Black Swans And The Collapse Of Empires Swimming In Debt
by ilene - March 5th, 2010 4:08 pm
Elaine Supkis passionately takes on Dr. Niall Ferguson. Her words in Niall’s LA Times excerpt are red. – Ilene
Black Swans And The Collapse Of Empires Swimming In Debt
Courtesy of Elaine Supkis at Culture of Life News
It is rather curious how people refuse to see obvious things. This is why so many things are ‘unexpected’ or a ’surprise’. People who do see obvious things are called ‘cynics’. Cynics are the exact opposite of banking gnomes and their ilk. Cynics disparage wealth and power in order to see reality and truth. Often, cynics go around telling people, ‘You are doomed’ which makes them party poopers. But then, often, they are right.
Cynic – Wikipedia, the free encyclopedia
The Cynics (Greek: Κυνικο?, Latin: Cynici) were an influential group of philosophers from the ancient school of Cynicism. Their philosophy was that the purpose of life was to live a life of Virtue in agreement with Nature. This meant rejecting all conventional desires for wealth, power, health, and fame, and by living a life free from all possessions. As reasoning creatures, people could gain happiness by rigorous training and by living in a way which was natural for humans. They believed that the world belonged equally to everyone, and that suffering was caused by false judgments of what was valuable and by the worthless customs and conventions which surrounded society. Many of these thoughts were later absorbed into Stoicism.
The first philosopher to outline these themes was Antisthenes, who had been a pupil of Socrates in the late 5th century BCE. He was followed by Diogenes of Sinope, who lived in a tub on the streets of Athens. He took Cynicism to its logical extremes, and came to be seen as the archetypal Cynic philosopher. He was followed by Crates of Thebes who gave away a large fortune so he could live a life of Cynic poverty in Athens. Cynicism spread with the rise of Imperial Rome in the 1st century, and Cynics could be found begging and preaching throughout the cities of the Empire. It finally disappeared in the late 5th century, although many
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Gold and Silver Soar as Bank of Japan Commits 10 Trillion Yen ($115 Billion) to Combat Deflation
by ilene - December 2nd, 2009 1:49 am
Gold and Silver Soar as Bank of Japan Commits 10 Trillion Yen ($115 Billion) to Combat Deflation
Courtesy of Mish
Commodities are soaring today, especially gold and silver, in the wake of news that the BOJ will Provide 10 Trillion Yen in Emergency Credit.
The Bank of Japan said it’s ready to pump more money into the financial system after unveiling a 10 trillion yen ($115 billion) program to help an economy battered by falling prices and the yen’s surge to a 14-year high.
“If there is a shortage of liquidity we are prepared to provide more funds,” Governor Masaaki Shirakawa said after an emergency board meeting in Tokyo today that decided to offer three-month loans at 0.1 percent to commercial banks.
Bond yields fell the most in 13 months, lowering borrowing costs for companies whose profits are being threatened by deflation and the yen’s advance. Today’s action constitutes “quantitative easing in the broad sense” said Shirakawa, who earlier today faced demands from government ministers to complement a stimulus package that Prime Minister Yukio Hatoyama will release this week.
“The BOJ was facing a lot of pressure from the markets and the government, so it wanted to show that it was being proactive,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “The BOJ’s understanding is that deflation risks have increased.”
Unlike the unlimited lending facility, which required private-sector debt as collateral, the bank will accept a wider range of assets including government bonds as well as debt issued by local governments. The program has no time limit.
The measure will “further spread the strong effect of monetary easing and encourage a further decline in longer-term interest rates in the money market,” the central bank said.
Prime Minister Hatoyama welcomed the decision.
“I’m very happy that the BOJ and government share the same view” on the economy, said Hatoyama, who is scheduled to meet with Shirakawa tomorrow. “I applaud their efforts to show their resolve to stop deflation and spur the economy.”
BOJ Spawns Speculation and Carry Trades
While correlation is not the same as causation, I would suggest that a new round of “quantitative easing" by the BOJ would likely fuel further speculation in commodities and various carry trades.
One thing that QE is not going to do is help Japan out of its…
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WOULD YOU LIKE A CARRY TRADE WITH THAT?
by ilene - November 20th, 2009 1:43 pm
WOULD YOU LIKE A CARRY TRADE WITH THAT?
Courtesy of The Pragmatic Capitalist
This excellent guest contribution, in response to Annaly Capital’s comments, comes from our friends at the PazzoMundo site:
The ‘carry trade’ is in the paparazzi’s sights. Have a look how it is faring on Google Trends:
It’s latest incarnation is via the USD. And as David Rosenberg points out – it looks like the world’s reserve currency is being used to fund just about every asset beyond cash on the risk spectrum.
