Bernanke’s Evil Peruvian Clone Gets Serious About FX Intervention, As Country Shuts Down Border With Revolutionary Ecuador
by Zero Hedge - September 30th, 2010 2:54 pm
Courtesy of Tyler Durden
After buying $200 million in the last two days, tiny little Peru is starting to show some serious resolve: over the past three days the small country has bought almost $400 million in USD. Considering that Japan’s vaunted intervention was only 5 times larger, perhaps Peru does mean business after all. And adding to the overall confusion in Peru, is that the fact that it has just closed off its border with Latin American neighbor, which just had a military coup. After recent news about the Fed’s criminal activity, one wonders how much it would cost to import some Ecuadorians in America: apparently this country’s citizens’ natural response to endless rape is just asking for more of the same.
Clip from tourist-friendly Honduras below. One wonders how much worse it would be if it that country’s Central Bank was pulling the same crap ours does on a daily basis.
Facebook
Twitter
LinkedIn 
del.icio.us
DiggAmerica’s China Bashing: A Compendium of Junk Economics
by ilene - September 30th, 2010 2:26 pm
America’s China Bashing: A Compendium of Junk Economics
![[geithnerpix_cs_20090602115626.jpg]](http://4.bp.blogspot.com/_azimCSzqNnc/S25o8jjFySI/AAAAAAAAEcY/R1J78lc4xSY/s1600/geithnerpix_cs_20090602115626.jpg)
Courtesy of Michael Hudson
It is traditional for politicians to blame foreigners for problems that their own policies have caused. And in today’s zero-sum economies, it seems that if America is losing leadership position, other nations must be the beneficiaries. Inasmuch as China has avoided the financial overhead that has painted other economies into a corner, nationalistic U.S. politicians and journalists are blaming it for America’s declining economic power.
I realize that balance-of-payments accounting and international trade theory are arcane topics, but I promise that by the time you finish this article, you will understand more than 99% of U.S. economists and diplomats striking this self-righteous pose.
The dollar’s double standard gives America an international free ride
For over a century, central banks have managed exchange rates by raising or lowering the interest rate. Countries running trade and payments deficits raise rate to attract foreign funds. The IMF also directs them to impose domestic austerity programs that reduce asset prices for their real estate, stocks and bonds, making them prone to foreign buyouts. Vulture investors and speculators usually have a field day, as they did in the Asian crisis of 1997.
Conversely, low interest rates lead bankers and speculators to seek higher returns abroad, borrowing domestic currency to buy foreign securities or make foreign loans. This capital outflow lowers the exchange rate.
There is a major exception, of course: the United States. Despite running the world’s largest balance-of-payments deficit and also the largest domestic government budget deficit, it has the world’s lowest interest rates and easiest credit. The Federal Reserve has depressed the dollar’s exchange rate by providing nearly free credit to banks at only 0.25% interest. This “quantitative easing” (making it easier to borrow more) aims at preventing U.S. real estate, stocks and bonds from falling further in price. The idea is to save banks from more defaults as the economy slips deeper into negative equity territory. A byproduct of this easy credit is to lower the dollar’s exchange rate – presumably helping U.S. exporters while forcing foreign producers either to raise the dollar price of their goods they sell here or absorb a currency loss.
This policy makes the dollar a managed currency. Low U.S. interest rates and easy credit spur investors to lend abroad or buy foreign assets yielding more than 1%. This dollar…
Defending China’s Trade Policies; a “What If?” Thought Test
by ilene - September 30th, 2010 2:11 pm
Defending China’s Trade Policies; a "What If?" Thought Test
Courtesy of Mish
In America’s China Bashing: A Compendium of Junk Economics Michael Hudson takes Paul Krugman, protectionists, Congress, and other China bashers to task, citing six economic errors they all make.
The following snip comprises a portion of economic errors 3-6. I encourage you to read the entire article. It’s worth a good look.
