Ilargi: A gigantic miss in the BLS June jobs report. Way below expectations at 18,000 new jobs. Unemployment rises to 9.2%. In Italy, everything rumbles. Trading of major bank Unicredit was halted.
So what do we do? We look at North America's coming soon to a theater near you gas crisis. Here's Stoneleigh back from a long trip:
Stoneleigh: In this era of global bubble-blowing we have seen speculative fever flourish in relation to many different asset classes. At the peak of a bubble the euphoria can be palpable, and the perception that 'it's different this time' confers a sense of invulnerability that justifies throwing caution to the wind.
Speculators cease to worry about how much they pay for an asset, since they think someone else will always pay more later. Unfortunately for those caught up in powerful swings of herding behaviour, it's never different this time. Boom inevitably turns into bust, because the supply of Greater Fools is not infinite after all.
Speculative financial flows seeking 'alpha' can overwhelm important sectors of the real economy. Price, driven by perception rather than by reality, significantly over-reaches the fundamentals. Demand is artificially brought forward. That apparent demand drives considerable mal-investment and a pathological level of risk-taking. When the bubble reaches its maximum extent and implodes, speculation moves into reverse and the sector is dumped.
The artificial demand stimulation disappears, leaving a demand vacuum. The scale of the mal-investment becomes obvious, and prices head for a significant undershoot of the fundamentals. A bubble that created virtual wealth temporarily, leaves very real economic wreckage in its wake. When a critical economic sector is affected, the fallout can be very painful.
We have been witnessing just such a dynamic playing out in the North American natural gas market in recent years, with a particular focus on the shale gas that is touted as being the key to energy independence. The hype over a supposed 100 year supply of cheap, clean energy has been pervasive. Vast sums of money have been committed as a result, despite very little critical evaluation of the real world prospects, at least in the public domain.
Thankfully there have been a few sober voices in the wilderness who were prepared to challenge the received wisdom, most notably Arthur Berman (whose superb work can be found at The Oil Drum) and Canadian gas expert David Hughes.
Conventional supplies of natural gas peaked 10 years ago, and concern over supply began a few years later. Considering that natural gas provides some 20% of electricity and 60% of home heating (more in the north east), it is not surprising that apparently imminent supply problems would have been a cause for concern. A particularly good review of the situation at the time can be found in Julian Darley's 2004 book High Noon for Natural Gas.
Unconventional gas sources (shale gas, coal bed methane and tight formation gas) have since appeared to be game-changers, and game-changers can restore complacency remarkably quickly. But, appearances can be deceiving, and complacency is dangerous.
Energy independence is the Holy Grail of what passes for energy policy in the US. The last 8 presidents have all stressed its importance, but none has been able to do anything about a growing dependence on energy imports, many from unstable parts of the world, or from energy exporters with increasing domestic demand who are well along the depletion curve themselves. There have been speeches on the value of ethanol and other biofuels, along with incentives for their production, but a conviction that energy independence might actually be achievable only really seemed to emerge with in recent years in relation to shale gas.
Apart from the policy windfall, an apparent gas bonanza offered the potential for lucrative financial returns (especially on land speculation), and it allowed environmental organizations to support gas as a transitional fuel on the path to a renewable energy future. Across the board support for shale gas was virtually guaranteed. However, strong consensus is always a red flag, as we have discussed many times here at The Automatic Earth. The stronger the consensus, the more it pays to question what so many uncritically hold to be true. It is clearly time to take a more in-depth look at the real prospects for natural gas in North America.
Geologist Arthur Berman has been the most prominent public critic of shale gas. His major points of contention lie in the companies 'manufacturing model', their extrapolation of gas reserves, the implication of rapid decline rates, and the destruction of shareholder value as the numbers simply do not add up. The 'manufacturing model' utilized by the gas companies asserts that all parts of a gas play are equal, so that one may drill anywhere with comparable success. Extrapolating from the few most successful wells yields reserve estimates that Mr Berman feels are hugely inflated. He demonstrates that all shale gas plays contract to a core area, typically representing no more than 10-20% of the original area.
In addition to there being relatively few 'sweet spots' in shale plays, Mr Berman also points out that shale gas wells show much more rapid depletion rates than conventional natural gas wells (65-85% in the first year, as compared to 25-40%), and that this has an inevitable impact on extrapolations of recoverable gas supplies.
In his view, the shale gas resource is vastly less than the estimates that have entered the public consciousness:
I recently grouped all the Barnett wells by their year of first production. Then I asked, of all the wells that were drilled in each one of those years, how many of them are already at or below their economic limit? It was a stunning exercise because what it showed is that 25-35% of wells drilled during 2004-2006 - wells drilled during the early rush and that are on average 5 years old-are already sub-commercial. So if you take the position that we’re going to get all these great reserves because these wells are going to last 40-plus years, then you need to explain why one-third of wells drilled 4 and 5 and 6 years ago are already dead [..]
If you investigate the origin of this supposed 100-year supply of natural gas…where does this come from? If you go back to the Potential Gas Committee’s [PGC] report, which is where I believe it comes from, and if you look at the magnitude of the technically recoverable resource they describe and you divide it by annual US consumption, you come up with 90 years, not 100. Some would say that’s splitting hairs, yet 10% is 10%. But if you go on and you actually read the report, they say that the probable number-I think they call it the P-2 number-is closer to 450 Tcf as opposed to roughly 1800 Tcf.
What they’re saying is that if you pin this thing down where there have actually been some wells drilled that have actually produced some gas, the technically recoverable resource is closer to 450. And if you divide that by three, which is the component that is shale gas, you get about 150 Tcf and that’s about 7 year’s worth of US supply from shale. I happen to think that that’s a pretty darn realistic estimate. And remember that that’s a resource number, not a reserve number; it has nothing to do with commercial extractability. So the gross resource from shale is probably about 7 years worth of supply.
Stoneleigh: Consistently disappointing results have not so far burst the shale gas bubble, as people seem all too willing to believe the hype without question. This lack of critical thinking is characteristic of bubble psychology. Bubbles are formed as an interaction between predators and willing victims blinded by greed. It's important to remember that it's never 'different this time'.
Art Berman:Shale play promoters constantly try to divert attention and analysis from current plays to newer plays. Newer plays have less data to analyze and, therefore, reserve claims are more difficult to question. Because the Barnett and Fayetteville shale plays have under-performed expectations, we were invited a few years later to consider the future potential of the Haynesville Shale play.
Now that the Haynesville looks disappointing, we are asked to consider the Marcellus Shale play. Since the State of Pennsylvania does not publish monthly production data for analysts to evaluate, no one can dispute or confirm the claims made by operators. With the shift to liquids-rich plays like the Eagle Ford Shale, we are again asked to trust the same promoters that sold us under-performing plays in the past that this time it will be different.
Stoneleigh: The shale gas bubble is a perfect example of the irrationality of markets, the power of perverse short-term incentives, the driving force of momentum-chasing, the dominance of perception over reality in determining prices, and the determination for a herd to stampede over a cliff all at once. The perception of a gas glut has driven prices so low that none of the participants are making money (at least not by producing gas) or creating value. We see a familiar story of excessive debt, and the hollowing out of productive companies dead set on pursuing a mirage.
Art Berman:It’s all about production numbers. They call these things asset plays or resource plays; that reflects where many are coming from, because they’re not profit plays. The interest is more in how big are the reserves, how much are we growing production, and that’s what the market rewards. If you’re growing production, that’s good-the market likes that. The fact that you’re growing production and creating a monstrous surplus that’s causing the price of gas to go through the floor, which makes everybody effectively lose money….apparently the market doesn’t care about that. So that’s the goal: to show that they have this huge level of production, and that production is growing.
