Thursday, January 31, 2008
EURUSD 1.50 Within Reach Though Retailers Increasing Their Shorts
The ratio of long to short positions in the EURUSD stands at -1.59 as nearly 62% of traders are short. Yesterday, the ratio was at -1.48 as 60% of open positions were short. In detail, long positions are 0.9% lower than yesterday and 20.8% stronger since last week. Short positions are 6.9% higher than yesterday and 28.2% stronger since last week. Open interest is 3.8% stronger than yesterday and 9.5% above its monthly average. The SSI is a contrarian indicator and signals more EURUSD gains. The considerable jump in short positioning over the past week reflects retailers’ confidence in resistance read at 1.49. However, since retailers are usually on the wrong side of the trade on trends and breakouts, this position may foreshadow the break to 1.50 that the market has threatened for many months.
Stagflation dilemma haunts euro
But other analysts say European growth worries are premature
LONDON (MarketWatch) -- When it comes to the threat of stagflation, the European Central Bank has appeared much more worried about the inflation portion of that dreaded compound word than signs of a stagnating economy.
But some foreign exchange analysts say Thursday's muted reaction by foreign-exchange and fixed-income markets to another round of troubling euro zone inflation data increased the likelihood that policymakers may soon pay more heed to signs of slowing European growth.
Stagflation describes a period of low or negative growth and high price inflation. Signs of the latter have been evident for a while, and more evidence emerged Thursday.
LONDON (MarketWatch) -- When it comes to the threat of stagflation, the European Central Bank has appeared much more worried about the inflation portion of that dreaded compound word than signs of a stagnating economy.
But some foreign exchange analysts say Thursday's muted reaction by foreign-exchange and fixed-income markets to another round of troubling euro zone inflation data increased the likelihood that policymakers may soon pay more heed to signs of slowing European growth.
Stagflation describes a period of low or negative growth and high price inflation. Signs of the latter have been evident for a while, and more evidence emerged Thursday.
U.S. mortgage rates reverse course and rise
CHICAGO (MarketWatch) -- Mortgage rates rose this week, ending about a month-long streak of declines, according to Freddie Mac's weekly survey released Thursday.
"The movement in fixed mortgage rates was broadly consistent with the movements of Treasury bonds over the week," said Frank Nothaft, Freddie Mac chief economist, in a news release. The 30- and 15-year fixed-rate mortgages rose by about 0.2 percentage points, he said, erasing the previous week's decline.
The 30-year fixed-rate mortgage averaged 5.68% during the week ending Jan. 31, up from last week's 5.48%. The mortgage averaged 6.34% a year ago. The 15-year fixed-rate mortgage averaged 5.17%, up from 4.95%. The mortgage averaged 6.06% a year ago.
Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.32%, up from last week's 5.13%. The ARM averaged 6.04% a year ago. And 1-year Treasury -indexed ARMs averaged 5.05%, up from 4.99%. The ARM averaged 5.54% a year ago.
READ THE REST
"The movement in fixed mortgage rates was broadly consistent with the movements of Treasury bonds over the week," said Frank Nothaft, Freddie Mac chief economist, in a news release. The 30- and 15-year fixed-rate mortgages rose by about 0.2 percentage points, he said, erasing the previous week's decline.
The 30-year fixed-rate mortgage averaged 5.68% during the week ending Jan. 31, up from last week's 5.48%. The mortgage averaged 6.34% a year ago. The 15-year fixed-rate mortgage averaged 5.17%, up from 4.95%. The mortgage averaged 6.06% a year ago.
Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.32%, up from last week's 5.13%. The ARM averaged 6.04% a year ago. And 1-year Treasury -indexed ARMs averaged 5.05%, up from 4.99%. The ARM averaged 5.54% a year ago.
READ THE REST
Expect more than a typical recession
SEATTLE (MarketWatch) -- Call this the perfect financial storm or what you will; Wall Street has made fools of financial institutions around the world with their CMOs, CDOs, and greedy boo-boos.
At least they didn't lose as much as their customers. The stock market is in distress, bond insurers are looking for a $200 billion bailout, junk-bond markets are at risk of further losses and life-, home- and auto insurers' risk has not yet been fully assessed.