Michael Hudson: Prof. Krugman describes China as “deliberately keeping its currency artificially weak. … feeding a huge trade surplus,” adding that “in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs.” In his reading the problem is not that America has let its economy be financialized, or that easy bank credit has bid up housing prices for American workers and loaded down their budgets with debt service that, by itself, exceeds the wage levels of most Asian workers. “An undervalued currency always promotes trade surpluses,” he explains.
But this is only true if trade is “price-elastic,” with other countries able to produce similar goods of their own at only marginally different prices. This is less and less the case as the United States and Europe de-industrialize and as their capital investment shrinks as a result of their expanding financial overhead ends in a wave of negative equity. To assume that higher exchange rates automatically reduce rather than increase a nation’s trade surplus is Junk Economics Error #4. It is a tenet of the free market fundamentalism that Prof. Krugman usually criticizes, except where China is concerned.
Mish Comment: Another Krugman flaw is that he seldom if ever looks at the consequences of what he proposes. Even IF manufacturing jobs returned to the US after tariff hikes, it would be at the expense of dock workers unloading ships, truckers hauling goods from coast to coast, and most importantly higher prices for consumers everywhere. Higher prices are not good thing. Higher prices would benefit the few whose jobs were saved, at the expense of everyone else. Higher prices also benefit governments that take a sales tax bite out of every transaction and squander it on needless projects.
Michael Hudson: Chinese currency appreciation would let speculators and arbitrageurs make a killing on the currency shift. Its exports would cost more – but is it believable that America would rebuild its factories and re-employ the workforce that has been
…
Here Is How The World’s Biggest Bond Funds (And Others, Just Not You) Get Advance Notice Of What The Fed Is About To Do
by Zero Hedge - September 30th, 2010 2:10 pm
Courtesy of Tyler Durden
Reuters has just released a stunning special report detailing how the Fed leaks all important, non-public, and ever so material, information to private parties. From the report:
On August 19, just nine days after the U.S. central bank surprised financial markets by deciding to buy more bonds to support a flagging economy, former Fed governor Larry Meyer sent a note to clients of his consulting firm with a breakdown of the policy-setting meeting.
The minutes from that same gathering of the powerful Federal Open Market Committee, or FOMC, are made available to the public — but only after a three-week lag. So Meyer’s clients were provided with a glimpse into what the Fed was thinking well ahead of other investors.
His note cited the views of “most members” and “many members” as he detailed increasingly sharp divisions among the officials who determine the nation’s monetary policy.
The inside scoop, which explained how rising mortgage prepayments had prompted renewed central bank action, was simply too detailed to have come from anywhere but the Fed.
A respected economist, Meyer charges clients around $75,000 for his product, which includes a popular forecasting service. He frequently shares his research with reporters, though he kept this note out of the public eye. Reuters obtained a copy from a market source. Meyer declined to comment for this story, as did the Federal Reserve.
By necessity, the Fed spends a considerable amount of time talking to investment managers, bank economists and market strategists. Doing so helps it gather intelligence about the market and the economy that is invaluable in informing the bank’s decisions on borrowing costs and lending programs.
But a Reuters investigation has found that the information flow sometimes goes both ways as Fed officials let their guard down with former colleagues and other close private sector contacts.
Frankly, we stopped right there, very much disgusted that we have been proven correct yet again when we asked rhetorically if “Bill Gross just confirmed on live TV that he has an “advance look” at non-public fed data?”. Now we know how it is that Bill Gross knew all too well that the Fed would lower its GDP expectations to 2% three weeks ahead of the minutes release. It also explains why PIMCO is ever so precise in going on margin…
Ecuador Calls For Help After Coup Attempt
by Zero Hedge - September 30th, 2010 2:07 pm
Courtesy of Tyler Durden
If this doesn’t send the S&P over 10% for September, nothing will.
Ireland Cancels All Remaining 2010 Bond Auctions Due To Market “Turbulence”
by Zero Hedge - September 30th, 2010 1:55 pm
Courtesy of Tyler Durden
Apparently in Ireland, a global stock market that surges up 10% in a month to celebrate the latest obliteration of the purchasing power of the American middle class is considered “turbulence.” This is precisely the excuse given by Irish PM Brian Cowen when asked why he has cancelled all bond auctions for the rest of the year. Surely, the market is buying it. Cowen also added that he doesn’t need funds at rates of 6.8 to 6.9%. What is hilarious is that he will need the funds much more in 3 months when the rates are double that, now that the country is openly nationalizing each and every bank, and will fund these “acquisitions” with tens of billions it doesn’t have.