The U.S. dollar has become a huge ‘carry trade’ vehicle for all risky assets. Historically, there is no correlation at all between the DXY index (the U.S. dollar index) and the S&P 500. In the past eight months, that correlation is 90%. Ditto for credit spreads — zero correlation from 1995 to 2008, but now it has surged to 90% since April. There was historically a 70% inverse correlation between the U.S. dollar and emerging markets, such as the Brazilian Bovespa, and that correlation has also increased to 90% since the spring. Even the VIX index, which historically has had no better than a 20% correlation with the U.S. dollar, has now sent that correlation surge to 90%. Amazing. The inverse correlations between the U.S. dollar and gold and the U.S. dollar and commodities were always strong, but these too have strengthened and now stand at over 90%.
My sense is that with it’s rise into public awareness, we are heading into the final throes of USD weakness. For example, when someone like Felix Salmon writing for Reuters does a survey of “How US investors can play the carry trade” that’s got to be a flag. And when phrases like ‘the gimme trade of the century’ are used (Annaly via TPC) in the same breath as describing it’s dynamics – the risk that complacency has set in is pretty darn high.
Think about it – the (currency version of the) carry trade says that you can borrow cheap in USD, sell those freshly minted dollars and buy into a higher yielding currency. The assumption is that the USD will continue to fall – so that in addition to the yield pick-up, you make a capital gain when you buy your…
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Strong Dollar Lies & More On Lies – Strong Dollar
by ilene - November 12th, 2009 1:34 am
More On Lies – Strong Dollar
Courtesy of Karl Denninger at The Market Ticker
10 handles came off the S&P 500 in less than 30 minutes (a 1% move) when the dollar strengthened by about two tenths of 1%.
What would be the impact of the dollar moving higher by 10%?
This is the problem with the carry trade. The leverage that gets deployed, once it gets going, is typically in the range of 5:1, 10:1 or even more compared to the equity markets. (Absolute leverage in the FX markets is frequently 100:1 – in fact, even retail traders can run 100:1 leverage at most FX brokers!)
Just remember folks, ZIRP and it’s pals are always exploited by the politicians to issue debt "free" into the markets. But once issued that debt has to be rolled over (since governments almost never run an actual surplus allowing them to pay down that debt), which means that the issue is not whether you can make the interest payments today, it is whether you can make them tomorrow given the possible changes in interest rates.
If interest expense ever exceeds income, you’re finished, just as was the "buyer" who took out an OptionARM and then had his payment reset to more than his income. Instant Boom.
The same thing happens to nations.
The problem is that nobody knows exactly where the line is, because that debt must be rolled, and it is the future cost of that rollover, not today’s interest rates, that determine where the wall is.
Have we reached the wall? Probably not yet. But if we keep issuing debt into artificially-suppressed interest rates, we will hit it with certainty, and the carry traders are betting (successfully so far) that government will not stop issuing debt (spending more than they make) and Bernanke will not pull enough liquidity to cause short rates to rise by even 1 or 2%.
Better hope all those "ands" and "buts" hold up folks.
(PS, if you think they will: Sold to you.)
Strong Dollar Lies
"His lips are moving."
"I believe deeply that it’s very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar," he said at a roundtable discussion with Japanese reporters. "We bear special responsibility for trying to make sure that we
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Monday Market Mark-Up – 50 Ways to Dump the Dollar
by phil - November 9th, 2009 8:18 am
"The problem is all inside your head", G20 said to me
The economy's an easy fix if you don't want to wait
All we need to do is globally inflate
There must be fifty ways to dump the dollarG20 said it's really not our habit to deflate
Furthermore, we have elections and the voters hate to wait
So we'll indebt ourselves, buy lowering the rates
There must be fifty ways to dump the dollar
Fifty ways to dump the dollarYou just buy a few Yen, Wen
Push up the Pound, Brown
You buy up the troy, boys
Give Goldman the fees
Take the IMF bling, Singh
Let it drop like a rock, Barack
Act like you're bored Jean-Claude
Let the dollar fall free
I heard they were dancing to this one at the G20 Meeting so I thought I'd share it with you. Never have so many gathered so often to accomplish so little as our G20 in the past 18 months. This weekend's meeting of the World's "top" Finance Ministers resulted in a split on whether to tax financial trading as part of a broader strategy to ensure the global economy’s expansion is less crisis-prone. The idea of the levy was to prevent excessive risk-taking and fund future bank rescues but US Treasury Secretary, Tim Geithner said trying to get the banks to behave is "not something we’re prepared to support."
