Saturday, December 15, 2007

Hey Buddy, Can You Spare $1,000 Trillion?

Finance portfolio: The profit$ of doom

Hey Buddy, Can You Spare $1,000 Trillion?

I write each editorial under the impression that a major event is going to prevent me from drafting the next one. My fear almost came true. This one was scheduled to be released early October then delayed due to an avalanche of scary news unseen before in my lifetime. The threat of 'monetary terrorism' has only one remedy called 'financial detoxification'. However, thanks for taking the time to read this column, which could have easily been much longer. As you will see, nobody can stop this freight train.

The story of the upcoming world crash is hidden in plain sight. Even mayor Bloomberg has jumped in the gloom and doom bandwagon: a global economic downturn was looming, triggered by the "lunacy" of public debt, he declared last month. Meanwhile denial continues. Although nearly 70% of the Americans do fear a recession, the possibility of a major crisis is not considered. A crisis? Not in my backyard, most of them think. It all boils down to faith. To be fair, the 'empire mentality' was born with history. Eventually people wake up to the harsh reality that the empire lied to them. The only successful government programs are wars and economic crises. When two or three decades of prosperity end with a crash and geopolitical crisis, what does this mean - frankly? Once again, the numbers tell a very different story than which we are being told. Yes dear Readers, you're not hallucinating. There is currently at least a $1,000 trillion dollar black hole in the world economy. To get the full picture, please keep on reading.

We have 600 trillion in world liabilities plus more than a 400 trillion-derivatives neutron bomb, all of which will go off when the Westerners (from EU and US) will no longer be able to borrow. The credit crisis could be just beginning according to, the Calcutta-born Australian Satyajit Das , a derivatives specialist who speaks of nearly $500tn. Das doesn't chew his words:

... Defaulting middle-class U.S. homeowners are blamed,
but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy..."

Well, that was then and there is now: since November 22, 2007, the derivatives exposure has taken another new surreal dimension. They grew at the fastest pace in at least nine years to $516 trillion in the first half of 2007. If you wonder which of the two - pure greed or destructive stupidity - rules the world, just know that you're no longer alone.

In America, the clock is dangerously ticking for consumers: the party's over, they are are truly tapped out. While it is difficult to make sense of mega-digits such as 1,000 trillion, this amount doesn't include consumers' debts. Although it is kind of tricky to say when the credit soufflé will flatten, those grasping the dangers of a negative savings rate are already taking action. Well, the smartest and they are a strict minority at this stage. Some amog the most 'cash-strapped' Americans are raiding their 401(k)s . Not knowing what is really going on, many might be prompted to turn to the 2 trillion already in pre-approved when times were booming, in the form of credit cards. To give you an idea of the dire situation, last May and June saw spikes in the amount of revolving debt, 12.2% and 8.4% respectively. The consumer credit 'is' the next bubble without a doubt. There are a growing number of debt-laden homeowners preferring to save plastic first.

Delusions, survival and credit. People want to keep accessing credit when they cannot stretch it financially instead of cutting down spending drastically or do whatever it takes to find an extra job. Talking of jobs, did you know that in 1972, wages reached their peak. Today, real wages are nearly one-fifth lower - inflation adjusted!

Beyond the climax

Now even an infusion of cash doesn't propel the market anymore. The Dow Jones behaves irrattionally. Thanks to the PPT (Plunge Protection Team). The economy as a whole has been rather stagnant in the West. Major European economies are on life support. They cannot overcome their costly social programs and the flood of (clandestine) immigration which is as bad as in the U.S. In a Forbes article we read that France has been in chronic deficit for 15 years. In 2005, Standard & Poor's said it may downgrade the credit ratings of Germany and Italy, two of Europe's largest economies, unless their governments rein in spending and cut debt. In 2007, German unemployment remains stuck at 16.5% and in 2006 Berlin was reported as bankrupt. Further Italy was described as the real sick man of Europe by The Economist in 2005 whatsoever. The credit crunch has also taken hold in Australia where personal debt is worse than during Great Depression. The situation is equally dire in Britain, where house prices are even more overvalued (than in the US). A spectacular crash cannot be ruled out, the IMF warned last month.