From Bloomberg:
Irish Prime Minister Brian Cowen said that his government decided to cancel bond auctions for the rest of the year because of “turbulence” in bond markets, and the state is already funded into next year. He made the comments in an interview with national broadcaster RTE.
“We are funded until next May,” Cowen said. “There has been such turbulence in the markets, since we don’t require those funds immediately why would we be going to get funds at rates such as 6.8 or 6.9 percent.”
Michael Tennenbaum Explains Why $50 Billion In Distressed Debt Could Default In Next Two Years
by Zero Hedge - September 30th, 2010 1:34 pm
Courtesy of Tyler Durden
Old school private equity guy-turned-hedge fund manager, Michael Tennenbaum, was on Bloomberg TV, discussing his perspectives for the distressed debt market (yes, such a thing did once exist, before HY bonds of 20x levered companies starting trading at par+). And all those who believe that courtesy of the Fed’s intervention in every market there will never be another bankruptcy, let alone a bond yielding more than 10% take heart: according to Tennenbaum a full $50 billion in distressed debt may go Chapter in the next two years, although this is probably more good news for all the mini restructuring boutiques who overhired last year only to see the administration make bankruptcy illegal. The math: “Over the next five years $1.2 trillion in non investment grade debt comes due, of which $200 billion are due in the next two years, and of that a quarter or $50 billion are issued by companies rated rated B or lower. The experience that we and others have had is that this leads to default.” Of course, Tennenbaum is a traditional debt-for-equity investor is more than incentivized to see this occur: he is currently sitting there doing nothing, as not only does nobody need DIPs or other rescue financings (why, when you can issue new B3/B- debt at 8%), but no company is willing to part with equity when every pitchbook it sees tells it can progressively refi current debt into paper that may eventually pay a 0.001% coupon. On the other hand, this, as well as every other contrarian outlook is predicated on the assumption that the Fed will be able to control the demolition of the US economy, which it won’t. Which is why we are confident that not only will Mike be correct (eventually), but the full amount of HY paper that will default will boggle the mind when the dominoes really collapse. Until then, study learn (and earn) the Bernanke Moral Hazard Put: learn it and love it.
Many more interesting observations from Tennenbaum, but here is a sliver on why the PE legend is bearish on the economy:
The math is very bad. The consumers are 70% of the economy, they are liquidating debt. The degree of stimulus coming from federal deficit spending is flattening and maybe declining. When you see things like AIG selling shares,
…
AIG: Time for Geithner to Clean Up the Mess
by ilene - September 30th, 2010 1:16 pm
AIG: Time for Treasury Secretary Geithner to Clean Up the Mess
Courtesy of rcwhalen, writing at Zero Hedge
Over the past several weeks, the news has been filled with reports about the likelihood of taxpayers recovering their investment in American International Group (AIG). We wrote about the AIG bailout in The Institutional Risk Analyst a great deal over the past two years, most recently in ‘The AIG Rescue: What Did We Bail Out and Why?’, March 22, 2010. Our contributor Richard Alford then opined:
“Why did the Fed let itself be put in the position where it became expected to act as a bankruptcy court and a supplier of capital to private insurance concerns? And why did we bail out the operating and capital deficits of AIG, deficits which suggest the same type of questionable accounting maneuvers and regulatory arbitrage as was seen in the Lehman Brothers collapse. If a bailout of AIG was better than bankruptcy, how would we know?”
How indeed. Part of the problem with the AIG situation as well as the other “investments” made by the Fed and Treasury in assets from the failure of Bear, Stearns, is that Treasury Secretary Geithner has not yet done the right thing and asked Congress to clean up his mess. The reasons for this reluctance are obvious now barely over a month before the mid-term election. And Tim Geithner’s latest efforts to window dress the AIG situation stem from the same political motivations.