But are you making any money? The answer to that is…no. Most of these companies are operating at 200 to 300 to 400 percent of cash flow; capital expenditures are significantly higher than their cash flows. So they’re not making money. Why the market supports those kinds of activities…we can have all sorts of philosophical discussions about it but we know that’s the way it works sometimes. And if you look at the shareholder value in some of these companies, there is either very little, none, or negative. If you take the companies’ asset values and you subtract their huge debts, many companies have negative shareholder value.
Stoneleigh: It is interesting to note the effect of hedging in allowing companies to continue pursuing a strategy that destroys value. Being able to play with various sources of someone else's money, shareholders or otherwise, makes a great deal of difference. That money will be thrown at the latest 'big thing' during its expansion phase. But, when that money is taken off the table, the hole in the collective business case will be abruptly revealed. That is when the damage done by financialization of energy production will really become obvious.
Art Berman:The companies have been hedged at $7.00 for the past 5 years--they have not been suffering with $3 or $3.50 realized prices. It is against realized prices of $7 that there are no earnings and no shareholder equity. The implied warning in my post is that now, with no hedges of any value available, imagine the future of earnings and shareholder equity.
The fact is that the marginal cost is $7, the companies have no earnings and the shareholder has nothing. The manufacturing model has failed and 10s of billions of dollars have been destroyed and continue to be destroyed. I have not asked you to defend your position--what is it, by the way? That we should believe smart public companies because they have bet other people's money on something that their balance sheets don't support, but they must be right anyway?
Stoneleigh: Periods of mania, where whole industries, or even whole economies and societies, collectively take leave of their senses, generate an all-in mentality, with no safety margins and no contingency plan. The flip side of over-shooting the fundamentals during the blowing of a bubble is undershooting them when the bubble implodes, killing investment and potentially rendering most of the industry uneconomic for long enough to eliminate most of the players. Hence an industry elevated far beyond its fundamentals by ponzi finance is also destined to be consumed by it.
Art Berman:For many companies, there is no turning back--the entire company has been bet on the success of shale plays. This seems to violate what has been learned in the E&P business about the importance of having a balanced portfolio. In some cases, companies do not have sufficient shareholder value to justify being bought and, therefore, saved.
Stoneleigh: Art Berman is not the only knowledgeable gas industry insider to point out that the emperor has no clothes, although most of the other who share his doubts do so much less publicly. The New York Times recently published a substantial quantity of correspondence that had been sent to them by insiders extremely concerned about bubble dynamics.
No identifying whistleblower details were divulged, so that the criticism remains largely anonymous. Many people have clearly recognized the warning signals of a mania for a long time, yet very little information has emerged in the public domain until too late to preserve much value. Following the herd is the path of least resistance. Failing to do so can easily be a career-limiting move, hence the facade continues until the damage has been done, and the sector hits a brick wall at a hundred miles an hour.
Here are some of the comments from that New York Times piece::
Geologist and official from Anglo-European Energy:After buying production for over 20 years, hopefully I know the characteristics of great wells (flat decline curves, low operating costs, large production), and as you know, the shale plays have none of these. The herd mentality into the shale will eventually end possibly like the sub-prime mortgage did. In the meantime it is very difficult to sell any kind of prospect that is not a shale play.
Analyst from PNC Wealth Management (2011):Money is pouring in from investors even though shale gas is inherently unprofitable. Reminds you of dot-coms.
Analyst from IHS Drilling Data (2009):The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work.
Retired geologist for major oil and gas company (2011):As I think you would agree, we are looking at a bubble here with caveats. The caveats are how corporate hubris and bad science have caused a lot of folks to think that gas is nearly too cheap to meter. And now these corporate giants are having an Enron moment, they want to bend light to hide the truth. The bubble will burst, folks will get run over, reason will be restored, if only temporarily.
Official from Bold Minerals LLC (2010):1. The players never did any careful regional studies before they made serious and irrevocable capital commitments to the various shale plays. Our scouting sources never got calls for logs or cores on the significant old tests, especially in the Haynesville. This was mystifying.
2. The pronouncement that the reservoir was uniform and covered 10 or 20 counties or (in the case of Marcellus) 5 states was absolute heresy in the conventional business. This very extravagant claim was never really debated or contested by the technical community. The downhole data for these broad sweeping conclusions was simply never there.
3. The escalation of lease bonuses to ridiculous heights and the taking of 3 year term leases put the companies in the position of being compelled to drill hundreds of potentially technically unsound wells with insufficient downhole information or face massive impairments by letting incredibly expensive acreage expire undrilled. In previous hot domestic plays, no major company would ever commit itself to lease positions of this scope and scale of expenditure that they could not afford to abandon if the technical picture became negative.
4. The ‘bait and switch’ where one massive set of capital outlays in the ‘best’ shale uncovered was soon to be eclipsed by the recognition of even better shales which required even more outlays before a thorough technical assessment of existing shale positions had been obtained could only be classified as a type of ‘mania’. It has no precedent in financial scale to any of the previous lease plays that experienced a speculative frenzy in domestic onshore petroleum history.
Official at Phoenix Canada Oil Company (2010):It is my strong view that we will see a near collapse of that play, probably sooner rather than later. Perhaps we will see a repeat of the coal bed methane (CBM) play 'disappearance' -- where that 'exciting' development faded into history 'without a trace'!
Official from Schlumberger (2010):All about making money. I'm working on a shale gas well that was just drilled in Europe. Looks like crap, but the operator will flip it based on ‘potential’ and make some money on it. Always a greater sucker....
Stoneleigh: Flipping is a key part of the dynamic, and not only in relation to the supposed gas potential, but also (if not primarily) the land. The effect on the natural gas sector is in some ways a by-product of yet another form of real estate bubble. When that bubble bursts, the carnage in the natural gas industry will be collateral damage, but with huge impact in a wider economy far more dependent on cheap and abundant natural gas than it realizes.
Art Berman:Returning to the broader subject of shale plays in general, why do operators keep drilling while their own over-production has depressed the price of natural gas by half of its value since January 2010? It seems fairly clear at this time that the land is the play, and not the gas. The extremely high prices for land in all of these plays has produced a commodity market more attractive than the natural gas produced.
Stoneleigh: The land element is an explicit part of the corporate strategy for gas companies. For instance, consider the transcript of a 2008 conference call between investors and the CEO of Chesapeake Energy, Aubrey McClendon (from the NY Times document trove):
Aubrey McClendon: I can assure you that buying leases for X and selling them for 5X or 10X is a lot more profitable than trying to produce gas for $5 or $6 mcf.
Stoneleigh: This is how a manic gas market can be temporarily profitable even if gas prices are low. Never mind that the short term gain for the very few comes at the expense of long term pain for the very many. Landowners are not likely to see the lease payments they were promised, investors are likely to see their supposed asset fall sharply in value, lenders will take major losses and the public will find that the low prices brought about by supply complacency do not last. In order to see why, it is necessary to examine the gas bubble in the context of the bigger picture for natural gas in North America.
The best source for this is a recent report entitled Will Natural Gas Fuel America in the 21st Century? by Canadian gas expert David Hughes, writing for the Post-Carbon Institute. A recent interview with Richard Heinberg and David Hughes on Radio EcoShock is also a useful reference. In summary, American natural gas production peaked in 1973.
