Credit Derivatives

Artimus turned me onto this source. Here's their recent publication on credit derivatives.

"Was the collapse of the subprime mortgage derivatives market a disaster - or merely the warning for something far worse? In today's reading we will take a look at a much larger potential danger to investors, that of credit derivatives, as introduced
below:"

"The credit derivatives market is roughly 30 times the size of the subprime mortgage market - and potentially even more at risk in the coming years. In the previous article, The Subprime Crisis Is Just Starting, we explored the roots of the subprime crisis, demonstrated how mortgage securitizations work, and then used this knowledge to show why 2008 could be a much more dangerous year for the subprime mortgage markets - and the global financial system - than 2007. In this article, we show how the same fundamental - and quite human - motivations that created the subprime market crisis also imperil the $35 trillion global credit derivatives market."

"Unfortunately, as of June 6, 2008, and after the writing of the main article, the credit derivatives danger became much more real, to the tune of $1.7 trillion of bad news coming a step closer to financial institution balance sheets, in just one day. This update has been added to the end of the article, as part of five pages of information for Turning Inflation Into Wealth readers, that was not available in the public investor education website version of the article."

The full report:
http://mortgagesecretpower.com/Readings/1007/cTWENTYONEgh.pdf

A prior post on the topic:
http://randomroving.blogspot.com/2003/03/puplavas-view-on-derivatives.html

Do You Believe In Miracles?

"Do you believe in miracles?" Al Michaels

You can't stop believing in miracles. This one is amazing:

June 30 (Bloomberg) -- A Yemeni Airbus that crashed into the Indian Ocean with 153 people aboard was barred from flying in France and the carrier, Yemenia, now faces a safety assessment by the European Union. A 5-year-old child is the only survivor found so far.
The Airbus SAS A310 was 15 minutes from landing in the Comoros Islands’ capital, Moroni, when it plunged into the sea today, Taha al-Ashwal, a Yemenia official, said by telephone from Yemen’s capital, Sana’a. The airline said the crash took place during stormy weather. Rescue teams who found the child are continuing the search for the other 141 passengers and 11 crew members, the Comoros presidency said on its Web site.

Keep the faith!

Dance Naked

I want you to dance naked
So I can see you
Id like to get to know you
You dont have to act naughty
Spin it round and round
Spin it round and round and round
John Mellencamp

In early 2008, Jim Puplava on his radio show began to talk a lot about "naked short selling". I had never heard the term before. He spoke about it every week and was so outraged by it that he organized a class action suit to prosecute these firms. By the end of 2008, the term and practice became known as the market melted down.

Reuters reports:

LONDON (Reuters) - "Global market supervisors sought on Friday to forge a more common approach to regulating abusive types of short-selling of shares by cracking down on settlement failures and stopping short of an outright ban. The International Organisation of Securities Commissions (IOSCO) policymakers adopted four principles its members agree to apply in their own markets to oversee a trading strategy critics say amplified the effects of the credit crunch. The principles broadly cover the need to maintain market stability, and for effective reporting regimes and enforcement."

"IOSCO comprises market watchdogs from over 100 countries, including the United States, Japan and the 27-nation European Union, who regulate over 95 percent of the world's securities markets. Short selling is the sale of shares not already owned in the hope prices will fall. Many countries introduced curbs from last September after the collapse of Lehman Brothers bank which sparked heavy selling in financial stocks."

"IOSCO said there was a need to punish failures to settle trades. The aim is to crack down on naked short selling whereby no prior share borrowing arrangements were made in time.
"As a minimum requirement this should impose strict settlement, such as compulsory buy-in, of failed trades," IOSCO said in a statement."

"By focusing on tackling settlement failures, regulators can avoid a legal minefield of defining naked short selling and pre-borrowing, said Martin Wheatley, chief executive of Hong Kong's Securities and Futures Commission SFC.L who chaired IOSCO's short-selling task force. This has the effect of putting a brake on naked short selling without having to go into legal and definitional problems," Wheatley said."

The entire article:
http://www.reuters.com/article/hedgeFundsNews/idUSLNE55I02220090619

While You Were Moonwalking

It was hard this weekend to turn on the TV and see something other than Michael Jackson. My favorite Republican called on Saturday very disturbed by the passing of the "cap and trade" bill (HR 2454) on Friday. I was unaware of the event. When asked for comment, I didn't have one related to the bill due to my ignorance of it's content. My main comment is that we have a $54 trillion bill to pay for our 27 year party, so we will be taxed in every which way. John McCain, if victorious, would have had no choice but to do the same. The tax approach might have appeared to be different, but the end result would have been the same. A "big party" calls for a "big hangover".