We need real ready-to-go financial leadership and we need it now. Tell the presidential candidates, Congress and economists to stay home. We need regulators with clear priorities.
Former Federal Reserve Chairman Paul Volcker, former FDIC Chairman Bill Isaacs and anyone they trust would be good choices. They beat inflation and presided over the savings and loan cleanup. Tell Ben Bernanke to go home.
As for you personally, it's every person for themselves and their family. Study the charts: This is a bear market.
READ THE REST
At least they didn't lose as much as their customers. The stock market is in distress, bond insurers are looking for a $200 billion bailout, junk-bond markets are at risk of further losses and life-, home- and auto insurers' risk has not yet been fully assessed.
We need real ready-to-go financial leadership and we need it now. Tell the presidential candidates, Congress and economists to stay home. We need regulators with clear priorities.
Former Federal Reserve Chairman Paul Volcker, former FDIC Chairman Bill Isaacs and anyone they trust would be good choices. They beat inflation and presided over the savings and loan cleanup. Tell Ben Bernanke to go home.
As for you personally, it's every person for themselves and their family. Study the charts: This is a bear market.
READ THE REST
Jobless claims surge, spending softens
WASHINGTON (Reuters) - The number of workers filing new claims for jobless aid surged last week to the highest since October 2005, and consumer spending softened at the end of last year, according to reports on Thursday that heightened worries about a possible recession.
The Labor Department said initial claims for state unemployment benefits jumped by 69,000 last week to 375,000. It was the biggest jump since September 2005 and the highest since October of that year, just after Hurricane Katrina devastated the U.S. Gulf Coast.
Separately, the Commerce Department said consumer spending edged up by 0.2 percent in December after a 1 percent gain in November, just enough to keep pace with inflation.
READ THE REST
The Labor Department said initial claims for state unemployment benefits jumped by 69,000 last week to 375,000. It was the biggest jump since September 2005 and the highest since October of that year, just after Hurricane Katrina devastated the U.S. Gulf Coast.
Separately, the Commerce Department said consumer spending edged up by 0.2 percent in December after a 1 percent gain in November, just enough to keep pace with inflation.
READ THE REST
Gold Investments Market Update
Prior to the Federal Reserve’s 50 basis point interest cut to 3%, gold was down $3.60 to $921.20 per ounce in trading in New York yesterday and silver was down 4 cents to $16.74 per ounce. Gold surged (from $920 to $934.25) to new record highs after the interest rate decision at 2:30 p.m (1930 GMT) in after-hours trading on the Comex division of the New York Mercantile Exchange (NYMEX). Silver surged to new highs at $16.87.
Both have seen profit taking and have since sold off in Asian and European trading. A monthly close above $900 tomorrow, the first ever, would obviously be very bullish from a technical point of view.
Negative real interest rates (with the key discount rate less than the rate of inflation) in the world’s largest economy is very inflationary and could lead to gold reaching $1,000 in the coming weeks, as the dollar comes under further pressure. The moniker ‘Helicopter Bernanke’ is looking more and more apposite as the Federal Reserve chairman again drops copious amounts of liquidity onto the increasingly troubled financial and economic waters. The risk is that by attempting to prevent deflation in asset classes, the Federal Reserve ends up creating stagflation and a mild form of hyperinflation. Or even worse by endeavoring to protect the banks, stock and property markets they end up putting the dollar’s position as the global reserve currency at risk.
READ THE REST
Both have seen profit taking and have since sold off in Asian and European trading. A monthly close above $900 tomorrow, the first ever, would obviously be very bullish from a technical point of view.
Negative real interest rates (with the key discount rate less than the rate of inflation) in the world’s largest economy is very inflationary and could lead to gold reaching $1,000 in the coming weeks, as the dollar comes under further pressure. The moniker ‘Helicopter Bernanke’ is looking more and more apposite as the Federal Reserve chairman again drops copious amounts of liquidity onto the increasingly troubled financial and economic waters. The risk is that by attempting to prevent deflation in asset classes, the Federal Reserve ends up creating stagflation and a mild form of hyperinflation. Or even worse by endeavoring to protect the banks, stock and property markets they end up putting the dollar’s position as the global reserve currency at risk.
