Financial Crisis

[MJP]

Hmmmm . . . . something just crossed my mind about this.

Who are the consumers, the purchasing managers? Could this be rampant government spending off the back of unsustainable borrowing?

You are just a born optimist.

My rather cynical thought given my impression of UK output was that an increase of something very little is not very much at all.

I think it's realistic to assume a Labour government would try and buck the market (simultaneously bankrupting the UK) in the run up to a general election.

[flying]

IMF Approves bond offering

http://www.reuters.com/article/usDollarRpt...G00356720090701

Their rep..Lipsky On TV today said they could offer up to 500 billion in bonds

Edited July 1, 2009 by flying

[MJP]

Banking System Like South Sea Bubble, says senior Bank of England official

http://www.guardian.co.uk/business/2009/ju...outh-sea-bubble

'Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison,' says executive director for financial stability

A senior Bank of England official today compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely "resorted to the roulette wheel" to keep up with each other.

The Bank's executive director for financial stability, Andy Haldane, said in a speech in Chicago that having been stable over much of the 20th century, returns in the banking system relative to the wider stockmarket shot up after 1986 until 2006.

"Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison," he said.

He said bankers and policymakers became seduced by the excess returns available: "Banks appeared to have discovered a money machine, albeit one whose workings were sometimes impossible to understand.

"One of the South Sea stocks was memorably 'a company for carrying out an undertaking of great advantage, but nobody to know what it is'. Banking became the 21st-century equivalent."

He said banking returns over the period were magnified by leverage as banks borrowed excessively, he said.

"During the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this crossfire, higher leverage became banks' only means of keeping up with the Jones's. Management resorted to the roulette wheel."

He noted that the 80% slump in bank shares since the credit crunch hit meant that returns from the sector were now back in line with their longer-run average (see graphic above). The market capitalisation of global banks has fallen by $3tn (£1.8bn) since the crisis began, he said.

"We should aspire to a financial system where there is greater market and regulatory scrutiny of future such money machines. In achieving this, there is a role for some body – a systemic overseer – which is able to detect incipient bubbles and fads and, as importantly, act to correct them. This role is about removing the punchbowl from future financial sector parties."

He said that in future there would have to be a greater distinction between management skill, which improves return on assets, and luck, when return on equity can be magnified by leverage.

"Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole."

A second lesson, he added, was that there would have to be much stricter system-wide limits on leverage, particularly among big banks whose stability is crucial to the whole financial system.

"For a number of diseases, 20% of the population account for around 80% of the disease spread. The present financial epidemic has broadly mirrored those dynamics," he said, adding that the failure of a core set of large, interconnected institutions such as Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG contributed disproportionately to the spread of financial panic.

"Epidemiology provides a second key lesson for financial policymakers – the importance of targeted vaccination of these 'super-spreaders' of financial contagion. Historically, financial regulation has tended not to heed that message."

He welcomed a recent move by US authorities to bring the trading of credit derivatives, which were at the heart of the crisis, on to exchanges so they could be better understood and controlled. "This is a bold measure and one which deserves international support."

Haldane's speech was part of a growing debate among global policymakers to try to build a better system of regulation and control of the financial system to prevent such crises as the current one from occurring again.

[MJP]

2G is a nightmare . . . double post.

Edited July 1, 2009 by MJP

[Abrak]

By the way as every post is a bit short of solutions for say the US problems, I will give one.

Transfer 10% of the total wealth namely US$6.5trn from the rich (the top 10% who own 80% of all assets), to the middle classes (we need to keep the poor, poor to encourage them).

The rich would hardly notice this (it is less than 20% of their total assets) and all debts (US$14.5trn) could be paid back over time rather than through taxes. More to the point it would over double the net worth of the median family so that a new consumer boom growth model could be recreated.

To be honest it makes a lot more sense transferring money from GS partners to the middle classes than bailing out GS with taxpayers money and then GS paying record bonuses to its partners.

[Abrak]

Naam you mentioned I predicted a 90 point drop, please look at chart below.