It is going to get worse before it gets better: the latest report by Goldman Sachs makes it crystal clear, the global economy hits a 'crunch'. As if this weren't enough, the IMF spreads gloom on 2008 by confirming that impact would be worse in 2008. The IMF and Sachs were seconded by the US Treasury Secretary acknowledging that we must prepare for a prolonged turmoil. Debt deflation is a nasty beast. The majority of bad-debt losses will be uncollectible in whole or in large part.

Forget about the Dow 14,000 and ask yourself frankly if you feel today better off than last year, or two years ago. That consumers must now resort to their credit cards to pay their monthly bills while banks are tightening their standards is a bad omen. As to wonder why the heck they have preapproved two trillion in the first place? On one hand they try to appear wary about further credit deterioration, on the other hand they continue their reckless marketing tactics. Their brand new targets are minority homeowners on the brink of foreclosures and college students, which they recruit as credit-card pushers to circumvent the restrictions banning credit card solicitations on campuses. Meanwhile the sin of usury continues to bankroll Congress. the US Senate Panel okayed $850 billion debt increase, ignoring the remark of 'Bubble Man Greenspan' himself, when he said that the demand for U.S. debt may be at `limit'. Cynicism knows no boundaries: the same man who warned Congress has in fact denied that regulators failed to foresee the problems which caused the global credit crunch. Though this didn't preventing him from applauding the performance of the housing market-bubble! On the top of that, and this is absolutely sickening, 'he' declared early October 07 that the fate of world economy lies with US housing... He should be jailed for the rest of his life. Period.


As foreclosures skyrocket across the US and threaten to bring down real estate prices by 50% in some cities according to Yale University professor Robert Shiller, more and more everywhere we read about the world credit-liquidity crisis unfolding. Truth to be told, central banks face a liquidity trap. Only some anchors and a minority of sound economists see the bad 'Omen' coming our way as Goldman announced this very week that to cut back their lending by as much as $2 trillion. We are so debt-inflated that such a move is going to contract and strangle the economy for good. We may thank the bankers for taking care of our wallets.


Just a question before I continue: did you hear about the British the Northern Rock-bank run by any chance? If you did you're lucky because it was not a major issue on any of the channels I am used to watching. Whether we'll be witnessing bank runs in America remains to be seen. As of 9/2/07, in the Financial Times the following headline could be read: The ongoing credit turmoil has the hallmarks of a bank run.

The current turmoil in the financial markets
has all the characteristics of a classic banking crisis,
but one that is taking place outside the traditional banking
sector, Axel Weber, president of the Bundesbank, said at
the weekend... Some Federal Reserve policymakers also
privately see comparisons between the current distress
in credit markets and the bank runs of the 19th century,
in which savers lost confidence in banks and demanded
their money back, creating a spiralling liquidity crisis
for institutions that had invested this money in longer-
term assets... His comments came as Frederic Mishkin, a
Fed governor, argued for a rapid and aggressive monetary
policy response to any fall in house prices. His diagnosis
of the financial crisis was echoed by other experts...
Paul McCulley, managing director of Pimco, said there was
a 'run on the shadow banking system'. He said the shadow
banking system held $1,300bn of assets that now had to be
put back onto the balance sheets of the banks...


Sorry but weren't we told the Federal Reserve was created in order to avoid that type of moral hazard? Where is the point now to go back to square one and find out that we're in worst shape than before the inception of the bank, in 1913. Yes back then panics were a reality, although the common man was unaware that they were linked to the competition between bankers and their reckless speculation. The same unethical behaviors occurring today on Wall Street, Danny Schechter exposes. Blaming the 'gold standard' was a myth invented for the ignorant masses, which embraced the Fed like a savior. What should have been implemented is putting Congress in charge of regulating the money supply, just as stipulated by the US Constitution. Infate or die. There is no other choice, my friends. The Fed has pumped over $47 Billion into financial system several days ago.