READ THE REST
Eskom Withdraws Authorisation for Mining Industry
JOHANNESBURG, January 31 /PRNewswire-FirstCall/ -- Gold Fields Limited ("Gold Fields") (NYSE, JSE, DIFX: GFI) is disappointed to confirm that Eskom has informed the Company that authorisation to increase electricity load from 80% to 90% by this evening, has been temporarily withdrawn in order to "protect further frequency decay and system instability."
To comply with this instruction, and in the interest of safety, production at Gold Fields' operations is being pulled back to the 80% power level.
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To comply with this instruction, and in the interest of safety, production at Gold Fields' operations is being pulled back to the 80% power level.
READ THE REST
Dealing with Recession
Clifford F. Thies
For all the talk by the Federal Reserve about "inflation targeting," we now see that responding to short-run problems is paramount for the Fed. Holding the line on inflation is something the Fed does when it is convenient. Resorting to inflating the money supply when times are tough is predictable, as is a continuing loss of purchasing power of the US dollar. The only uncertainty is how fast the dollar will lose purchasing power. Will it be at a creeping rate, or at a galloping rate, or at a hyperinflationary rate?
You might think that we learned our lesson about inflation during the 1970s, when we moved first from a creeping to a galloping rate, and then risked a further move to hyperinflation. The double-dip recession we then went through starting in 1979 fell in the second tier of economic downturns (below only the Great Depression). There is currently no indication that a severe downturn is on the horizon. But, if we work hard enough at it, with fiscal and monetary policy pumping up the economy and delaying and exacerbating the inevitable, we can make such a severe recession possible in the future. FULL ARTICLE
Ron Paul's replies on CNN debate Jan. 30, '08
And here is a Debate Synopsis by Justin Raimondo on Takimag.com
Four signs that gold has further to rise
It's been a great start to the year for gold - and its fellow precious metals - so far.
In fact, I’m beginning to wonder if my target of a high in gold of $1150 an ounce this year was a little conservative. Perhaps I’m feeling too exuberant and that’s a warning signal, but there are certain signs that suggest an intermediate-term top is coming - I'll tell you what they are in a moment - and I don’t see many of them.
In fact, if the Federal Reserve cuts interest rates later today by half a point, we might even see my target before the end of February...
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In fact, I’m beginning to wonder if my target of a high in gold of $1150 an ounce this year was a little conservative. Perhaps I’m feeling too exuberant and that’s a warning signal, but there are certain signs that suggest an intermediate-term top is coming - I'll tell you what they are in a moment - and I don’t see many of them.
In fact, if the Federal Reserve cuts interest rates later today by half a point, we might even see my target before the end of February...
READ THE REST
MBIA credit rating fear
Shares in MBIA, the world's biggest bond insurer, tumbled after reporting its largest-ever quarterly loss and admitting it's considering how to raise new capital.Late yesterday the company reported a loss of $2.3bn for the last three months of 2007. MBIA, which together with other bond insurers guarantees $2.4 trillion of debt, is scrambling to keep hold of its top credit rating. The loss of the rating would threaten the ratings of a further $652bn of securities.
Analysts reckon that fears that MBIA and Ambac will lose their ratings contributed to the volatilty in stock markets last week.
The high-profile banking analyst who triggered the resignation of Citigroup chairman Charles "Chuck" Prince is predicting investment banks will need to take further write-downs of $40bn (£20bn) to $70bn as a result of the current crisis in the bond insurance market.
READ THE REST
Update: MBIA shares rise; bond insurer highlights liquidity
Also note the Ripple Impact of $534 Billion Debt Downgrade
Desperate Measures in Desperate Times
The Fed cut interest rates eight days after the last shift, but why do I feel that the biggest economy in the world is being run on a rolling day-to-day basis with policy makers reacting to each and every little toss and swirl of the markets?
Last week we had a 0.75pc cut which was odd enough (striking one almost as if game of scissors, paper, rock presided over whether to go for 1pc, 0.75pc or 0.5pc and paper won).
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Then, however, to follow it up only a few short days later with another 0.5pc smacks of desperation. The theory going round is that the Fed does not want to be seen as having being spooked by the Société Générale debacle, about which they were as in the dark as the French Government and has, therefore, followed up last week's panic move with a further cut. A bit fanciful, perhaps, but the whole thing does look a bit strange.