Alexjah, in that you are supposed to predict the future of the stockmarket without any given reason I would think you pretty mad. If you took that chart and the starting point as evidence of much at all, I would be very surprised. It seems to me that I could pencil in a very comfortable line predicting that that the market would trade sidewase over the period. Adjust the date forward a month and you can even say you predicted the market would go up.

Personally, given chaos theory rational expectations and all that, anyone making short term predictions is either a mug or highly paid and doing it for a living. At least any explanation of a short term prediction should be justified by a 'cause' such as 'directors of listed companies are record net sellers' rather than a mere prediction and an assumption we will take you as a guru.

Afterall to the extent that prices are driven by 'I think' mentality they move in the opposite direction. When people are maximum bullish prices can only rationally go down. So to the extent I think your predictions are simply that, they should be assumed be a contra-indicator in that expectation without rationality is exactly what you make money off.

[Datsun240Z]

What does the US have to do to get out of this mess it created?

The world should not depend on the US. Those credit loving people, made te whole world go miserable.

[Datsun240Z]

Few months back I saw on a economy talkshow on the Dutch TV, owner of the Dutch National Bank ( Duisenb, showed the " highly secured, gold supply of the country " location unknown.

Now this is only done as a backup, when the entire economy fails, and the fake " digital money " runs out on dry, men rely on the good old gold again.

[Naam]

Naam you mentioned I predicted a 90 point drop, please look at chart below.

Alexjah, in that you are supposed to predict the future of the stockmarket without any given reason I would think you pretty mad. If you took that chart and the starting point as evidence of much at all, I would be very surprised. It seems to me that I could pencil in a very comfortable line predicting that that the market would trade sidewase over the period. Adjust the date forward a month and you can even say you predicted the market would go up.

Personally, given chaos theory rational expectations and all that, anyone making short term predictions is either a mug or highly paid and doing it for a living. At least any explanation of a short term prediction should be justified by a 'cause' such as 'directors of listed companies are record net sellers' rather than a mere prediction and an assumption we will take you as a guru.

Afterall to the extent that prices are driven by 'I think' mentality they move in the opposite direction. When people are maximum bullish prices can only rationally go down. So to the extent I think your predictions are simply that, they should be assumed be a contra-indicator in that expectation without rationality is exactly what you make money off.

Abrak, it doesn't make sense to discuss a painting's colours and the brushstrokes of an old master with a blind person or in this case with somebody who's heraldic message is "the one that [sic!] knows..."

[flying]

China requests debate on reserve currency at G14

http://jessescrossroadscafe.blogspot.com/

Always a good read. Jesses crossroad cafe

The fallback position then will be the composition of the SDR, and a long phasing of the change in the primacy of the dollar and a few G7 currencies. China will seek more diversity and the inclusion of gold and silver, which is anathema to the Wall Street banking cartel.

What comes next, no one can say. But change is in the wind, and with that change comes the rise and fall of powerful but all too human institutions which many still believe can last for a thousand years, even as they are on the brink of der untergang, their downfall.

Edited July 1, 2009 by flying

[MJP]

More evidence of rampant money printing . . .

This really must stop now!

http://www.thedailymash.co.uk/news/society...s-200907011870/

[Abrak]

Without wishing to be a conspiracy theorist, one should at least consider this. Virtually every major country in the world is working hard at the moment to devalue their currency in order to promote growth. Why should China be any different? Clearly, with a pegged currency, it doesnt have much monetary policy of its own. Still be 'diversifying' away from the dollar and expressing concern about its future weakness, it may have the desired effect of weakening the US$ and the yuan in respect to other countries.

[Abrak]

More evidence of rampant money printing . . .

This really must stop now!

http://www.thedailymash.co.uk/news/society...s-200907011870/

Having read the article, I am pretty sure there is a typo there. There is no possibility that he could actually buy up 'Norway', I suspect the person in question was either hopelessly optimistic or couldnt read his maps properly. Presumably the country he is referring to is Iceland.