The bill is posted here. The ironic thing is that I went to the website last night to read the bill and I kept getting "Java script errors" and couldn't get full access.
http://www.opencongress.org/bill/111-h2454/text

The opposition states that the bill will have this effect:
1. Reduce aggregate gross domestic product (GDP) by $9.6 trillion
2. Destroy an average of 1-3 million jobs, every year
3. Raise electricity rates 90 percent after adjusting for inflation
4. Raise inflation-adjusted gasoline prices by 74 percent
5. Raise residential natural gas prices by 55 percent
6. Raise an average family's annual energy bill by $1,500 annually
7. Increase the federal debt by 26 percent, which is $29,150 per person

The concept of "cap and trade" is:
"Under this system the government would set a mandatory limit on the amount of carbon emissions an entity can produce (the cap); and entities which produce below the limit, can sell their unused “credits” to other organizations which produce above the limit (the trade)."
Source: http://www.examiner.com/x-14783-Law-and-Politics-Examiner~y2009m6d25-Will-a-cap-and-trade-scheme-be-a-good-deal-for-us

The Wolf & The Henhouse

I found it amazing that we're about to provide more power to the Federal Reserve. The organization that fueled this "credit orgy" since 1982 now will have more powers to "tip the canoe".

The Washington Times reports:
"The Federal Reserve, already arguably the most powerful agency in the U.S. government, will get sweeping new authority to regulate any company whose failure could endanger the U.S. economy and markets under the Obama administration's regulatory overhaul plan. The final plan due to be released on Wednesday -- which originally aimed to streamline and consolidate banking and securities regulation in one or two agencies -- now is expected to sidestep most jurisdictional disputes and simply impose across the board standards to be applied by all financial regulators, according to administration and industry sources."

The Governor and The Onion

Martin D. Weiss, Ph.D. summarizes California. The U.S. onion is peeling.

"Washington and Wall Street seem to be treating California as if it were a sideshow in the financial circus of these turbulent times. It's not. California is home to the largest manufacturing belt in the United States and to Silicon Valley, the nation's largest high-tech center. California is America's most populous state with 38 million people. Its GDP of $1.8 trillion is the largest in the U.S. Its economy is bigger than those of Russia, Brazil, Canada, or India. And it's collapsing."

"Major California counties are ground zero in the continuing mortgage meltdown: Los Angeles County with 5.32 percent of mortgages 90 days past due ... Monterrey County, 8.02 percent ... Imperial, 8.13 ... San Bernadino, 8.66 ... Madeira, 9.21 ... San Joaquin, 9.53 ... Riverside, 10.2 ... Merced, 10.57 ... and more! California's inventory of foreclosed homes is skyrocketing. Home prices are plunging. And the impact of surging unemployment is just beginning to show up in the data ..."

"The state's unemployment rate has surged to 11.5 percent, the worst since World War II. Last month, California lost 68,900 jobs. And since July 2007, it has lost 859,000 jobs, including 739,500 just in the past 12 months. Even if the economy recovers, an unlikely scenario in my view, economists agree that California will continue to be slammed by layoffs, at least through the end of this year and probably well into 2010."

"And even assuming a national recovery, UCLA's Anderson Forecast projects an average unemployment rate of 12.1 percent from this fall through next spring. What about without a national recovery? California's jobless could go beyond 15 percent. Worse, if you include part-time workers seeking full-time work plus workers who have given up looking entirely, it could reach 25 percent, exceeding the worst national unemployment levels of the Great Depression."

"Our wallet is empty. Our bank is closed. Andour credit is dried up."
Governer Arnold Schwarzenegger

Bubbles of A Different Kind

I was asked twice this morning why I didn't make a post about MJ. I would like this blog to "vibrate on a different plane". Not necessarily a "higher" or "better" one, but a "different" one.

Instead of "Bubbles The Chimp", I'm more concerned about bubble-mania and the impact on our future. Anyway, I'm going to miss Farrah more than MJ. I was a proud owner of that poster "back in the day".

My mother used to say that "they always die in 3's". Well, she was right again...Ed McMahon, MJ, and Farrah.

.