Last week we had a 0.75pc cut which was odd enough (striking one almost as if game of scissors, paper, rock presided over whether to go for 1pc, 0.75pc or 0.5pc and paper won).
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Then, however, to follow it up only a few short days later with another 0.5pc smacks of desperation. The theory going round is that the Fed does not want to be seen as having being spooked by the Société Générale debacle, about which they were as in the dark as the French Government and has, therefore, followed up last week's panic move with a further cut. A bit fanciful, perhaps, but the whole thing does look a bit strange.
Forex Market Update - 30/01/2008
By FX Insights Moderator,
As expected, Bernanke and the FOMC gave the markets an additional 50bps cut, dropping the Fed's key interest rate to a paltry 3.00%... The market's first-wave, initial response was to drive the euro up 100 pips against the dollar, but as we indicated in our chat this afternoon, we'd then see a pullback and retracement of at least 50 pips, which has since materialized as we're sitting comfortably at the 1.4830 level...
There's just a few points I want to cover in today's update... some food for thought going forward... Today's Fed action, in my opinion, will keep the USD under pressure in the near-term. In yesterday's update we discussed each possible scenario that could play out today and I won't take the time to re-hash as you can read yesterday's update if you like...
In addition, Fed Funds Futures is pricing in additional rate cuts in March, possibly bringing the Fed's key interest rate as low as 2.25%! So, what does this mean for the dollar? I'd like to use the CHF as an example of something I believe could play out should the Fed decide to keep cutting and cutting and cutting all the way down to 2.25% or lower... For the past few years the Swiss have kept their key interest rate at or below the 2.50% level -- it was only last year that the SNB finally moved rates to where they currently sit at 2.75%, which is a major factor why the CHF has gained against the USD...
Now, when the Swiss kept rates hovering around the 2.00% to 2.50% levels, the markets beatup the CHF by using it as a funding currency and as a carry trade currency... the crazy thing about that is, Switzerland has always been a very fundamentally sound economy and very prosperous, with solid GDP and low unemployment rates, however, their artificially low interest rates took a damaging toll on the CHF... banks, investors, and traders used the CHF as a funding currency because Swiss rates were so low and it was cheap to borrow and cheap to repay...
These banks and investors would use cheap francs to invest in either higher yielding currencies and or higher yielding investments like equities, commodities, etc... you get the idea... What I'm getting at is this -- should the Fed keep hacking interest rates, keep price fixing, and keep devaluing the dollar, I believe the USD could go the way the CHF went for the past few years, which is the USD being used as a funding or carry trade currency...
Think about it... these are some scary and current interest rate differentials:
USD and AUD -- 375bps in favor of the AUD
USD and NZD -- 525bps in favor of the NZD
USD and EUR -- 100bps in favor of the EUR
USD and GBP -- 250bps in favor of the GBP
USD and CHF -- 25bps in favor of the USD
In this market, the money flows to where there is a higher rate of return and right now, there are many other places to get a higher rate of return...
Now, I'm not making any predictions that the dollar is going to turn into a carry traded currency, but I truly believe this is a real potential should the Fed keep on this super rate cut cycle... with those interest rate differentials as they are presently, why would the banks buy up dollars, especially if the Fed is just going to keep going lower with rates? Maybe I'm thinking too logically here, but it just wouldn't make any sense to say buy dollars and sell-off Aussies when there's a 375bps interest rate differential... Moving on...
Today's action left some traders scratching their heads, wondering why the euro couldn't sustain a break above the 1.4900 level... well, please keep in mind we have a mega fundamental release -- NFP.Now that the banks have gotten today's FOMC out of the way, the next hurdle before we make any bigger, extended moves is Friday's NFP...
I believe the banks are formulating a gameplan and are likely saving their heaviest firepower for Friday... in addition to NFP, there's likely an option expiry on Friday morning, after NFP, at the option barrier of 1.5000... We'll talk more about NFP tomorrow and as we run-up to the data release... but as far as trading goes, it's the same old story I've been saying for the past two weeks...