Irrationality plagues debt-based economies since they are backed by consumers 'confidence. The willingness to take on debt goes along with the optimism that one will be able to repay. This explains why the moral hazards linked to paper money are enormous. Most of the people think that printing more money is the solution, and so are bailouts. But what the heck can a bailout achieve when the interbank lending business itself has broken down almost completely? In the Financial Times as of 9/04/09, we could read the scary headline: Sense of growing Crisis over interbanks deals.

Unicredit analysts say: 'The interbank lending business
has broken down almost completely.... it is a global phenomenon
and not restricted to just the euro and the dollar markets...
if this situation continues, it could potentially have very
serious implications...


Are those at the head of our monetary institutions a bunch of idiots or do they have a plan? Considering the state of global finance, which is pretty well documented on moneyfiles.org, it is indeed a difficult to make sense of the credit market shutdown. Here is a NYTimes excerpt, also published as of 9/04/09

... Banks to test debt market this week: All summer,
bankers have sweated on Wall Street. Instead of spending time at
the golf course or at their summer houses, many found themselves
in the office trying to make sense of the credit market shutdown
that had left their companies responsible for the billions of
dollars used to finance leveraged buyouts, yet facing uncertain
prospects of getting investors to take some of the debt off their hands...


Flash back. In his 9/05/07 article, Stephen King, a HSBC banker and regular columnist at the independent.uk, mentions several ugly truths when admitting that in order to save the innocent, we may need to bail out the guilty. Rewards for failures is a typical elite thing. It is how the powers-that-be and their cheerleaders have always colluded. However, this sums it up pretty well. The bailout logic is borrowed from a collectivist concept that the government is the ultimate wealth creator. Though there is something faulty in this particular case: why can't the government just make sure that its citizens are provided with the adequate financial education instead, so the guilty can be prosecuted rightfully? This major failure raises another issue: should the state be in charge of the education? On Blomberg.com, the columnist Mark Gilbert takes a radical stance by arguing in favor of easing the money-market crisis by letting banks go bust. Bailouts merely postpone the outcomes while making it worse. 'Helicopter Ben' and his clique have thus chosen to completely implode the world economy. This is a super-duper bad-loan bailout scam, Bill Fleckenstein concludes. The truth is that Citigroup Inc. and JPMorgan Chase & Co., are just 'Enrons' waiting for their day of reckoning. And the game goes on and on. As the monetary scientists improve their old tricks to save 'them' from disgrace by raising more than $60 billion, some already wonder if the *Banks Stabilization Fund* will work:

... It is quickly being realized that it doesn’t really
solve the problems, Joshua Rosner, a managing director at the
research firm Graham Fisher & Company who had been skeptical of
the proposal, told The Times. The path they have taken of skimming
off the cream from the top doesn’t resolve the fact there is poison
at the bottom....



Doomed profits:

What has happened over the last decades is that the world financial institutions have learned better to shift risks - they think. The result of this shortsighted assumption is that our security systems have remained dormant, allowing the 'easy money binge' to perpetuate the illusion of wealth.

Even Chinese investors are betting all they have on a dead cat bounce. They are so infatuated with their shares that they don't hear their own lawmakers sounding the alarm.

..."Although listed companies achieved rapid growth,
investors should still beware of hidden bubbles behind the
profit surge and invest in a prudent and rational manner,"
said the report released on Sunday. According to the report,
the interim profit figures relied too much on yield of investment
in the securities market and the prospects of a continued profit
increase is doubtful...


This insane credit expansion fuelled by unethical speculation will cost China dearly. Damages are already showing: rivers are so polluted that they are described as on the verge of collapse. In turn heavy pollution is blamed for soaring birth defects and disease englufs the country. This only on a human level. The economic fallout will be unprecedented.