[flying]

Still be 'diversifying' away from the dollar and expressing concern about its future weakness, it may have the desired effect of weakening the US$ and the yuan in respect to other countries.

Seeing all that is transpiring do you really feel the USD will need help weakening?

Then again *in respect* to others may be another question

[losworld]

Unfortunately I'd say we are in for a W and not a V so the roller coaster will go up and it will go down again followed by hyperinflation at the top of the W brought about by gross mismanagement of fiscal policy in the United States i.e. overprinting of money or in doublespeak "quantitative easing". Now couple together a falling U.S. dollar with an increasing Chinese currency and you will see the prices of all the cheap Chinese products on the shelves going up dramatically and no U.S. product available to replace it since all our manufacturing knowledge was provided to China by our greedy multinationals and paid off politicians. And I haven't even factored in the increasing price of fuel. Hyperinflation get used to the word.

I really truly hope I am wrong on this one but I doubt it.

[badge]

Oops I almost forgot to reply to Naam.

[..]

Alex if you have a method of diving short term fluctuations well done

I have worked with people who use astrology as a market guideline. All of these ideas would be completely laughable.. if it were not for their accuracy

Why not confound the cynics with yet more accurate predictions? May 11th was some time back now.

Luckily you dont need to know Phi from Uranus to invest in financial markets, so theres room for all

[badge]

More evidence of rampant money printing . . .

This really must stop now!

http://www.thedailymash.co.uk/news/society...s-200907011870/

Your aware The Daily Mash is satire? In the same vein as The Onion?

[Abrak]

Abrak, it doesn't make sense to discuss a painting's colours and the brushstrokes of an old master with a blind person or in this case with somebody who's heraldic message is "the one that [sic!] knows..."

I entirely agree with you which is why I would never bother replying to an idiotic post from someone who I just thought was simply stupid. But I actually like Alexjah's posts so when I see someone claiming he can predict the short term future of the stockmarket, I rather question my own judgment.

Incidentally I used to be paid for making short term calls on the market (one day to 3 months and 6-8 pages by breakfast.) In that i made short term predictions I can also say I was more right than wrong not because I had a valid argument (afterall if Directors are net sellers and it is published information it is probably discounted in the price) but because I saw the overnight order book which (especially as it was usually mirrored elsewhere) would be enough to move the market.

So unlike Badge, I dont see the point on making a thread about how to make money in these markets. To the extent you can confidently predict prices it should be under the assumption that you have 'inside information' that is not discounted, so the point of publishing it on the internet I cannot see. There are exceptions, in that random walk and rational expectations assumes perfect information, and in somewhere like Thailand you can fairly confidently predict stock price movements based on underlying fundamentals and the fact that noone else has bothered looking at them. But, again, to the extent that this is the case I have no idea why someone would wish to post the fact on an internet forum.

So the thread would turn into an 'I think this going up' thread or 'I just sold this at 30% profit thread' which would be utterly useless. So to the extent that TV is inundated by threads on which stocks are going up, I will probably sell every stock I own. If this doesnt make sense, then I should at least explain that it is quite effective in that I got lucky by buying dollars at the bottom when Jay Z (who has no Euro liabilities and is a hip hop star) renegotiated his contract in Euros (this being the headline on E news which could only point to maximum bearishness on the dollar). (It was also helped by my GF asking me if I owned any dollars because she thought I should sell them.)

[Abrak]

Unfortunately I'd say we are in for a W and not a V so the roller coaster will go up and it will go down again followed by hyperinflation at the top of the W brought about by gross mismanagement of fiscal policy in the United States i.e. overprinting of money or in doublespeak "quantitative easing".

Actually this I do not foresee. Because I dont really see how you can have both mismanagement of fiscal and monetary policy at the same time. If you are going to have a 'irresponsible fiscal' policy you need a responsible monetary policy to finance it. And if you are going to have an 'irresponsible monetary policy' as Bernanke has recently pointed out, fiscal excesses must be kept in check. To the extent that a place like Zimbabwe has a deficit it would be very small relative to GDP and remember their GDP is small relative to anyone elses.