That was all the Gang of 12 needed to hear and the commodity markets went wild with the guarantee of no additional regulation on the horizon and the dollar was taken down to new lows in overnight trading, plunging to $1.50 to the Euro and $1.685 to the Pound, over 2% off Friday's lows. They Yen Rose back to under 90 to the Dollar and the Nikkei, of course, did not like that one bit and an early rally turned into a flatline for the day. The rest of the global markets, however, were off to the races with Europe up 1.5% at 8 am and the US futures up over a point as well as gold flies to $1,110 an ounce and oil heads back to $78.50, up $2 from Friday's low.
Of course, doing nothing to prevent excessive speculation by the "too big to fail" crowd isn't…
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The Horrible Conundrum Facing The Fed
by ilene - September 26th, 2009 6:14 pm
The Horrible Conundrum Facing The Fed
Courtesy of Karl Denninger at The Market Ticker
The Fed’s continued policy pronouncements that:
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
[This] has set up a completely-untenable position for The Fed and the greater economy.
The problem The Fed and America faces is that this latest "blast of the liquidity firehose" is not limited to The United States in its impact.
Indeed, the problems that this sort of "monetary policy" generates have almost nothing to do with the US Economic picture – rather, they have everything to do with the international nature of markets and monetary flows and the impact that such a policy pronouncement has on them.
Specifically, The United States Dollar has become the primary funding currency for carry trades:
“The dollar is the big funding currency,” said Jonathan Clark, vice chairman of New York-based FX Concepts Inc., the world’s largest currency hedge fund, with $9 billion in assets under management. “The reason why people are borrowing the U.S. dollar for carry trade is A: It’s very cheap to fund, and B: The expectation is it’s going to go down.”
This is a tremendously destructive force for an economy, and is largely-responsible for Japan’s inability to return to economic prosperity and growth over the last 20 years – the Yen became a funding currency of choice.
But Japan had an advantage we do not – a weak currency benefited to a tremendous degree their exporters, and they are an export-based economy. As a consequence the damage done internally to import prices by the continued downward pressure on their currency was counterbalanced by an improving balance-of-payments picture.
America, on the other hand, has a huge trade deficit. Attempting to reverse this is essentially impossible as we have offshored production to low-labor-cost locales such as Vietnam and China. We are also absolutely dependent on foreign energy sources and despite 30 years of political promises to resolve that problem we have refused to
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US Dollar Replaces Japanese Yen as “Carry Trade”
by ilene - September 18th, 2009 12:44 pm
US Dollar Replaces Japanese Yen as "Carry Trade"
Courtesy of Trader Mark at Fund My Mutual Fund
How sad – as we yell out for all to hear that "we are nothing like Japan" we are piece by piece taking the role – from zombie banks supported by government, stimulus out the rear end for pork projects, a lost decade in the market, long term stagnant economic growth despite government report "hocus pocus", and now the US peso has replaced the disrespected yen as the world’s cheap source of funding for speculation worldwide. I can’t stress enough to US readers how every day the US dollar loses value, you lose purchasing power and over time a standard of living. But since most in this country live in a nominal world versus the real world, they are not understanding the implications of our "solutions".
A good opinion piece in Bloomberg (Hedge Funds’ ATM Moves from Tokyo to Washington) on the implications of the world’s RESERVE currency also turning into its CARRY currency.
- China’s real problem is how quickly the dollars they hold in great quantity are getting all the respect of pesos these days. Sound like hyperbole? Not when you consider what may be the hottest investment of 2010: the dollar-carry
trade . - Move over Japan. Investors spent a decade borrowing in zero-interest-rate yen and putting the funds in higher-yielding assets overseas. It’s the U.S.’s turn to flood the world with cheap funding and the risks of this going wrong are huge.
- The carry trade has never been a proud part of Japan’s post-bubble years. Officials in Tokyo rarely talk about the yen’s role in funding risky or highly leveraged bets on markets from Zimbabwe to New Zealand. Japan never set out to become a giant automated teller machine for speculators. (well I guess in that 1 area we are different from Japan; it appears to be the government’s plan to be the ATM for all the world, especially American consumers. House ATM gone? No problemo – government ATM is here to replace it) It was a side effect of policies aimed at ending deflation.
- The perils of the carry trade were seen in October 1998. Russia’s
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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 site