I'm staying euro long at this point -- cautiously long -- playing the market tight on the intraday, and keeping my best euro longs from the 4385 to 4658 level open at this point on a swing basis... We could certainly see some more retracement between the 0300 and 0700 EST timeframes as the market may want to allow the euro to correct a bit, then buyers will re-emerge to pickup better entries... Can we go to 1.5000? At this point, I believe it's possible...
I have to imagine there are some big stop sets between 1.5000 and 1.5020, and experience tells me the banks and brokers will do what they can to run stops and trigger stops... that being said, let me repeat that I'm playing the intraday cautiosly long and certainly not loading the boat and blindly expecting 1.5000 to show up on our doorsteps by Friday... As always, please practice smart and strict risk/money management the rest of this week... keep your margin in check...
Today's price action for the euro was correlated to the Dow, gold, and oil, so let's keep our eyes on those market correlated variables as we trade tomorrow... fundamentally, we have another huge day tomorrow, so please prepare accordingly... bear in mind, as we said, the market may be holding it's heaviest fire power for Friday...Lastly, if you're a yen trader, stay strapped in because your rollercoaster ride from hell could just be getting warmed up in the near-term...
-FX Insights
Wednesday, January 30, 2008
Fed slashes rates as US recession looms
The Federal Reserve has slashed interest rates for the second time in little over a week as the US economy stands on the brink of recession.
The Fed, which stunned markets with an emergency cut of 0.75 percentage points last Tuesday, reduced rates by 0.5 percentage points to 3pc.
Fed chairman Ben Bernanke and fellow members of the Federal Open Market Committee made their decision hours after figures from the US Commerce Department showed that gross domestic product slowed to its weakest level of growth in five years in the last three months of 2007.
My Comment: The title of this article mentions "Recession Looms". Duh! US GDP growth down to 0.6% in the 4th quarter! What do you call that??? The Recession has already arrived in the US...for goodness sake..start calling a spade a spade man.
Meredith Whitney fears $70bn carnage on monoliners
The high-profile banking analyst who triggered the resignation of Citigroup chairman Charles "Chuck" Prince is predicting investment banks will need to take further write-downs of $40bn (£20bn) to $70bn as a result of the current crisis in the bond insurance market.READ THE REST
UK house-price slowdown deepens
The slide in the housing market gathered more pace last month, increasing speculation that the Bank of England's Monetary Policy Committee will cut interest rates at its meeting next week.
Mortgage approvals slumped to just 73,000, the lowest level since records began in 1999, accelerating the downward trend. Approvals dropped from 113,000 in June to 99,000 in September and 81,000 in November.
You say you want a revolution?
Every movement in history has faced some time of testing, some experience that either forges it into something strong and unified, or forces it to fade away into the history books as another failed experiment.Dr. Paul has written to you that we are heading straight for Super Tuesday. Our opponents are free to beat up on each other and wear themselves down while we gather our supporters and prepare to storm the convention with delegates.
Last night, over 60,000 people stood up and asked for an end to the runaway violation of our liberties. But contrary to the impression you may be getting from the mainstream media, no national delegates have yet been won in Florida. Those delegates will only be awarded between February 6 and April 30 at delegate selection caucuses, and many of those delegates will be supporters of Dr. Paul.
Ron Paul is the only candidate not to give up on any state in the Republican race, and just as we competed strongly in overlooked states like Nevada and Louisiana, so too will we compete in Maine, Minnesota, and other states that the so-called "top-tier" candidates are content to ignore.
Now, as the focus shifts to Super Tuesday, Rudy's campaign is crushed, Huckabee is losing momentum by the day, and McCain and Romney are fighting over who is the most liberal.
We've been here before. In 1776, despite a courageous effort at holding onto the city, George Washington ceded New York and quickly retreated to New Jersey.
We've been here before. In 1776, despite a courageous effort at holding onto the city, George Washington ceded New York and quickly retreated to New Jersey.
1777 brought the British recapture of Fort Ticonderoga, as well as American defeats at Brandywine and Germantown.
And then, during the winter of 1777-1778, Washington and his army faced perhaps their most humiliating moment, forced to endure a harsh Pennsylvania winter with limited supplies at Valley Forge.
The American revolutionaries dealt with their defeats, focused on their goals, and emerged from Valley Forge as a force that would defeat the most powerful nation on earth.