Despite the advent of the horizontal fracking technology enabling the exploitation of shale gas and other unconventional sources, and a massive increase in well drilling, that peak has not been exceeded. Without new drilling, gas production would decline by 32% in a year.
In the 1990s, 10,000 wells a year were drilled. From 2006-2009 that number had increased to 35,000, but production only increased by 15%. 60% of US production in 2006 originated in wells drilled in the last 4 years, while 50% of 2007 production came from wells drilled in the last 3 years. This is an image of an industry on an accelerating treadmill, and an energy industry in trouble.
These wells are expensive, in both financial and energy terms, especially before the sweet spots have been defined for a shale play. The fracking process necessary in order to extract gas from very low permeability reservoir rock is complex and has many side-effects that must be expensively dealt with (the subject of a forthcoming post). The water requirements are huge, complicating gas production in arid areas.
The net energy for unconventional gas production is therefore much lower than for conventional supplies. In other words, a much larger fraction of the energy produced must be reinvested in energy production, leaving less as a surplus for society's other purposes. The steepness of the net energy curve prevents gas from being considered as a long-term, large-scale fuel source.
Nevertheless, the shale gas hype has led to talk of no longer needing Canadian natural gas imports or an Alaskan pipeline, and most preposterously of all to discussion of converting a proposed LNG receiving terminal into an exporting facility. The Department of Energy has called for gas to represent the cornerstone of US energy security, with 45% forecast to come from shale gas by 2035 under the Natural Gas Act 2011.
A substantial increase in electricity generation from natural gas is envisaged, and gas promoters like T Boone Pickens are calling for gas to move into transport on a large scale as well. Very substantial government subsidies are being considered for the shale gas industry, thanks to political vested interests:
Voicing strong support for the natural gas industry, a bipartisan group of eight federal lawmakers from gas-producing states sent a letter to President Obama on Monday asking him to promote continued natural gas development "by any means necessary, but most specifically, by unconventional shale gas recovery."
"The need for the United States to move toward energy independence becomes more crucial as the crisis in the Middle East and North Africa worsens," the letter said.
Stoneleigh: Unfortunately, throwing money at a net energy issue will not solve the problem, and in times when money is scarce it will be even more problematic. For production to be maintained, drilling must continually accelerate, but gas prices are so low on the perception of glut that this is exceptionally unlikely. The bursting of the gas bubble will suck most of the project finance out of the sector for a period of time. We can therefore expect gas production to decline sharply in the coming years. Gas declines from a production peak are typically sharper than oil declines, so the change could be quite rapid.
Although demand will soften under the depression conditions for which we are headed, natural gas should receive considerable relative price support in a deflationary environment. The bust part of the cycle is happening earlier than for oil, and by the time we find ourselves in depression, a gas supply crunch could already be underway due to the effects of several years of low prices and so many losses coming home to roost in the aftermath of the shale gas mirage. In North America, gas supply could therefore be a much more immediate concern than oil supply.
Consider one very telling comment from the NY Times trove of shale gas correspondence, which casts light on the shale gas boom in context of the conventional gas situation:
Official from Bold Minerals LLC:I don’t think the driving force here was just the seductive story of an infinite supply of ‘manufactured gas’ with no risk and assured margins. Nor was it simply the greed of the investment bankers and company executives for fees and windfalls on stock options. Because the thing took off on a wing and a prayer. It was a dubious proposition from the outset.
The indicators of a potential disaster which I set out above would be obvious to any senior manager in an oil company. They were flashing warning lights, so why was caution thrown to the wind? Desperation. The conventional exploration game has gotten so tough domestically that managements were willing to grab on to anything that offered a prospect of replacing reserves.
The outlook for conventional exploration is just so grim domestically and the carefully concealed pessimism was so profound at most companies the shale story took hold because it offered a hope to domestic companies of ending the death spiral of continual declining production and enormous losses on failed exploration projects.
Stoneleigh: An energy crisis is not a distant possibility, but a very real threat over the next few years, likely beginning with natural gas. We are in for a shock.
Europe, Free Speech, and the sinister repression of the Rating Agencies
by Ambrose Evans-Pritchard - Telegraph
Before we all join the chorus of abuse against the robber agencies, let us not lose sight of what is happening in the eurozone. The EU authorities are attempting to muzzle free opinion, first by threatening Fitch, Moody’s, and S&P with vague retribution, and then by drafting restrictive laws to prevent them from publishing unwelcome messages. It is financial repression, pure and simple. The same will be done to the press in due course. Then to you, dear reader.
"We must break the oligopoly of the rating agencies," says German finance minister, Wolfgang Schäuble. By "we", of course, he means the EU apparatus of coercion. The European Commission has already created a pan-EU oversight body with binding powers to breathe down the necks of these agencies. It will draft restrictive legislation by the end of the year. The Portuguese downgrade ensures that it will be even nastier." Developments since the sovereign-debt crisis show we need to take a further look at reinforcing our rules," said Commission chief Jose Manuel Barroso.
Mr Barroso came close to accusing the agencies of cartel activities and a malicious agenda. "It’s quite strange that the market is almost dominated by only three players. It seems strange that there is not a single rating agency coming from Europe. It shows that there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe."
Leaving aside the not-small matter that Fitch is owned by the French group Fimalac (quoted on the Paris bourse), or that it is largely run by Britons who belong to the EU and contribute to Mr Barroso’s salary, this talk of anti-European bias cannot pass unchallenged.
Currency unions switch exchange risk into default risk. The rating on countries in currency unions ought to be lower therefore (ceteris paribus). States with their own sovereign currency and debt in their own currency can let the exchange rate take the strain when they get into trouble, as the US and the UK have done. Foreign investors lose money on the exchange rate. There may be all kinds of risks and dangers in the US and the UK, but default is not high on the list (discounting the US soap opera over the debt ceiling).
This not the case at all for EMU laggards. They cannot devalue or inflate away debt. The stress shows up in the bond markets instead. The more relevant comparison in this respect is between the Euroland’s Club Med states and California. The Anglo-Saxon agencies do not rate many US states at AAA. California is A- and may lose that soon enough.
To compare the ratios of national debt to GDP levels in the Anglosphere with those in Europe, as the EU elites tirelessly do, is to the miss the point. My gripe against the agencies is not that they are downgrading all these semi-bankrupt states today, but that they totally failed to signal the inherent dangers of EMU a long time ago when the crucial investment decisions were being made. They too were swept up by euro euphoria. They too failed to understand the inherent structure of monetary union, or to spot obvious warning signs as the drama unfolded and the North-South divide became ever-more apparent. They handed out AAAs like confetti.
That is the great indictment of Fitch, S&P, and Moody’s in this sovereign saga, especially Moody’s (which has since replaced much of its French-led sovereign team). Moody’s still had a A3 rating on Greece in May 2010. Unbelievable.
I have great sympathy for the Portuguese. They did not have a demented credit and property boom during the roaring noughties (yes, they did earlier). They did not cheat on the deficit figures. They do indeed have bloated a public sector but basically the cause of their disaster is having locked into EMU in the mid-1990s before they were ready. They lost control of monetary policy and have been the victims of a dysfunctional currency union ever since.
Parts of their light manufacturing industry have been wiped out by Chinese imports, flooding Portugal at an exchange rate of 9 or 10 yuan to the euro. Portugal needs a 50pc devaluation against China. The Portuguese have shown impressive stoicism since the crisis erupted. They have knuckled down under the new free-market government of Pedro Passos Coelho, complying diligently with the demands of the EU/IMF inspectors. (Pointlessly, in my view. They should simply leave the euro and put an end to the misery. But that is another matter.)