All is a matter of psychology and perception whatsoever. And this will not prevent the world economy from falling off a cliff. Hard data always wins over in due time. Once does not wipe off 1,000 trillion in world liabilities just like that, even if this is electronic or virtual money. Strangely, it is very rare to see 'super bulls' and 'perma-bears' converge: The bulls by calling for bailouts and the bear by nodding pessimistically. The profits of doom will be soon causing the next shocks to the broad market.

Those who are forecasting Armageddon in the hope that
the Fed will come to the rescue are, for the most part, stock-
market bulls. But, strangely, their views are shared by their
opposites, the so-called perma-bears. Perma-bears have long
argued that the American economy in general (and the housing
market in particular) represents an unsustainable bubble, inflated
by cheap credit and a dramatic mispricing of risk. Convinced
that the downturn they have forecast is finally here, they write
off as fantasy any signs that the rest of the economy might
weather the housing and financial-market storms.


Both groups now envision the perfect storm coming our way.

Now comes the nasty 1,000 dollar trillion question: what will credit agencies say after the demise, when an increasing scrutiny will point to them as the culprits responsible for coercive and perilous speculation?

Lethal Collusion Exposed:

In the FTimes last month again, one could read that credit rating agencies were being investigated for their symbiotic relationship with investment banks in the EU. Axel Weber, President of the Bundesbank, said: What we are seeing is basically what we see underlying all banking crises. In America the response has been less sharp but critical nonetheless, the same FTimes columnist reports. Of course the agencies deny any wrongdoing. This shouldn't come as a surprise. They have always done so. It became just more blatant during the subprime debacle. Now that the damages are done, the S.E.C is probing ratings agencies' subprime role. According to CBS, last September, the federal agency hasn't come to any conclusions about their explanations for unexpected losses on those assets. Remember Enron? How many people are currently jailed? And they will be asked again many questions when the consumer credit bubble pops. How does it come that they turned a blind eye to $1,000 trillion black hole, do you think? Barry Ritholtz' conclusion establishes the abysmal track records of Moody's, Fitch and S&P.

Ellen Brown has probed a 300 year-old scheme maintained in place (despite the boom-bust cycles) with the complicity of the common man who views the government and central bankers as wealth managers. The cliques at the top, which have enjoyed the ignorance of the masses for centuries long, are now faced with a boomerang effect. For them too, chickens have come back home to roost.

Do you believe me now when I speak of 'financial detox' whose consequences may be as severe as the great depression? We didn't get there because of a lack of regulations but through products sold as exotic financial instruments (credit derivatives, commercial paper, hedge funds, CDOs, CDSs, SIVs, ABCP, etc), hence any astute way to recycle debts found its way hrough. I don't know how work most of these instruments, but in the Asia Times, James Cumes, describes this financial addiction quite well:

When everyone in the house is crazy, only the sane seem
like fools. So it was when the financial addiction spread everywhere.
Then everyone who was not taking his daily dose of heroin or cocaine
became the fringe-dweller, the oddball, the brake on progress, the
party-pooper at the greatest no-cash-down, how-to-spend-it shindig
that our planet has ever known. Debt piled on debt everywhere: in
households, corporations, public finances and international deficits,
in magnitudes that had never been even glimpsed in the most creative
imaginations before.


Back to the basics

Pessimism doesn't encourage to pile on debt, and until the loan is spent generally a feeling of invincibility can be experienced. Credit happiness is short-lived. Just as with drugs, there is a withdrawal.

Although consumer borrowing is a very important part of the equation, debt monetization (or recycling) between banks might be even more so. There are currently fears that lending between banks have ground to a halt. In the EU, we're talking of 100bn that should have been dealt with last August. In the UK it was a matter of 70bn over the next 10 days (in a article written in August). More alarmingly, ECB made 269-billion euro refi offer as market tensions persisted as of 09/12/07. Not only banks created a monster in the first place, now they also want us to believe that refinancing debt to pay debt is the safest bet on earth. The Bank of England Governor must be sweating heavily though. A few days ago he declared that markets are 20% overvalued and poised for severe fall.