Our momentum is building. Each one of us, from Dr. Paul himself down to the grassroots supporter who donates the last $5 he or she can give, is focused on the goal.
Early in the struggle for American independence, George Washington wrote: "Perseverance and spirit have done wonders in all ages." Even then, Washington realized that a fierce struggle for self-government can only be won with a spirit of determination equal to the challenge.
Today, in the midst of our new revolution, let's consider Washington's words once again. The task before us is enormous. The foes of liberty are deeply entrenched, and they will not relinquish their power without a struggle.
But fighting in our favor is the unconquerable human spirit, the innate desire to be free. We must embrace this inner strength, dig in our heels, and persevere, just as Washington and his rag-tag colonials, the first American grassroots patriots, did before us. And if we must pass through a Valley Forge or two along the way to victory, let those times of testing temper the steel of our determination.
If Ron Paul is to continue his fight for liberty to the Republican Convention, we need your help in two critical ways:
1. Become a precinct leader today: It's easy, but more importantly, it's vital to Ron Paul's success: https://voters.ronpaul2008.com/.
2. Donate: Just as the Continental Congress supplied General Washington's troops in the field, we too must raise as much money as we can to equip our grassroots supporters.
Help us win this revolution and usher in a new era of freedom, peace, and prosperity. Donate today: https://www.ronpaul2008.com/donate.
Matthew Hawes, Policy Assistant
Daniel McCarthy, Internet Communications Coordinator
Jonathan Bydlak, Fundraising DirectorRon Paul 2008
Bank Reserves Go Negative
By Mike "Mish" Shedlock
I have been watching a chart of Borrowed Bank Reserves for several weeks. The action is unprecedented.
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I have been watching a chart of Borrowed Bank Reserves for several weeks. The action is unprecedented.
READ THE REST
Why Is Bernanke Trying to Fight the Bear?
Last Tuesday, January 22, 2008, the US central bank lowered its federal funds rate target by a hefty 0.75% to 3.5%. The panicky decision to lower the fed funds rate target was made ahead of the Fed's meeting at the end of this month. Last Tuesday's cut by the Fed was the largest nonscheduled interest-rate cut in more than 20 years.Let us say that the present aggressive interest rate stance by the Fed fails to prevent the economy from falling into a recession; what kind of action is Bernanke then going to undertake? In some of his writings, he has suggested that, under such circumstances, the Fed should adopt a very aggressive stance and start pushing money on a massive scale, i.e., helicopter money. Needless to say that if this were to happen, Bernanke would run the risk of badly damaging the foundations of the real economy.
FULL ARTICLE
Government Regulation vs Free Markets
Every American, from the top Fortune 500 CEO to the youthful fast-food hamburger flipper, owes his standard of living – the highest in the world – to free market capitalism. It's capitalism – private property and free markets – that provides the information and the incentive that allows each of us to maximize the value of our economic activity. Yet to hear the (mostly) Democratic presidential candidates tell it, free markets are faulty, unfair, and inherently unstable; indeed, government should constantly regulate markets and ride to the rescue whenever recession threatens.
The overall economic ignorance displayed in this year's political campaign has been staggering. Instead of calling for balanced budgets, sound money, permanent tax reductions, and less regulation, most of the candidates have called for more inflation and more government intervention.
READ THE REST
The Sixty-Year Storm
by George Soros
Today’s financial crisis, triggered by the collapse of the housing bubble in the United States, also marks the end of an era of credit expansion based on the dollar as the international reserve currency. It is a much bigger storm than any that has occurred since the end of World War II.
To understand what is happening, we need a new paradigm. It is available in the theory of reflexivity, which I first proposed 20 years ago in my book The Alchemy of Finance . The theory holds that financial markets do not tend towards equilibrium. Biased views and misconceptions among market participants introduce uncertainty and unpredictability not only into market prices, but also into the fundamentals that those prices are supposed to reflect. Left to their own devices, markets are prone to extremes of euphoria and despair.
Indeed, because of their potential instability, financial markets are not left to their own devices; they are in the charge of authorities whose job it is to keep the excesses within bounds. But the authorities are also human and subject to biased views and misconceptions. And the interaction between financial markets and financial authorities is also reflexive.