Yet, out of the blue, Moody’s cuts them four notches to junk status, and precipitates an explosive rise in yields across the maturity curve. A "punch in the stomach" said Mr Passos Coelho. Indeed.
But let us be clear. The EU itself brought this about by declaring war on the very investors needed to finance the vast borrowing needs of the European project. By baying for the blood of bankers and "speculators" (ie pension funds and the like who bought Greek, Portuguese, and Irish debt in good faith), Chancellor Merkel has set off capital flight and raised the spectre of defaults. Her specific demands for "burden-sharing" by Greece’s private creditors (and therefore Portugal and Ireland next) have changed the landscape. The agencies have no choice at this stage. Their job is signal default risk.
The ECB has warned tirelessly that attempts to punish investors in this fashion would back-fire horribly, set off a fresh contagion, and potentially spiral out of control. This is where we are today as Club Med bond yields go haywire again. Governments need to love and caress bond-holders, not spit at them. By the way, holders of Greek and Portuguese long-term debt have already lost half their money based on current resale values.
What should have been done is obvious. The EU’s bail-out fund should have been given powers mop up the bonds of countries in distress on the open market at a hefty discount (as the ECB suggested). Investors would have suffered condign losses, and the EU could have given Greece debt relief by retiring bonds with no net loss to European taxpayers.
This elegant solution was blocked by Germany because it was seen as a slippery slope towards a Transfer Union, and might have violated the Grundgesetz. (In a sense the Germans are right, but you shouldn’t join a currency union in the first place if don’t realize that it implies fiscal union.)
Now, if the EU institutions wish to avoid being held hostage by the robber agencies they should stop using the ratings as a basis for lending collateral at the ECB. They should create their own more rigorous method of assessing credit-worthiness, ignore the agencies altogether, and make their case directly to global investors. What the EU should not do is try to muzzle free opinion, or free speech. We are on a slippery slope.
The ECB’s worst nightmare
by Gavyn Davies - Financial TImes
Under normal circumstances, the decision of the ECB to raise interest rates by 0.25 per cent at a time when the European economy is slowing, and inflation seems to be peaking, would have been a very big deal. However, with the peripheral debt crisis still deteriorating, the rate increase has not really been the centrepiece of market attention today.
Instead, the main focus is on the composition of the ECB’s balance sheet, where a much larger, if slower moving, story is unfolding. The ECB is gradually being drawn into the “socialisation” of peripheral country debt, in ways which are completely outside the control of the central bank, and which could yet end in crisis.
Today, the ECB decided to continue accepting Portuguese debt as collateral for repo operations, even though Portugal has been downgraded by Moody’s this week. The ECB is increasingly taking actions which they would have deemed unthinkable two years ago. But they are trapped, and will remain trapped until there is a more comprehensive solution to the peripheral debt crisis.
The case for a rise in interest rates in the eurozone was discussed in this previous blog in April. This pointed out that the margin of cyclical unemployment in Europe is much smaller than it is in the US, which implies that the “correct” level for short rates (as indicated for example by the Taylor Rule) is higher in the case of the ECB than it is for the Fed. However, since April, industrial production in the global economy has slowed, and there has been a notable drop in eurozone consumers’ expenditure in Q2. In addition, inflation in the eurozone has stabilised, after a succession of disappointing data releases early in the year. Given this latest economic evidence, my own vote today would have been for no change in rates, but at least the ECB board has not indicated that any further rate rises are just around the corner.
All of this is, however, a sideshow compared with what is happening to the ECB’s balance sheet. As the private financial market has progressively withdrawn funding from the banking systems of Greece, Ireland and Portugal, the ECB and its constituent national central banks have been sucked into replacing the lost capital on an increasingly alarming scale.
The banking sectors in the three most troubled economies have been unable to issue bonds with a maturity of greater than 12 months since the crisis blew up in 2010. Furthermore, the private repo market has largely dried up, implying that banks in the troubled economies have had to turn to the ECB as the only source of available liquidity.
All of this is now fairly familiar, but the important point is that it is still showing no sign of any improvement, even though the EU is preparing to release the latest round of emergency funding for Greece. Martin Wolf’s column explained in considerable detail yesterday why the European rescue operation has so far failed to persuade the government bond markets that the troubled economies are moving back towards solvency. In fact, it is the reverse.
The banking markets have drawn the same conclusion. The imposition of additional, increasingly onerous, fiscal tightening on chronically weak economies seems to be raising, rather than lowering, the market’s assessment of sovereign default risk. And that has made it harder to imagine any improvement in the private funding of the banks, which are large holders of sovereign debt, and need to use it as collateral in repo operations.
As a result, the ECB has had to provide open ended liquidity, or face the certain failure of the banking sectors in the peripheral countries. The ECB is now financing around 20 per cent of the balance sheets of Greek and Portuguese banks, and has a total exposure to the troubled economies in excess of €400bn. Not all of this would be ultimately written off in the event of sovereign defaults. But the capital and reserves of the European System of Central Banks is only €81bn, so recapitalisation of the central banks could easily become necessary. As a result, much of the risk which has been taken on by the ECB would be “socialised” or “communitised” across the taxpayers of the EMU nations.
As if that were not enough of a problem, there are signs of a further, and even less controllable, problem emerging. Ordinary bank depositors in Greece and Ireland are beginning to shift their money out of the retail banks. Fearful of bank failures, and/or the break-up of the euro followed by currency devaluations, people are either hoarding cash under the mattress, or seeking safer havens like bank accounts in Germany.
Nicola Mai of JP Morgan has produced a neat graph on the extent of this bank deposit flight, which is reproduced below:
Since the beginning of the crisis, the Greek and Irish banking institutions have lost about 15 per cent of their retail deposits. The consequence of this bank run is that the ECB has had to replace this source of bank funding as well. The pace of withdrawal of bank deposits in Greece and Ireland is not quite as fast as that which occurred during the Argentinian crisis in 2000-02, and has not shown any sign of recent acceleration, but it adds a volatile and unpredictable element to the crisis.
As the UK government found in the case of Northern Rock, the appearance of queues outside banks is one of the worst nightmares which a central bank can face. It has not happened in Europe – yet.
26 EU banks face stress test struggle
by Jill Treanor - Guardian
Moody's says a third of the 91 banks in Europe likely to need external support in a financial crisis
Almost a third of the 91 banks in Europe subjected to tests of their ability to withstand shocks to the financial system are likely to need some form of external support, says the ratings agency Moody's. While Andrea Enria, the chairman of the European Banking Authority, last week insisted it was impossible to speculate on the number of banks that would fail the Europe-wide stress tests, Moody's has used its credit ratings to assess the outcome.
A week before the results are expected to be released by the EBA, Moody's estimated that 26 of the banks "have a heightened risk of needing extraordinary external support" to protect their capital buffers. It emphasised that the tests needed to be credible if banks were to have the ability to raise extra funds on financial markets. However, no British banks are thought to need extra capital. Bank share prices are already under pressure after Moody's suddenly downgraded Portugal to junk status for fear it would need to renegotiate its bailout.
Last year's stress tests were called into question after Ireland's banks needed to be bailed out within months of being given a clean bill of health. Only seven banks failed last year.
Moody's took some comfort that the tests – based on worst-case scenarios – were stricter than the 2010 ones, but noted that the EBA's 2011 stress assumptions do not assume a sovereign default at a time when the risk of such a default within the eurozone has increased.