The fact is that the “loans” by the Fed to AIG were really private equity investments and thus illegal under the Federal Reserve Act. Under the new Dodd-Frank law, the Fed could not make these advances at all. Thus the first step to getting this situation in order is to recognize that the stakes in AIG as well as the assets acquired from Bear, Stearns prior to the acquisition by JPMorgan Chase are illiquid, long-term investments that are inappropriate for the balance sheet of the U.S. central bank.
The Treasury should issue debt to the Fed in exchange for these assets and the ownership would ultimately shift to the Federal Financing Bank (FFB). The FFB is the part of the Treasury that ultimately holds all financial investments by the government, including the stakes in AIG, General Motors and Citigroup.
The FFB is the appropriate place for these assets to be…
Is Europe Preparing To Ban Rating Agency Downgrades, As It Sets Off On Weekly Farce Tests?
by Zero Hedge - September 30th, 2010 12:48 pm
Courtesy of Tyler Durden
Who needs The Onion, when you have Europe. Reuters quotes EU’s Rehn as saying that bank stress tests will need to be a regular occurrence in the future of the EU: in other words, every time banks drop by 20% or so, the European Department of Truth will trot out the another piig zombie de jour, plastered with lipstick and demonstrate just how viable it is. Just because everyone believes what an honest and solvent Europe has to say. But here’s the kicker: headline floating by that Europe may well be preparing to ban all sovereign downgrades. After all, how dare someone suggest that Europe’s ponzi has any way to go but up.
BN *EU WILL DISCUSS NEW RULES FOR SOVEREIGN DEBT RATINGS
BN *SOVEREIGN DEBT CREDIT RATINGS FACE EU DEMAND FOR TRANSPARENCY
BN *EU WILL DISCUSS PROPOSALS AT MEETING TOMORROW
BN *BELGIUM’S REYNDERS: NEED CONTINUOUS MONITORING OF FIN SYSTEMS
At this point we are more concerned about Commedy Channel’s viewership as everyone focuses on the hourly stand up coming from the EU, than Europe actually succeeding in fooling anyone it won’t be insolvent in a year or less.
Listing The Best Replacements For Larry Summers
by Zero Hedge - September 30th, 2010 12:32 pm
Courtesy of Tyler Durden
Let’s cut to the chase: Larry Summers is leaving the Obama administration because he simply could not destroy the US economy fast enough. Which is why the next director of the National Economic Council should not be allowed to do a half-assed job. With that in mind, here are the best replacements for the now vacant post as suggested by Bloomberg’s Jonathan Weil.
1. Dick Fuld. Now here’s somebody we could rely on to leave a big mark. Like the size of a meteor crater. I realize Lehman Brothers was the largest bankruptcy in history, and Fuld was its CEO. This is what makes him useful. No matter what he says, people instinctively will think the opposite must be true. If Obama wants us to believe the economy is turning around, all he has to do is get Fuld to say “the best is behind us.”
2. Jimmy Cayne. True, the former Bear Stearns boss managed to sell his firm to JPMorgan Chase in a government-brokered deal for $10 a share. That’s a notch against him, compared with Fuld’s pristine record. In tough times, though, Cayne could be counted on to project calm, provided he’s far from the action, say, at a bridge tournament. He’d make a fine second choice.
3. Stan O’Neal. The former Merrill Lynch CEO, who got a $161.5 million severance package, knows the warm feeling of stimulus and has ice in his veins. He played 20 rounds of golf on four different courses during the last several weeks of the third quarter of 2007, while Merrill lost $8.4 billion on subprime mortgages. His handicap only got better.
4. Angelo Mozilo. Who better to get us out of the housing crisis than the man who did more than almost anyone else to get us in it? Sure, picking the former Countrywide Financial CEO might seem counter intuitive, given how the SEC is suing him for fraud. Yet even if he loses, it’s only a civil case. He’ll still have the most valuable qualification of all: Never convicted.
5. Hank Greenberg. This man has an eye for talent. The former CEO
…
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(