Boom-bust processes usually revolve around credit, and always involve a bias or misconception – usually a failure to recognize a reflexive, circular connection between the willingness to lend and the value of the collateral. The recent US housing boom is a case in point.
READ THE REST
Today’s financial crisis, triggered by the collapse of the housing bubble in the United States, also marks the end of an era of credit expansion based on the dollar as the international reserve currency. It is a much bigger storm than any that has occurred since the end of World War II.
To understand what is happening, we need a new paradigm. It is available in the theory of reflexivity, which I first proposed 20 years ago in my book The Alchemy of Finance . The theory holds that financial markets do not tend towards equilibrium. Biased views and misconceptions among market participants introduce uncertainty and unpredictability not only into market prices, but also into the fundamentals that those prices are supposed to reflect. Left to their own devices, markets are prone to extremes of euphoria and despair.
Indeed, because of their potential instability, financial markets are not left to their own devices; they are in the charge of authorities whose job it is to keep the excesses within bounds. But the authorities are also human and subject to biased views and misconceptions. And the interaction between financial markets and financial authorities is also reflexive.
Boom-bust processes usually revolve around credit, and always involve a bias or misconception – usually a failure to recognize a reflexive, circular connection between the willingness to lend and the value of the collateral. The recent US housing boom is a case in point.
READ THE REST
The Road to Hyperinflation - Part 2
Central Banking History of Failing to Stabilize Markets
It has been forgotten by many that before 1913, there was no central bank in the United States to bail out troubled commercial and associated financial institutions or to keep inflation in check by trading employment for price stability. Few want inflation but fewer still would trade their jobs for price stability.
For the first 137 years of its history, the US did not have a central bank. The nation then was plagued with recurring business cycles of boom and bust. For the past 94 years that the Federal Reserve, the US central bank, has assumed the role of monetary guardian for the nation, recurring business cycles of boom and bust have continued, often with the accommodating participation of the Fed. Central banking has failed in its fundamental functions of stabilizing financial markets with monetary policy, succeeding neither in preventing inflation nor sustaining growth nor achieving full employment. Since the Fed was founded in 1913, the US inflation has registered 1,923%, meaning prices have gone up 20 times on average despite a sharp rise inproductivity.
For the 18 years (August 11, 1987 to January 31, 2006) of his tenure as chairman of the Fed, Alan Greenspan had repeatedly bought off the collapse of one debt bubble with a bigger debt bubble. During that time, inflation was under 2% in only two years, 1998 and 2002, both times not caused by Fed policy. Paul Volcker, who served as Fed Chairman from August 1979 to August 1987, had to raise both the fed funds rate and the discount to 20% to fight hyperinflation of 18% in 1980 back down to 3.66% in 1987, the year Greenspan took over the Fed just before the October 1987 crash when inflation rose to 4.53%.Under Greenspan’s market accommodating monetary policy, US inflation reached 4.42% in 1988, 5.36% in 1989 and 6.29% in 1990. US inflation rate was moderated to 1.55% by the 1997 Asian financial crisis when Asian exporting economies devalued their currencies to lower their export prices, but Greenspan allowed US inflation rate to rise back to 3.76% by 2000. The fed funds rate hit a low of 1.75% in 2001 when inflation hit 3.76%; it hit 1% when inflation hit 3.52% in 2004; and it hit 2.5% when inflation hit 4.69% in 3005. For those years, US real interest rate was mostly negative after inflation. Factoring in the falling exchange value of the dollar, the Fed was in effect paying US transnational corporate borrowers to invest in non-dollar markets, and paying US financial institution to profit from dollar carry trade, i.e. borrowing dollars at negative rates to speculate in assets denominated in other currencies with high yields.
READ THE REST
It has been forgotten by many that before 1913, there was no central bank in the United States to bail out troubled commercial and associated financial institutions or to keep inflation in check by trading employment for price stability. Few want inflation but fewer still would trade their jobs for price stability.
For the first 137 years of its history, the US did not have a central bank. The nation then was plagued with recurring business cycles of boom and bust. For the past 94 years that the Federal Reserve, the US central bank, has assumed the role of monetary guardian for the nation, recurring business cycles of boom and bust have continued, often with the accommodating participation of the Fed. Central banking has failed in its fundamental functions of stabilizing financial markets with monetary policy, succeeding neither in preventing inflation nor sustaining growth nor achieving full employment. Since the Fed was founded in 1913, the US inflation has registered 1,923%, meaning prices have gone up 20 times on average despite a sharp rise inproductivity.