The agency believes that more bond holdings will be covered this time, as only 20% of exposure to sovereign debt was covered by last year's tests. The test are based on the crucial core tier one capital falling below 5% under at least one of the worst-case scenarios, which include a drop in GDP over two years of 4%, compared with 3% for last year's tests.
Moody's is unlikely to change its own ratings on banks as it expects the non-rated banks to fall into the category of needing some form of external help. "Other things being equal, banks assigned a stand-alone rating of D+/Ba1 or below could be expected to be the most vulnerable to shocks. Consequently, while we would not expect all such banks to fail the test, we do expect that the banks that fail the EBA stress test will likely be among Moody's lower-rated banks or among the unrated banks," Moody's added.
Europe declares war on rating agencies
by Ambrose Evans-Pritchard - Telegraph
A chorus of policy-makers from Europe and across the world have denounced Moody's drastic downgrade of Portuguese debt as an act of financial vandalism, accusing the "Anglo-Saxon" rating agencies of driving states into bankruptcy and destabilising the global system.
Wolfgang Schauble, German finance minister, said there was no justification for the four-notch downgrade or for warnings that Portugal might need a second bail-out. "We must break the oligopoly of the rating agencies," he said. Heiner Flassbeck, director of the UN Office for World Trade and Development, said the agencies should be "dissolved" before they can do any more damage, or at least banned from rating countries.
Moody's downgrade late on Tuesday set off immediate contagion to Ireland, with dangerous ripple effects across southern Europe. Yields on Irish two-year bonds surged above 15pc of the first time. Italian borrowing costs reached levels not seen since the aftermath of the Lehman crisis in late 2008. Yields on Spain's 10-year bonds jumped 12 basis points to 5.59pc.
The renewed jitters chilled the torrid summer rally on global bourses. The FTSE 100 slipped 21 points to 6,002, while Milan fell 2.4pc. A quarter-point rate rise in China added to the mood of caution, capping commodity gains.
David Owen, of Jefferies Fixed Income, said concerns are growing the crisis could spread to bigger economies as growth falters across Europe's southern arc. "The risk of cross-over into Spain and Italy is very serious. The fear is what will happen if Spanish 10-year yields rise above 5.7pc and stay there for a few weeks. Spain also has €2.5 trillion of private sector debt, and a rise in rates risks pushing the country into recession."
Portugal's new premier, Pedro Passos Coelho, said Moody's downgrade was a "punch in the stomach" at a time when the new government has done everything demanded by the EU/IMF inspectors. The rating agency said it had little choice once EU leaders began to insist on "burden sharing" for private holders of Greek debt, raising the spectre of default. It is almost certain any Greek formula will be extended to Portugal.
The European Central Bank has cautioned EU leaders from taking a hard line on private creditors, warning it would destroy confidence among the very investors needed to fund Europe's deficits. The net effect would be destructive. This is exactly what has occurred.
The Institute of International Finance (IIF) representing 400 global banks has floated the idea of a bond "buy-back" on a voluntary basis that would help Greece lower its debt burden, but this has not been enough to satisfy German demands for more creditor pain. The IFF said yesterday it was studying a "menu of options to help Greece", including variants of a complex French plan for debt rollovers. The original plan was widely deemed too harsh on Greece.
Jose Manuel Barroso, the European Commission president, questioned Moody's motives and said it had fanned the flames of "speculation" with an unwarranted downgrade. "It seems strange there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe," he said, seemingly unaware that Fitch Ratings is French-owned.
The Commission is drawing up laws to clamp down on the agencies. These will now be tougher. "Developments since the sovereign debt crisis show we need to take a further look at reinforcing our rules," said Mr Barroso.
European debt crisis: Portugal is latest domino to fall
by Phillip Inman - Guardian
The EU's richer nations must admit that they made bad decisions when they bought peripheral sovereign debt
There is a growing sense of despair in Brussels. Unlike previous attacks on the euro project, the latest downgrade of Portugal's debt by the ratings agency Moody's feels like the beginning of the end. Those economists and fund managers who argued that a second bailout for Greece with private sector involvement would mean something similar for Portugal and most likely Ireland are hitting their target.
Like a 19th century battalion holding the line against oncoming hoards with depleted firepower and an officer class at war with itself, the euro's supporters are in a desperate situation.
Since last year's Greek debacle, European leaders have sought to provide lifelines to the worst hit countries by replacing the private debt markets with the European Central Bank. The ECB now holds almost £100bn of Greek debt. Portugal was in much the same position, but hoped to muddle through its crisis with just one bailout from Brussels. Moody's says it is likely to join Greece in a second bailout because, like with Greece, private lenders are going to stay away for longer than expected.
Investors ask why they should buy the bonds issued by a country that will be forced to change the terms for the worse mid way through the life of the loan. That is what Brussels is contemplating for Greece. Moody's naturally assumes the same will be imposed on Lisbon. Just as we found in the worst period of the banking crisis, attempts by politicians to save money and preserve asset values only make the situation worse.
The UK government was urged to nationalise the worst hit banks almost as soon as Northern Rock collapsed, but did everything it could to avoid recognising the problem and when it did, it tried mergers and loans coupled with austerity to minimise the effect on the state. Lloyds was encouraged to merge with Halifax and when that failed it was told to use an injection of government cash, to be repaid, as a way to slim down. Now Lloyds, like most of our banks, are zombie institutions unable to help the UK economy get back on its feet.
The same recipe is being lined up for Greece and soon for Portugal. Moody's recognises this unpalatable fact and says it fears "Portugal will not achieve the deficit reduction target – to 3% by 2013 from 9.1% last year as projected in the EU-IMF programme – due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system."
It then lists four main areas of concern. The first centres on the ability of Lisbon's new government to make promised cutbacks in sectors such as healthcare, state-owned enterprises and regional and local governments. Delays in tackling tax avoidance, the possibility of a further bailout of local banks and limits on economic growth also sow the seeds of doubt that Portugal can make it through the next few years without extra loans.
Like the worst-hit banks, Portugal, Ireland and Greece are bust. To get them back on their feet there is a moral case for including private sector investors in further bailouts. Why should governments bear all the burden? It's a fair question, but that road leads to disaster. Even though many private investors in eurozone sovereign debt are EU banks and pension funds, and you might think a force for good, they have no other motive than to maximise returns. They will listen to Moody's fears and scram at the first time of trouble.
This contagion effect is real and economically ruinous. In Japan, businesses, politicians and academics are permanently worried about Greece. US policymakers likewise. Stocks fell in New York in the hours after the Portugal downgrade because the possibility of another Lehman Brothers felt real. The only answer is for the EU richer nations to admit that they made bad decisions when they bought peripheral sovereign debt. It was not a risk-free bet. It turned bad and their assets are only worth 20 or 30 cents in the euro.
The French and Germans, in particular, have rather smugly portrayed themselves as wiser than everyone else during the financial crisis. That somehow their adherence to a regime of "conservative" bond purchases allowed them to avoid the problems visited on the US, Britain and most other European nations.
If anything it is the opposite. They are up to their necks in bad debts, just as much as the UK: it's just that their debts relate to bad loans made to Greece, Portugal, Ireland and Spain, and not housing developers or buying exotic financial derivatives.
Spain is often talked about as the next domino. On Tuesday ugly economic figures for Italy appeared to put Rome higher up the scale of walking disasters. Unless Brussels admits the full extent of the problems blighting Greece and Portugal, the panic will spread, hurting all of us.