Kieth Richards & The DEA

Peter Schiff posted a very good commentary on Financial Sense Online:

"In seeking to undo the damage inflicted over the past decade by misguided government policies, the new regulatory regime would ensure that the problems underlying our financial system will only get worse. As was the case with the deeply flawed Sarbanes-Oxley legislation of 2002, or the misguided provisions of the Patriot Act of 2001, such as the torturous anti-money laundering requirements, the move will further burden the financial services industry with unnecessary regulation that will drive up costs, lower quality, and shelter the biggest and least innovative companies. Ultimately, the structure will put the entire U.S. financial industry at a global competitive disadvantage."

"The underlying problem is that the excessive risk taking which brought about the crisis was not market-driven, but a direct consequence of government interference with risk-inhibiting market forces. Rather than learning from its mistakes and allowing market forces to once again control risks and efficiently allocate resources, the government is merely repeating its mistakes on a grander scale – thereby sowing the seeds for an even greater crisis in the future."

"As is typical of government attempts to control economic outcomes, Obama's plans focuses on the symptoms of the disease and not the cause. The American financial system imploded for two reasons: cheap money and moral hazard – both of which were supplied by the government. Under the proposed new regulatory structures, these toxic ingredients will be combined in ever-increasing quantities."

"Obama proposes to entrust the critical job of 'systemic risk regulator' to the Federal Reserve, the very organization that has proven most adept at creating systemic risk. This is like making Keith Richards the head of the DEA."

the entire article:
http://www.financialsense.com/fsu/editorials/schiff/2009/0619.html

Politicos & The Flat Tire

Dave Barry might have the politicos figured out.

"The Democrats seem to be basically nicer people, but they have demonstrated time and again that they have the management skills of celery. They're the kind of people who'd stop to help you change a flat, but would somehow manage to set your car on fire. I would be reluctant to entrust them with a Cuisinart, let alone the economy. The Republicans, on the other hand, would know how to fix your tire, but they wouldn't bother to stop because they'd want to be on time for Ugly Pants Night at the country club." Dave Barry

Patriotism vs Nationalism

The word "patriot" continues to be used more and more these days. Big Bully O'Reilly makes his determination of "patriot" or "pinhead". So what is this surge in the use of the words "patriot" and "patriotism" all about? Possibly, during contraction cycles we channel our fear into this pride and/or arrogance as the herd comes closer together. Our fear might cause us to pull away from other countries and focus on ourselves. We might become more aggressive and imperialistic. Lastly, we might evolve more towards nationalism rather than patriotism. There is a huge difference and the results can be drastically diverse.

"I am patriotic. These days I like to draw the line between patriotism and nationalism. Patriotism is love of country. Nationalism is breast beating 'we are number one and kick your butt'." Peggy Noonan

The Gold ATM Machine???

Now this sounds cool!

"Asset management company TG-Gold-Super-Markt is planning to set up 500 ATMs at strategic locations all over Germany. The machines will distribute one-gram (0.0353 oz) mini-bars of gold, about the size and thickness of a child’s fingernail. The tiny gold pieces will cost 31 euros – around US$44 – which includes a hefty 30% markup to spot."

"Thomas Geissler, chief executive of TG-Gold-Super-Markt, told Reuters that this new way of selling bullion 'is an appetizer for a strategic investment in precious metals. Gold is an asset everyone should have, between 5 and 15 of your liquid assets in physical gold.' "

Source:
http://www.financialsense.com/editorials/casey/2009/0609.html

The Status of Our British Cousins

Justice Litle provides a status report on our British compadres. Will the peeling onion devour Gordon Brown?

"We’ll start with Britain - not an adopter of the euro, but a member of the EU (European Union) nonetheless. Britain has been hurled into political chaos, thanks to an unholy combo of deep financial crisis, explosive Labour Party scandals, and the hapless lame-duck status of embattled Prime Minister Gordon Brown. Cabinet Ministers are resigning left and right in protest as Brown’s popularity plummets, calling for the PM to step down. Election results tallied this week showed the Labour Party (Brown’s party) putting in its worst showing since 1918."

"Philip Stevens, chief political commentator for the Financial Times, sees an ominous chain of events now set in motion. “Everyone thought the [election] results would be bad,” Stephens reports. “But these [results] are calamitous... the Prime Minister was prepared, if you like, for very bad results. He’s now got to grapple with absolutely terrible results.”

"If the Brown government fails, Britain will be left rudderless in the midst of the worst fiscal storm in decades. In a worst-case scenario where bad events lead to worse decisions, opines Stephens, the domino chain could even lead to a British exit from the EU."

"This outbreak of chaos is awful and unsettling for the British economy - and by extension awful and unsettling for Europe. As of this writing, it is not yet clear whether Prime Minister Brown can survive a political coup... or even whether he would be better off resigning, Dick Nixon style, in the interest of sparing greater turmoil."