[Abrak]

More evidence of rampant money printing . . .

This really must stop now!

http://www.thedailymash.co.uk/news/society...s-200907011870/

Your aware The Daily Mash is satire? In the same vein as The Onion?

Are you aware that by posting that comment you are implying that 'MJP' might be a complete and utter moron?

[MJP]

More evidence of rampant money printing . . .

This really must stop now!

http://www.thedailymash.co.uk/news/society...s-200907011870/

Your aware The Daily Mash is satire? In the same vein as The Onion?

Are you aware that by posting that comment you are implying that 'MJP' might be a complete and utter moron?

I really had no idea the 'The Mash' wasn't real. It certainly seems to be the only paper that tells the truth or makes any sense.

[Abrak]

I really had no idea the 'The Mash' wasn't real. It certainly seems to be the only paper that tells the truth or makes any sense.

I hope you wont take that as meaning I consider you a complete and utter moron.

To be honest, I am suffering a bit from the same problem, in that statements made by mad gabbling 'gold bugs' holed up in their log cabins with canned food and their shotgun, keep on turning into reality.

Maybe I ought to subscribe to 'The Mash'. BTW I particularly like the bit about Norway considering I think of there as the financial safe haven of the world!

Edited July 2, 2009 by Abrak

[Abrak]

BTW I have a puzzle for anyone who wishes to answer it.

It is this. To a certain extent I dont know if there is going to be inflation or deflation in the future. I am mostly geared to deflationary income environment (as opposed to prices) but if everything turn out really well and everything returns to normalized growth I am going to be OK.

Where I am not hedged is for the long drawn out Japanese type low growth, low inflation scenario. While the obvious answer is to buy bonds they are inherently very risky in an inflationary environment. So I am really looking for an option, if we have hyperinflation and it goes to zero, I dont care, if the world (through some magic gets back to normal) and it goes to zero I dont care.

Nobody seems to be able to come up with a good option on this scenario. The best that I can think of is sovereign credit default swaps but even then I am not sure which but some 5 year terms look a good punt as a hedge. So I am not looking for specific investment advice, just a concept of how to hedge a bunch of assets against a long drawn out deflationary environment (on the assumption that this is one of many possibilities and the outcome could also be hyperinflationary.)

[lannarebirth]

BTW I have a puzzle for anyone who wishes to answer it.

It is this. To a certain extent I dont know if there is going to be inflation or deflation in the future. I am mostly geared to deflationary income environment (as opposed to prices) but if everything turn out really well and everything returns to normalized growth I am going to be OK.

Where I am not hedged is for the long drawn out Japanese type low growth, low inflation scenario. While the obvious answer is to buy bonds they are inherently very risky in an inflationary environment. So I am really looking for an option, if we have hyperinflation and it goes to zero, I dont care, if the world (through some magic gets back to normal) and it goes to zero I dont care.

Nobody seems to be able to come up with a good option on this scenario. The best that I can think of is sovereign credit default swaps but even then I am not sure which but some 5 year terms look a good punt as a hedge. So I am not looking for specific investment advice, just a concept of how to hedge a bunch of assets against a long drawn out deflationary environment (on the assumption that this is one of many possibilities and the outcome could also be hyperinflationary.)

If you think it's LT sideways or slow growth maybe sell calls on long positions?

[MJP]

I really had no idea the 'The Mash' wasn't real. It certainly seems to be the only paper that tells the truth or makes any sense.

I hope you wont take that as meaning I consider you a complete and utter moron.

To be honest, I am suffering a bit from the same problem, in that statements made by mad gabbling 'gold bugs' holed up in their log cabins with canned food and their shotgun, keep on turning into reality.

Maybe I ought to subscribe to 'The Mash'. BTW I particularly like the bit about Norway considering I think of there as the financial safe haven of the world!

Hey you great big nelly, of course not, you're one of my real internet pals. Shame us lot don't meet up really, but I guess we're all spread out over the continent.