As Bank of England governor, Sir Mervyn King, keeps insisting, the European crisis is not one of liquidity. It is a full-blown debt crisis. Therefore, offering more loans, especially at outrageously high interest rates as Brussels intends to do, fails to tackle the core problem, it only makes the situation worse.
Italy's finances: Tremonti in trouble
by Schumpeter - Economist
Giulio Tremonti is a crucial figure in Silvio Berlusconi’s conservative government: a guarantor for the markets of the fiscal rigour that has so far kept Italy out of the debt crisis sweeping the euro zone periphery. Until now, moreover, Mr Tremonti has been untainted by the financial and sexual scandals that have besmirched the prime minister and several members of his administration.
But on July 7th a scandal involving allegations of graft in high places came uncomfortably near his door. It was announced that judges in Naples had issued an arrest warrant for one Marco Milanese, a lawmaker accused of corruption who, until nine days earlier, was Mr Tremonti’s political adviser and one of his closest associates. Worse was to come. Since Mr Milanese is a member of the Chamber of Deputies, the lower house of the Italian parliament, he cannot be arrested immediately and so the prosecutors have had to apply to parliament for leave to proceed.
According to Italian media reports, the documents accompanying their request showed that Mr Milanese was paying the €8,500 ($12,200) a month rent on the apartment used by the finance minister in Rome. Shortly afterwards, Mr Tremonti issued a statement acknowledging that he had “accepted the offer made to me by [Mr] Milanese for the temporary use of part of the property”. He said that, after finding out about the prosecutors’ initiative, he would change his arrangements “as of this evening”.
It remains to be seen whether that will be enough to distance him from a scandal that clearly has a long way yet to run. In an earlier statement of their own, the prosecutors said Marco Milanese was wanted on suspicion of having supplied confidential official information to a businessman in return for “significant cash payments and other gifts such as expensive watches, jewels, luxury cars (Ferrari and Bentley) and holidays abroad”. He was also alleged to have given jobs in firms controlled by the finance ministry to two other men in return for favours.
Caught on camera
The arrest warrant for Mr Milanese was the latest in a string of embarrassments for the finance minister this week. Earlier in the day, the web site of La Repubblica, a daily, made available a video recording of a press briefing by ministers in which Mr Tremonti was unwittingly caught describing one of his cabinet colleagues as a “moron”.
The briefing was held to provide details of a four-year, €40 billion package of deficit-cutting measures drawn up by the Treasury. On July 4th it was discovered the bill contained a measure—subsequently withdrawn—that would have allowed Fininvest, the core firm in Mr Berlusconi’s business empire, to suspend the payment of compensation of up to €750 million. Mr Tremonti has since intimated that the clause was sneaked into the legislation by the prime minister’s office. But Mr Berlusconi said it had been discussed in cabinet and that his finance minister had regarded it as “sacrosanct”.
by Economist Berlusconi's bung: The failure of a shameless budget manoeuvre by the prime minister
Nothing illustrates better the gulf between Italy’s multi-billionaire prime minister, Silvio Berlusconi, and the people that he governs than the impact of Italy’s emergency budget, introduced on June 30th. For most Italians, it meant sacrifices running to hundreds of euros. For Mr Berlusconi, it promised savings of hundreds of millions.
In total the cabinet approved deficit-cutting measures of €40 billion ($55 billion). The finance minister, Giulio Tremonti, wanted to dispel any spectre of a Greek collapse in Italy. But he is under pressure, especially from Mr Berlusconi’s coalition partners in the Northern League, to consider the political consequences. Alarmed by the ruling parties’ dismal showing at local elections in May, the League’s leader, Umberto Bossi, has called for a U-turn: tax cuts funded by drastic cuts focused on defence spending.
The four-year austerity budget is a compromise. Mr Tremonti got his deficit reductions. Yet all but €6 billion of the tax rises and spending cuts will take effect after 2012, hinting that there may be an election next year, before they bite. Mr Bossi got a promise of lower income tax, accompanied by a hint that the shortfall may be made good by a gradual rise in VAT.
That would hit the poor harder than the rich. But as the details became known, there was even worse news for the less well-off, including many of Mr Berlusconi’s (and even more of Mr Bossi’s) voters: increased health charges and a freeze on cost-of-living increases for higher-value state pensions. More cuts must be made by local and regional authorities, which are set to lose €10 billion in central-government transfers. The budget also includes a rise in the flat-rate stamp duty on government bonds that have for years formed the core of every middle-class Italian saver’s portfolio, which could sharply reduce their net returns.
These are tough times in southern Europe. Italy’s public debt will top 120% of GDP this year. It cannot afford to run a big deficit. The government argues that everyone must bear some pain. Unsurprisingly, then, there was outrage (even privately among ministers) when it emerged that, for the prime minister himself, the budget contained not pain but an analgesic of monstrous proportions.
The biggest threat to Mr Berlusconi was never his various trials, even if some could still cause trouble. His main financial worry is a civil action brought against Fininvest, the firm at the heart of his business empire, by a company belonging to his long-standing rival, Carlo De Benedetti. The case arose after the battle over Mondadori, Italy’s biggest publishing house, in the early 1990s. Three Fininvest lawyers were found to have bribed a judge for a favourable court verdict. Mr De Benedetti wants compensation. A lower court decided he should have €750m: big bucks, even by Mr Berlusconi’s standards.
A clause tucked into the 100-odd pages of the emergency budget offered him some respite by letting any defendant liable to pay compensation of more than €20m suspend payment until completing Italy’s two-stage appeal procedure. In a system notorious for delay, that could take years. Amid reports that neither Mr Tremonti nor the League was told of this clause, the prime minister withdrew it, decrying his critics’“shameless exaggeration”. Even before this week, it was not easy to see how Mr Berlusconi could reverse the steady decline in his popularity in time for the next election. Now it looks harder.
Eurozone split over new Greece bailout
by Heather Stewart - Guardian
• Dutch minister condemns French plan as 'illusory'
• Yield on Portuguese bonds soar after downgrade
Eurozone finance ministers are sharply divided over how to handle the spiralling Greek debt crisis, Dutch finance minister Jan Kees de Jager revealed as he attacked France's plans for a new rescue package.
Speaking in London after a meeting with the chancellor, George Osborne, de Jager said it was "illusory" to hope that Europe's banks would voluntarily bear their fair share of the costs of a new bailout for Athens, and that President Sarkozy's current proposals let Greece's private sector creditors off too lightly.
Any evidence of a fresh split among European policymakers will increase anxiety in the financial markets, which were rattled on Wednesday by news that ratings agency Moody's had downgraded Portugal's debt to junk status. "We do have concerns about the French scheme," de Jager said. "I think it's illusory to think of such a scheme as voluntary, so we have to work on solutions so that banks reach a level playing field." As a non-eurozone member, Britain is on the sidelines of talks about a new bailout for Greece, but de Jager said Osborne was "very close to our position".
The cost of insuring Portuguese government debt through credit default swaps hit a record high after the downgrade, while the yield on Portuguese 10-year bonds jumped by more than a percentage point to 12.07%, ratcheting up the pressure on Lisbon.
European commission president José Manuel Barroso criticised Moody's announcement, saying: "In this context, and the absence of new facts on the Portuguese economy that could justify a new assessment, yesterday's decisions by one rating agency do not provide for more clarity. They rather add another speculative element to the situation."
Sarkozy sought to quell the rising panic in markets last month by announcing he had persuaded French banks to play their part in a new bailout package for Greece by swapping their outstanding bonds for new long-term loans. Germany's banks later said they would join in, and European bankers were meeting in Paris on Wednesday to hammer out the details of a deal.