The entire article:
http://www.financialsense.com/editorials/litle/2009/0610.html

The Chinese Apetite

Everyones fear is that the Chinese will develop the American appetite for everything. Imagine 1,330,044,544 people joining the Supersize Me club!

On June 11, 2009 the New York Times reported:
“According to J.P. Morgan, China’s iron ore imports were 33 percent higher in April than a year earlier. Crude oil imports were up nearly 14 percent, aluminum oxide imports climbed 16 percent and refined copper imports jumped 148 percent. Imports of coal soared 168 percent as Chinese utilities bought more foreign coal while trying to negotiate better prices with domestic producers.”

Does it look like China is slowing down?

The Heartland Theory & Turkey

In April I made a post regarding The Heartland Theory. The article below provides some up to date detailed insight into the strategy and the region:

http://www.financialsense.com/editorials/engdahl/2009/0617.html

Jebediah, Cletus, and The Federal Reserve

This past Memorial Day weekend, I had the pleasure to join some friends on an adventurous father-son weekend to the Buffalo River in Arkansas. Two days of canoeing the rapids and camping amongst the stars was tremendous. Being that we were in the "back-country", my son and I decided to adopt new names for the weekend, Jebidiah and Cletus.

We quickly realized that balance would be crucial to surviving the river. Jebidiah claimed that I (Cletus) was causing the canoe to be "back heavy", but we had no problem keeping up with our brethren. With a canoe full of cargo, tipping over was not the desired outcome. Balance became our focus.

Financial markets, like canoes, appear to always be seeking balance or equilibrium. One night on our canoe trip, we had a discussion on the role of the Federal Reserve Bank. I was the loner in stating that the Fed has caused major fluctations in the market and we would be better off without it.

The chart below presents some interesting conclusions. The Dow Jones Industrial Average - Gold Ratio is presented from 1800 to 2005. The creation year for the Federal Reserve Bank is noted (1913). Note the "wild canoe ride" that occurs after the creation of the Fed. Before creation, there was steady growth with some corrections. Afterwards, it's major swings in both directions. Like someone paddling a canoe, the Fed "shifts its weight" too rapidly in the other direction causing a volatile swing to the other side.


For a more detailed analysis of the last century:
http://randomroving.blogspot.com/2009/02/dow-jones-industrial-average-gold-ratio_22.html

Archie & The Helmet

As a young boy I was fortunate to be able to attend many Saints games to watch my hero Archie Manning attempt to turn the Saints into a winning franchise. I remember one game where a fight broke out on the field and the benches quickly emptied with referees and coaches in the middle of the melee trying to break it up. At the commencement of the fight, Archie, the team leader, slowly walked away from the brawl, took his helmet off, and sat from afar watching the event transpire. It was obvious that Archie was aware that something more important was going on....an NFL football game. The fight was a side event that had no impact on the larger task at end.

When watching the news at night and reading emails from my "politically charged" friends, I often think of Archie and his decision to walk away from the melee and stay focused on the more important task at hand. The politicos are swinging with full force, and I wonder if they are even aware of the major changes that are occurring. It might be a case of the "forest and the trees".

Filling The Parking Lot

I was having a beer with my new neighbor this weekend and he was elaborating about developments in his business sector. His company is involved in major infrastructure projects around the world. He mentioned their office in Dubai and I asked him how the city was handling the contraction. He responded "the parking lot at the airport is filled with abandoned cars". I didn't quite understand his statement so I asked for clarification. He then stated that the country allows for expatriates to invest in local real estate. Over the past few years, speculation went crazy and many folks were holding property that was under water. He then stated "this part of the world handles defaults a little differently." So basically, many have fled the country to escape prosecution. They drive to the airport and leave their car in the parking lot. He said that his company has lost three employees in the last month due to these reasons. He said that they don't resign until they've successfully fled the region. Wow.....sounds like the used car business might have a surplus in Dubai!

http://randomroving.blogspot.com/2009/03/is-atlantis-underwater.html

http://randomroving.blogspot.com/2008/12/night-in-atlantis.html

Noonan On The State of Affairs

Peggy Noonan, author of seven books and a former President Reagan speech writer, writes in her latest book, "Patriotic Grace":

