings are in the commercial paper of French banks, such as Societe Generale, BNP Paribas and Credit Agricole. French banks are some of biggest creditors to Greece, with over $53 billion in outstanding loans to the Greek government and private sector.

 While fund managers have had plenty of warning of the potential of a default in Greece, many would likely still be caught off guard. Many fund managers assume that a bailout will prevent a default by Greece.

 The bankruptcy of Lehman Brothers similarly caught money-market fund managers off guard, famously causing the Reserve Fund to “break the buck.”

 The debt of these French banks is still very highly rated and Moody’s says the risk of default on the short-term debt is very low. But the high ratings assume that the probability of a default by Greece is very low.

 If Greece defaults, it is possible that the market value of the commercial paper of French banks could plummet and the ratings could be downgraded. Money-market funds would likely refuse to fund new issuances of the short term debt, creating a liquidity problem for the French banks.

 Other European banks would likely face pressure as investors tried to measure their exposure to Greece and those over-exposed to Greece.

 One thing that may help money-market funds weather the Greece storm better than the Lehman hurricane is that they now have an implicit US government backing. While no longer directly insured by the FDIC, many believe that in a crisis the government would once again step in to insure the accounts, just as it did in 2008.

Doug Noland’s Credit Bubble Bulletin

[Selected Notes]

June 15 – Bloomberg (Boris Groendahl):  “A ‘disorderly’ Greek default would spread contagion to Portugal, Ireland and beyond as Europe’s inability to contain the debt crisis threatens the survival of the euro, Brown Brothers Harriman strategist Lena Komileva said.  Estimates for the damage of an unmanaged default understate indirect effects on the European and global banking systems, said Komileva, Brown Brothers’ Global Head of G10 Strategy… An unmanaged Greek credit event would cause liquidity to seize up, leaving banks around the world struggling to find funding, she said…The real economic cost behind it is not so much the direct cost of Greek default, but the uncertainty surrounding broader financial stability the day after Greece defaults.’”  Read more»

“Lehman Moment”

     What appeared an incredible sum for the one-time bailout of an inconsequential economy is increasingly recognized as the tip of the iceberg for huge structural problems at Europe’s periphery and beyond. The markets are beginning the process of recalibrating the potential costs. The results are frightening.

     Expanding debt impairment is becoming a major problem; there’s no apparent default mechanism that wouldn’t imperil many of the world’s major financial institutions; and the tentacles of this potential crisis reach far out cross the global system.

Isn’t it incredible that the failure of one firm, Lehman Brothers, almost brought down the global financial system?  It is equally incredible that, less than three years later, a small country of 11 million has the world teetering on the edge of another systemic crisis.  Today’s circumstance is a sad testament both to the instability of the international Credit “system” and to the lessons left unlearned from the previous crisis.For about 15 months now my analysis has attempted to draw parallels between the initial subprime eruption and last year’s Greek debt crisis.  Both were the initial cracks in major Bubbles (“Mortgage/Wall Street Finance” and “Global Government Finance”).  These two weakest links – due to their role as the marginal borrower exploiting a period of system market excess – were extremely poor Credits.  On the one hand, the systemic vulnerabilities associated with a potential bursting of major Bubbles elicited aggressive policy responses to the initial subprime and Greek tumults.  On the other hand, policy had no constructive impact on the underlying quality of the debt – while significantly inciting market excesses (market price distortions, Credit and speculative excess, etc.) that exacerbated systemic fragilities.

There was heightened fear this week that the “Greek” crisis was evolving into Europe’s “Lehman Moment.”  Read more»

Death by Debt

One of the conclusions that I try to coax, lead, and/or nudge people towards is acceptance of the fact that the economy can’t be fixed. By this I mean that the old regime of general economic stability and rising standards of living fueled by excessive credit are a thing of the past. At least they are for the debt-encrusted developed nations over the short haul – and, over the long haul, across the entire soon-to-be energy-starved globe.

he sooner we can accept that idea and make other plans the better. To paraphrase a famous saying, Anything that can’t be fixed, won’t.

The basis for this view stems from understanding that debt-based money systems operate best when they can grow exponentially forever. Of course, nothing can, which means that even without natural limits, such systems are prone to increasingly chaotic behavior, until the money that undergirds them collapses into utter worthlessness, allowing the cycle to begin anew. Read more»

Doug Noland’s Credit Bubble Bulletin

June 6 – Bloomberg (Daniel Kruger):  “The risk of owning U.S. government debt is as great as any time since the 1950s with yields at the year’s lows and Treasury Secretary Timothy F. Geithner locking in borrowing costs by selling longer-term securities.  Yields on Treasuries would only need to rise 0.3 percentage point over one year on average from 1.67% to produce a loss, based on the benchmark Barclays Treasury index, a study by… First Pacific Advisors shows. The last time bonds were close to this level was in March 2009, when a 0.43 percentage point rise in yields would have left holders of comparable maturity five-year Treasuries with losses.”  Read more»

The King of Non-Productive Debt

There is important confirmation of the “bear” thesis to discuss.  But, as usual, let’s first set the backdrop:

The world is in the midst of history’s greatest Credit Bubble.  A dysfunctional global financial system essentially operates without mechanisms to regulate the quantity and quality of debt issuance.  In response to severe banking system impairment and fiscal problems in the early-nineties, the Greenspan Fed helped nurture a Credit system shift to nontraditional marketable debt.  The bank loan was largely replaced by mortgage-backed securities (MBS), asset-backed securities (ABS), GSE debt instruments, derivatives and a multitude of sophisticated “Wall Street” Credit instruments.  The Credit expansion grew exponentially, while becoming increasingly detached from production and economic wealth-creation (the boom, in fact, exacerbated deindustrialization).

The Fed implemented momentous changes in monetary management to bolster the new “marketable debt” Credit system structure, including “pegging” short-term interest rates; serial interventions to assure “liquid and continuous markets;” and adopting an “asymmetrical” policy framework that disregarded asset inflation/Bubbles, while guaranteeing the marketplace an aggressive policy response to any risk of market illiquidity or financial/economic instability.  Massive expansion of marketable debt coupled with a highly-accommodative policy backdrop incited incredible growth in speculation and leveraging.  Over time, trends in U.S. Credit, policy and speculative excess took root around the world. Read more»