But ratings agency Standard & Poor's said on Monday that it would consider the complex debt-swap proposed by the French to be a "selective default" – a decision that would have damaging knock-on effects throughout financial markets.
The European Central Bank has warned that if other ratings agencies echo S&P's judgment, it could be forced to stop accepting Greek bonds as collateral, jeopardising the solvency of parts of the European banking sector.
But de Jager said the French plan lets the banks off too lightly, and unless finance ministers impose bigger losses on them, Europe would be "converting private debt into public debt" by lending Greece more money from European taxpayers to pay back bondholders.
Sony Kapoor, of the Brussels-based thinktank Re-Define, said the current plan would have all the disadvantages of a default without actually reducing Greece's debt. "The appearance of private-sector involvement is far more important to EU leaders than the actual fact of it," he said. "We are in the worst of all worlds. The EU and Greece have paid most of the costs that would result from any restructuring of debt without realising any of the upside in the form of a reduction of risks to EU taxpayers or a restoration of debt sustainability in Greece."
Despite the ongoing crisis, the ECB is expected to go ahead with a planned increase in interest rates tomorrow, increasing the pain for recession-hit Greece and Portugal. Higher eurozone interest rates also feed through to the rate Greece, Ireland and Portugal pay on bailout loans.
De Jager showed little sympathy for the plight of Greece, however. "Contagion risks are not best handled by bailout funds, or by being soft on each other, but by taking strong measures," he said. "The size of the government needs to decrease in these countries."
He denied that would mean abandoning the cherished European social model. "These economies could be European in the traditional sense, but without the rigid labour markets and rigid monopolistic structures that go with it, especially in the southern European countries. They have to be torn down."
He said he was trying to build a coalition among sympathetic eurozone governments, including Germany, to demand greater private-sector involvement in any new rescue package. Greece is expected to need a fresh bailout of up to €120bn, but finance ministers are not expected to reach a final agreement until the autumn.
De Jager backed Britain's argument that the European commission's demand for an increase in its budget was unacceptable. The Dutch parliament has called for the EU budget to be frozen in cash terms – even tougher than David Cameron's argument for a real-terms freeze. "We are in agreement," de Jager said.
Elliot Wave: House Prices Will Fall 90-95% / Deflation Not Inflation on The Dollar, First
by MCMSinger - Patrick.net (June 20)
Robert Pretcher said himself in a video that although he may sound like an extremist - he expects home prices to eventually collapse to 90-95% devaluation of it's highest peak. He also expects deflation. Why? Because although the money supply is very high - you have to understand that the debt on that money supply is close to 8-10 times its size.
Where did that debt come from? From easy credit to anyone. I believe a lot of people don't understand that US has already gone through inflation.... When? Through the bubble years when everyone was spending on credit cards, easy mortgage to anyone, excessive student loans, & excessive business expansion.
Banks do not really lend you the money. They only pretend to lend you the money as if they actually have that money in reserve when they actually do not. They are allowed to lend I believe 8 times more than they actually have in reserve.
This effectively means that a bank is pretending to lend you money which you believe is actually available in the monetary supply within a economic system - when truthfully that money never existed in the first place - it was electronically credited out of nowhere - basically electronically printed when you were approved for a loan which you applied for (mortgage, college loan or business funding) - and then electronically credited to you.
You are basically fooled into believing you owe the bank money - when you don't because they didn't actually take that money available in the monetary supply within a economic system - instead they electronically printed about 80% of your "loan" themselves - while they only really actually lent you 10-20% of the "loan".
Let me get to the main point: The bankers have effectively made people chase $14-20 trillion dollars actually available within the economic system to pay off $140-160 trillion... How does that work? It doesn't!
This formula makes individuals in a economic system chase after money - money becomes scarce - even though the supply of the money is quite high and it is backed by nothing - the debt accumulated is so many times greater than the supply available.
This mathematically creates a depression and deflation by manipulating the supply of money within an economic system while at the same time manipulating the debt within an economic system - so the debt is many times more than the supply.
Now that the banks are no longer "lending" (counterfeiting) much.... The defaults just keep piling up - and that's exactly what mathematically has been engineered.
Though the government is in the mortgage and loan business now. I understand that haven't fully close their own "lending" (counterfeiting) however once Freddie & Fannie along with Sallie is ended - expect the defaults to skyrocket & the contraction of the economy to increase many times - because then you can no longer pay off debt from more debt.
First you will have deflation - then after all the defaults, bankruptcies & foreclosures have been processed through - maybe in 2-10 years depending on how things proceed - you will have MASSIVE inflation due to the supply of the money and the fact that it is backed by nothing. The dollar is definitely not stable however understand other currencies are much worse in how solid they are.
Deflation is what will hurt most Americans not inflation in my humble opinion. Inflation will help americans to easily pay off their mortgages, student loans, & credit cards. This will free them from debt slavery while at the same-time allow them to keep their homes and have businesses create jobs.
Inflation will hurt savers though - but savers are very few in this economy and it is actually very tough for most americans to save money even though a lot of them are trying to cutback on useless luxuries. Most americans are either under debt or live paycheck to paycheck from being homeless.
What I am saying is exactly what happened in 1929-1933. Too much debt with very little money available to pay it off. The federal reserve also contracted the money supply which worsened things even more. The United States of America has been hijacked by wall street & international bankers, I'm sorry but that is just the cold hard truth...
The stimulus & bailouts were just to temporary - once QE2 ends in June 30 (10 days from now) - if nothing else is done to get more money into the system - the whole thing is going to collapse eventually when you go by the math. Math never lies - opinions do.
The bankers did exactly the same-thing in 1929 - put a little bit of money in the stock market to keep things a little bit afloat after a major crash - then in 1933 pull out the money - triggering a much bigger crash... The same game it seems they are playing - just on a much larger scale - which will make the collapse worse.
Stock market is rigged - get out of it. It's not worth it if the bull runs continues - too much risk - if you still make money - good for you but understand that you are taking a lot of risk when you should consider protecting yourself. Also whenever the stock market crashes - New York State real estate collapses but the collapse of that market spreads a bit to other markets.
What do you think about my perspective? With these factors in mind of what the banks have done - I can confidently say that the housing market definitely is in risk of falling 90-95% - even though that may sound extreme - when you look at the math behind it - it is actually very logical. Again - Math doesn't lie, opinions do.
Sure gas prices are rising along with groceries and utilities but that is not a full perspective in my humble opinion of inflation vs. deflation. I do think that eventually they will those prices will fall down. In April 2008 -gas was rising but then it fall. I believe it's simply up temporarily due to artificial prop ups to the economy by the government. Grocery stores by the way are losing money.
I do believe that both inflation and deflation will happen - just at different times. And maybe also even with different necessities possibly. Though generally I believe all asset prices and commodity prices will deflate but then inflate.
Central banks pull most gold in a decade from BIS
by Jack Farchy- Financial TImes
Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade.
The move, disclosed in the BIS’s annual report, marks a sharp reversal from the previous year when central banks added to deposits of gold at the so-called "bank for central banks" rather than lending it directly to the private sector amid growing concerns over counterparty risk.
Central banks and other official institutions collectively hold about 30,000 tonnes of bullion in their reserves, and many seek to earn an income on their gold by lending it out, just as any other currency. However, demand to borrow gold has fallen sharply in the past decade, driving interest rates on gold lending to record lows.