I saw it as an opportunity to introduce this little circle on this thread to one of my favourite reads, 'The Daily Mash'. If ever you feel a bit down, confused by the world, just go read the Mash. It sorts everything out! If ever my old saying "when you're cynical, everything becomes clear" was applicable to journalism there it is.

Regards log cabins, I am stockpiling long shelf-life stuff just in case. Drives sister mad "where the hel_l are we going to put this lot?!" (Really I'm doing it because I'm off to Portugal soon for quite a while and want to leave them in good stead . . . sssshhhh!!!!!)

[jcon]

BTW I have a puzzle for anyone who wishes to answer it.

<snip>

...just a concept of how to hedge a bunch of assets against a long drawn out deflationary environment (on the assumption that this is one of many possibilities and the outcome could also be hyperinflationary.)

That's a tough one, Abrak - because, as you word it, one could replace 'deflationary' with 'hyperinflationary' as your 'possibilities' or 'outcomes.' (so as I read it, it's a question about hedging against everything!)

For example, you could have asked the same question in this way:

...just a concept of how to hedge a bunch of assets against a long drawn out hyperinflationary environment (on the assumption that this is one of many possibilities and the outcome could also be deflationary.) **well maybe without the 'long term' in front of 'hyperinflationary' (since you're using Japan as the basis of the long term part), but still**

I think I just confused myself on that one... So no help there... but I will throw in my personal opinion (which doesn't mean much, except to me) that I think this autumn will provide serious trading opportunities to make some money so you can a) use it in a deflationary environment or b ) have more toilet paper in a hyperinflationary environment. Either way, there is always the bum gun.

[Abrak]

BTW I have a puzzle for anyone who wishes to answer it.

<snip>

...just a concept of how to hedge a bunch of assets against a long drawn out deflationary environment (on the assumption that this is one of many possibilities and the outcome could also be hyperinflationary.)

That's a tough one, Abrak - because, as you word it, one could replace 'deflationary' with 'hyperinflationary' as your 'possibilities' or 'outcomes.' (so as I read it, it's a question about hedging against everything!)

For example, you could have asked the same question in this way:

...just a concept of how to hedge a bunch of assets against a long drawn out hyperinflationary environment (on the assumption that this is one of many possibilities and the outcome could also be deflationary.) **well maybe without the 'long term' in front of 'hyperinflationary' (since you're using Japan as the basis of the long term part), but still**

I think I just confused myself on that one... So no help there... but I will throw in my personal opinion (which doesn't mean much, except to me) that I think this autumn will provide serious trading opportunities to make some money so you can a) use it in a deflationary environment or b ) have more toilet paper in a hyperinflationary environment. Either way, there is always the bum gun.

Yah well if I was as confident as you about trading opportunities I wouldnt be giving hedging much thought either. But I am currently in lines with Dr Faber in his newsletter (which I am rarely) which is 'Right now, I do not see anything that offers a particularly favorable risk reward opportunity and, therefore, I would take it easy. My doctor advised me “to cut back on predictions, “because as Mark Twain observed: “prophecy is a good line of business, but it’s full of risks.”'

I have enough real assets that quite frankly if everything turns out hunky dory (i.e. low inflation good growth) I am fine. I suspect everyone is in that position.

To be honest the most likely situation on a 10 year view is that there will be very little real growth. I wish to position my financial asset portfolio on that basis. Even if I am wrong I will make it up elsewhere. Although I am inherently inflationist and have a portfolio of financial assets geared to inflation, I also see the deflationary forces and wish to hedge. Obviously if you are a firm believer in deflation you can go for bonds but actually I have in general been shorting them through a long position (i.e. TFT). It is relatively easy imho opinion to hedge against inflation but to hedge against deflation is much more difficult especially as you are trying to achieve a 'straddle' or maybe the opposite?