"What are we barreling toward? A difficult time, I think. We know we live in an age of weapons of broad and immediate destruction, that they can be deployed against civilian populations by any group with the will, money, and mad focus to do it. I think a lot of people are carrying around in their heads, unarticulated and even, in some cases, unnoticed, a sense that the wheels may be coming off the trolley and the trolley off the tracks, that in some deep and fundamental way things have broken down and can’t be fixed anytime soon. It came to me as a reordering thought. I’d felt a version of this sentiment since 9/11, and maybe you did too. The old ways are over, the old politics are over. We have to sober up, we have to change. This is a time for seriousness, for high-mindedness, forbearance, and reason. Is there a grown-up in the house? America is at a very crucial stage in its life. That we're facing some really big things and we're acting like it's still the 1980's and still the 1990's and still having our brute, dumb, vicious politics at a time that we need something better. Before this is over, we'll all have to help each other down the stairs. Something tells me that it's going to get a little dark out there."

"Patriotic Grace" on Amazon along with an interview about the book:
http://www.amazon.com/Patriotic-Grace-What-Why-Need/dp/0061735825/ref=sr_1_1?ie=UTF8&s=books&qid=1245073984&sr=8-1

The End of The Poker Game

J turned me onto this enlightening interview with "Liars Poker" author, Michael Lewis. A great perspective of the entire expansion cycle.
http://www.cnn.com/video/?/video/us/2009/06/07/gps.michael.lewis.int.cnn

Stay Hungry, Stay Foolish

An inspiring commencement speech given by Steve Jobs at Stanford's graduation. Thanks Pauli!
http://articles.mercola.com/sites/articles/archive/2009/05/26/One-of-the-BEST-Commencement-Speeches-of-All-Time.aspx

Big Ben Lays An Egg

" 'Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,' Bernanke said in testimony to lawmakers today. 'Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,' Bernanke said in response to a question. 'The Federal Reserve will not monetize the debt.'"

From Federal Reserve Chairman Ben Bernanke, in testimony before House Budget Committee on June 3rd, as quoted by Bloomberg

60 Minutes had a segment last night with him and it was very informative:
http://www.cbsnews.com/stories/2009/03/12/60minutes/main4862191.shtml

The Natural Gas Dilemma

The natural gas price has been severely hammered since peaking last summer above $13.5 per thousand cubic feet. It now trades at $3.935. I decided to make a pilot purchase of the natural gas ETF (symbol UNG) this morning at $14.2092/share for the following reasons:

-it currently trades at a price very low to the last six years

-despite the fact that we currently have greatly increased our proven natural gas reserves and have seen decreased demand, I believe that it will be a significant resource for our country for many years to come

-natural gas is currently trading very low relative to oil prices.

-when this administration wakes up to the "green-ness" of this fossil fuel relative to oil and coal, it will be placed at the forefront of our energy plan (ask T. Boone about this).

Beck, Schiff, and Faber

An informative Glenn Beck interview with Peter Schiff and Marc Faber.
http://www.youtube.com/watch?v=zJaDuERV7c8

Power Seizes Fear

“Fearful people are more dependent, more easily manipulated and controlled, more susceptible to deceptively simple, strong, tough measures and hard-line postures. ... They may accept and even welcome repression if it promises to relieve their insecurities.” George Gerber

Historical Examples of Crash and Currency

"As we saw in the past crisis in Russia, Argentina, Thailand, and Brazil; equity markets eventually do return while the devalued currency never regained strength. The US case is no different. Further rebound by the equity market in nominal terms can be seen albeit with extreme volatility, and we will likely witness a 4-digit gold price in 2009 that will never look back. As the Chinese saying, crisis is spelled danger + opportunity. There is still time to diversify out of "dollars before the world recognizes the dollar’s permanent debasement and demotion of status." John Lee

The entire article.....note the chart illustrating the increase in U.S. liabilities..
http://www.financialsense.com/editorials/lee/2009/0602.html

The Fort & The Canon

The debate of whether deflation or inflation await us is still ongoing. Jeff Clark makes a strong case for protection in either outcome.

"Whether we’re served debilitating deflation or insidious inflation, holding gold (and silver), along with an appropriate allocation of precious metals stocks, offers us both a fort for protection and a canon for profit."

http://www.financialsense.com/editorials/casey/2009/0603.html

Some Hard Data On Mortgages

One thing you never see presented in the media is "hard data". Yes, they show nice stock price charts, but the macro level economic data never gets presented graphically to illustrate where we are on the curve.

The chart below presents a very revealing picture of the mortgage market and what has yet to come.

Is this the next finanical storm? Read the article and make your own decision.

http://www.financialsense.com/editorials/casey/2009/0528.html