Hedging by gold miners, which is typically structured to involve borrowing gold, was traditionally the largest source of demand. But since miners have cut back their hedging programmes to almost zero, the gold lending market, which is mediated by large bullion-dealing banks, has dwindled. Lending gold for six months earned a rate of 0.1 per cent on Thursday, according to benchmark market assessments published by the London Bullion Market Association.
In response to e-mailed questions, the BIS confirmed that the fall in the value of gold deposits disclosed in its annual report represented "a shift in customer gold holdings away from the BIS". "The Bank’s gold deposit liabilities declined by around 635 tonnes between 31 March 2010 and 31 March 2011," it added. Comparison with previous annual reports showed the withdrawal was the largest in at least 10 years.
Traders said the move of gold holdings away from the BIS probably reflected a combination of factors. Some central banks, unimpressed with the paltry interest rates on offer, may have taken the decision not to lend their gold at all. "My perception is there’s less and less gold being put out by the central banks into the gold market," said one banker.
However, some central banks may have rediscovered an appetite for lending gold to the private sector, which can earn higher rates depending on the credit rating of the counterparty and structure of the transaction.
"As commercial banks’ balance sheets have started to look better there may have been a switch back to lending to the private sector," said Philip Klapwijk, executive chairman of GFMS, a consultancy. "Yield enhancement can be a powerful inducement to a central banker," an industry executive added.
The next, worse financial crisis: Ten reasons we are doomed to repeat 2008
by Brett Arends - MarketWatch
The last financial crisis isn’t over, but we might as well start getting ready for the next one.
Sorry to be gloomy, but there it is. Why? Here are 10 reasons.
1. We are learning the wrong lessons from the last one. Was the housing bubble really caused by Fannie Mae, Freddie Mac, the Community Reinvestment Act, Barney Frank, Bill Clinton, “liberals” and so on? That’s what a growing army of people now claim. There’s just one problem. If so, then how come there was a gigantic housing bubble in Spain as well? Did Barney Frank cause that, too (and while in the minority in Congress, no less!)? If so, how? And what about the giant housing bubbles in Ireland, the U.K. and Australia? All Barney Frank? And the ones across Eastern Europe, and elsewhere? I’d laugh, but tens of millions are being suckered into this piece of spin, which is being pushed in order to provide cover so the real culprits can get away. And it’s working.
2. No one has been punished. Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide , along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains. But they aren’t in jail. They aren’t even under criminal prosecution. They got away scot-free. As a general rule, the worse you behaved from 2000 to 2008, the better you’ve been treated. And so the next crowd will do it again. Guaranteed.
3. The incentives remain crooked. People outside finance — from respected political pundits like George Will to normal people on Main Street — still don’t fully get this. Wall Street rules aren’t like Main Street rules. The guy running a Wall Street bank isn’t in the same “risk/reward” situation as a guy running, say, a dry-cleaning shop. Take all our mental images of traditional American free-market enterprise and put them to one side. This is totally different. For the people on Wall Street, it’s a case of heads they win, tails they get to flip again. Thanks to restricted stock, options, the bonus game, securitization, 2-and-20 fee structures, insider stock sales, “too big to fail” and limited liability, they are paid to behave recklessly, and they lose little — or nothing — if things go wrong.
4. The referees are corrupt. We’re supposed to have a system of free enterprise under the law. The only problem: The players get to bribe the refs. Imagine if that happened in the NFL. The banks and other industries lavish huge amounts of money on Congress, presidents and the entire Washington establishment of aides, advisers and hangers-on. They do it through campaign contributions. They do it with $500,000 speaker fees and boardroom sinecures upon retirement. And they do it by spending a fortune on lobbyists — so you know that if you play nice when you’re in government, you too can get a $500,000-a-year lobbying job when you retire. How big are the bribes? The finance industry spent $474 million on lobbying last year alone, according to the Center for Responsive Politics.
5. Stocks are skyrocketing again. The Standard & Poor’s 500 Index has now doubled from the March 2009 lows. Isn’t that good news? Well, yes, up to a point. Admittedly, a lot of it is just from debasement of the dollar (when the greenback goes down, Wall Street goes up, and vice versa). And we forget there were huge rallies on Wall Street during the bear markets of the 1930s and the 1970s, as there were in Japan in the 1990s.
But the market boom, targeted especially toward the riskiest and junkiest stocks, raises risks. It leaves investors less room for positive surprises and much more room for disappointment. And stocks are not cheap. The dividend yield on the S&P is just 2%. According to one long-term measure — “Tobin’s q,” which compares share prices with the replacement cost of company assets — shares are now about 70% above average valuations. Furthermore, we have an aging population of Baby Boomers who still own a lot of stocks, and who are going to be selling as they near retirement.
6. The derivatives time bomb is bigger than ever — and ticking away. Just before Lehman collapsed, at what we now call the height of the last bubble, Wall Street firms were carrying risky financial derivatives on their books with a value of an astonishing $183 trillion. That was 13 times the size of the U.S. economy. If it sounds insane, it was. Since then we’ve had four years of panic, alleged reform and a return to financial sobriety. So what’s the figure now? Try $248 trillion. No kidding. Ah, good times.
7. The ancient regime is in the saddle. I have to laugh whenever I hear Republicans ranting that Barack Obama is a “liberal” or a “socialist” or a communist. Are you kidding me? Obama is Bush 44. He’s a bit more like the old man than the younger one. But look at who’s still running the economy: Bernanke. Geithner. Summers. Goldman Sachs. J.P. Morgan Chase. We’ve had the same establishment in charge since at least 1987, when Paul Volcker stood down as Fed chairman. Change? What “change”? (And even the little we had was too much for Wall Street, which bought itself a new, more compliant Congress in 2010.)
8. Ben Bernanke doesn’t understand his job. The Fed chairman made an absolutely astonishing admission at his first press conference. He cited the boom in the Russell 2000 Index of risky small-cap stocks as one sign “quantitative easing” had worked. The Fed has a dual mandate by law: low inflation and low unemployment. Now, apparently, it has a third: boosting Wall Street share prices. This is crazy. If it ends well, I will be surprised.
9. We are levering up like crazy. Looking for a “credit bubble”? We’re in it. Everyone knows about the skyrocketing federal debt, and the risk that Congress won’t raise the debt ceiling next month. But that’s just part of the story. U.S. corporations borrowed $513 billion in the first quarter. They’re borrowing at twice the rate that they were last fall, when corporate debt was already soaring. Savers, desperate for income, will buy almost any bonds at all.
No wonder the yields on high-yield bonds have collapsed. So much for all that talk about “cash on the balance sheets.” U.S. nonfinancial corporations overall are now deeply in debt, to the tune of $7.3 trillion. That’s a record level, and up 24% in the past five years. And when you throw in household debts, government debt and the debts of the financial sector, the debt level reaches at least as high as $50 trillion. More leverage means more risk. It’s Econ 101.
10. The real economy remains in the tank. The second round of quantitative easing hasn’t done anything noticeable except lower the exchange rate. Unemployment is far, far higher than the official numbers will tell you (for example, even the Labor Department’s fine print admits that one middle-aged man in four lacks a full-time job — astonishing). Our current-account deficit is running at $120 billion a year (and hasn’t been in surplus since 1990). House prices are falling, not recovering. Real wages are stagnant. Yes, productivity is rising. But that, ironically, also helps keep down jobs.
You know what George Santayana said about people who forget the past. But we’re even dumber than that. We are doomed to repeat the past not because we have forgotten it but because we never learned the lessons to begin with.