On September 9, another HSBC executive endorsed 'the credit squeeze' on CBSMW but with a much gloomier tone. The worst is not over. According to him it is all about damaged confidence among the market players that needs to be restored. Confidence is broken and the outcome will be 'da' crash of the millennium Dr. Ravi Batra explains while remaining positive in the long run:

... we are now more overvalued than Japan was in 1990.
So certainly most American financiers know we are in a bubble
economy but they hate to admit it because they think that
they are one way or another responsible for it.... That could
lead to a political revolution, but I do not believe it will
lead to a dictatorship. I think we will see the rule of money
end and that we (the majority of Americans and citizens around
the world) will benefit by a tremendous revolution... Well
first there will be a lot of destruction of money


Citizens and investors alike will learn the hard way that coercion is the root of all evils. Indeed, how coercive is forcing people to take on 401ks and IRAs to avoid taxation, not to mention taxation itself. This among other things: such as encouraging the use credit cards to buy stocks by making plastic a way of life. What to think of super bonuses prompting CEOs to cook their books, all of which condone short-term gambling along with the pump and dump mentality. It is interesting to mention that an average CEO' salary was about 25 times more than the common worker in the 70's. By 2005 it shot up to 465 times more! The worst coercion is without a doubt cheap interest rates delivered by central banks directly and which rejoice people gravitating around the lending industry. Cheap interest rates go along with pervasive corruption and predatory lending.

In short any type of coercion provokes an amoral speculative frenzy. And this looks very blatant when analyzing the story behind every boom and bust cycles. Such trends will go away the day the average investor will have understood that becoming a 'fat cat' in a short period of time is generally the result of a lack of discipline and ethics - at the expense of the gullible being lured into asking the government more incoherent regulations that do not address the fundamentals.

Something fishy:

Every year and worldwide, thousands of college students in economics are recognized by their peers. A distinction they welcome proudly as the door to brilliant career opportunities open. If they have the right connection, all the better: many will end up working for big financial firms or even government or centrals banks. Although is surely is amazing that our fate lies in the hands of those prominent people one does not need a PhD in economics to understand why the obsession with growth dominates all political debates, and why lawmakers make employment a high priority of theirs. To grasp the rhetoric behind the numbers, one has to take a look at the big picture to see why 'growth and GDP' are in fact a tale concealing one of the most blatant fallacies ever.

Although this is recurrent in the so-called rich countries, let's take the example of the USA. How does it come that the twin deficits are ever increasing, the national debt just went past 9 trillion dollars. Finding items 'made in America' has become a tour de force - all this despite the boom! The problem is that the word 'economy'(and 'forest' alike) is an abstraction. Both do not exist. A forest is composed by trees and an economy sustained by humans.

Not only because people cannot sell and buy everything at the same pace, making theories and rules for the majority does not work. Basing the GDP on consumption is additionally fatal since it is impossible to live beyond one's means forever. If you want to find an explanation to the business cycles, here it is.

The End Of Conventional Wisdom

The GDP fairy tale has been conventional wisdom for decades. Anyone having a good sense of logic see the hoax of a model based on debt consumption and extreme consumerism. Spend or die is economic cannibalism. One does not need to be a rocket scientist to ponder the origins of our 1,000 trillion sinkhole. To be fair there are other ingredients contributing to the mess we find ourselves in today but since economics is the only way to gauge 'Property Rights' and 'Freedom', for the sake of our survival we must reject doomed theories such as these. Let's cross our fingers very hard and take action, Dr. Ravi Batra may not be a dreamer after all.
posted by SB Kayser-Scherman @ 9:25 AM

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