Selling calls on long positions works but only in so far as it hedges my long positions which I can do by selling them (only joking). I inherently dont like buying bonds on a 3.8% 10 year yield as a hedge against deflation. I dont want to hold a position that will be crucified by say my hyperinflation bet to the extent I dont make any money. That is why I am looking for an option, and a long term one, that will inherently bring me big rewards in deflation to make up for losses in what is now a too inflation bias portfolio of assets given the recovery of inflationary expectations.

That is why say I might be interested in 5 year sovereign credit default swaps which have limited downside (like everything to zero (unlike shorting)) and almost unlimited upside.

To be honest, to the extent that this seems a difficult problem, I believe it is one that virtually everyone should have. Who here is smarter than Krugman who says there is going to be deflation or smarter than Bernanke who pulls the strings and says it risks hyperinflation. If you have a view one way or another well good for you and good luck. But based on the fact that both these guys are far more intelligent than me, I dont, and merely wish to hedge a portfolio of assets in such a manner.

Given that it is easy to hedge inflation, presumably it shouldnt be too difficult to hedge deflation. I cant believe nobody has given it thought. I just want an option that will perform well given a -2% growth and -5% inflation p.a. figure over the next 5 years. In that there is a very highly leveraged ETF of USTs, I think that would work.

P.S. I can tell JCon is a trader because when you make 10% in a day (or lose it) the whole concept of hedging only makes sense in a hedge fund mentality - namely that it is a serious excuse to gear up. What you should realize is that deflation -10% prices as in 1932 is so value destructive to an overall wealth portfolio that despite its improbability you have to hedge against it.

Edited July 2, 2009 by Abrak

[Abrak]

I really had no idea the 'The Mash' wasn't real. It certainly seems to be the only paper that tells the truth or makes any sense.

I hope you wont take that as meaning I consider you a complete and utter moron.

Hey you great big nelly, of course not, you're one of my real internet pals. Shame us lot don't meet up really, but I guess we're all spread out over the continent.

Look MJP. In that you are calling me a 'big nelly' I am beginning to think that 'you thought, I thought' that your comment 'I really had no idea 'The Mash' wasnt real.' was a serious comment. In which case you must be wondering whether I am the complete moron or not - if for whatever reason you didnt think I wasnt taking the piss I will put in a few explanation marks next time for emphasis!!!!!!!!!!

Edited July 2, 2009 by Abrak

[flying]

467,000 Sheesh little more than the 356k forecast

http://www.cnbc.com/id/31705608/

Actually UE is well over 10% here now.

Appears to be a 2nd stimulus being talked about now.

Funny as I never got my 1st

[Abrak]

467,000 Sheesh little more than the 356k forecast

http://www.cnbc.com/id/31705608/

Actually UE is well over 10% here now.

Appears to be a 2nd stimulus being talked about now.

Funny as I never got my 1st

The employment numbers coming out of the US are really scary. To me while the Government is talking output gaps, there is a long term structural employment issue that is arising.

To me this is more evident in the level of employment which is contracting so fast rather than simply the level of unemployment.

You can see high unemployment rates in the past but you have never seen such a drastic dip in employment.

While I can get excited about an inherently boring graph is because of this. The rise in unemployment in previous recessions was essentially caused - at the bottom line - by a rise in the number of people wishing to be employed rather than a fall in total employment. Now we are seeing a fall in the number of total employed. Not only is this rare, it makes a nonsense of the Governments output gap assumption because it implies that US output is also falling.

To me also, to the extent that the employment number is a long term growth ratio which people assume to be sustainable, that also looks in doubt, given the fall looks to be breaking that trend rather than simply leveling off and returning. The worse news is that unemployment is a serious lag indicator - even the most optimistic cant rule out 11% unemployment, while 15% unemployment is possible. Taking into account the 'underemployed' you are looking at a ratio of up to 25% which is close to civil unrest (before xbox era).

I know it looks like a blip on a long term chart but it also looks highly unusual and dramatic.

(BTW I do realize it would be a more interesting chart if it showed employment during the last depression - unfortunatley BLS stats only go back to 1948.)

Edited July 2, 2009 by Abrak