For the 18 years (August 11, 1987 to January 31, 2006) of his tenure as chairman of the Fed, Alan Greenspan had repeatedly bought off the collapse of one debt bubble with a bigger debt bubble. During that time, inflation was under 2% in only two years, 1998 and 2002, both times not caused by Fed policy. Paul Volcker, who served as Fed Chairman from August 1979 to August 1987, had to raise both the fed funds rate and the discount to 20% to fight hyperinflation of 18% in 1980 back down to 3.66% in 1987, the year Greenspan took over the Fed just before the October 1987 crash when inflation rose to 4.53%.Under Greenspan’s market accommodating monetary policy, US inflation reached 4.42% in 1988, 5.36% in 1989 and 6.29% in 1990. US inflation rate was moderated to 1.55% by the 1997 Asian financial crisis when Asian exporting economies devalued their currencies to lower their export prices, but Greenspan allowed US inflation rate to rise back to 3.76% by 2000. The fed funds rate hit a low of 1.75% in 2001 when inflation hit 3.76%; it hit 1% when inflation hit 3.52% in 2004; and it hit 2.5% when inflation hit 4.69% in 3005. For those years, US real interest rate was mostly negative after inflation. Factoring in the falling exchange value of the dollar, the Fed was in effect paying US transnational corporate borrowers to invest in non-dollar markets, and paying US financial institution to profit from dollar carry trade, i.e. borrowing dollars at negative rates to speculate in assets denominated in other currencies with high yields.
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The Great Depression - The Sequel ?
The D Bomb Is DroppedIt’s happened. One widely read financial daily very recently dropped the “D” bomb. The article compared today's economic situation not to the 1987 affair with a happy ending, but to the much “darker metaphor” of the Great Depression in 1929.
The main similarity, according to the article was this: The all-out rescue efforts of the financial powers-that-be to stop a downturn and push the economy onto solid ground. Then as now, two main bodies carry out the task: the central bank and the White House.
1929: The Federal Reserve promises “cheaper credit” and slashes the discount rate from 5.5% (1929) to .75% (1932). At the same time, U.S. President Herbert Hoover creates an “Economic Stimulus Plan” to provide $160 million in tax relief to the public.
2008: On January 22, the Federal Reserve approves an emergency 75-basis-point rate cut, the largest single reduction in 23 years (and fourth cut in four months). Days later, U.S. President George Bush encourages Congress to support a $150 billion “Economic Stimulus” through tax rebates.
Merrill downgraded on bond insurers, subprime
BOSTON (MarketWatch) -- Oppenheimer & Co. on Wednesday downgraded shares of Merrill Lynch & Co. to underperform, saying bond insurers' problems could prompt more write-downs at the investment bank and noting the firm's exposure to subprime mortgages.
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UBS, BNP Paribas reveal fresh hits from credit crisis
LONDON (MarketWatch) -- Two of Europe's largest banks revealed fresh problems stemming from the U.S. housing downturn Wednesday. Swiss banking giant UBS extended its latest write-down to $14 billion and France's BNP Paribas said its quarterly profit will slump over 40%.
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Forex Market Update - 29/01/2008 - FOMC Outlook (2)
FX Insights Moderator,
Just a quick update on some things as we head in to the FOMC...
My short @ 4794 was closed @ 4793 this morning and I've not re-entered the market with any new shorts and will not re-enter with any new shorts at this point... at least not until I see what the Fed does...
I only have 1 open short and that is at 4714 and I will keep this short open for the time being... my overal bias remains euro long -- cautiously long -- I'm not adding any new longs at these levels and not adding any trades at all this close to the rate decision...
This morning's GDP data can certainly lend some credence to the possibility of at least a 50bps cut, as GDP had slowed considerably during Q4 and is presently showing signs of complete stagnation during this first quarter of 2008.
I'd like to caution against jumping into the market as soon as the rate decision is released... we could see a pull back on the EUR/USD when the decision hits the wires...
The pull back can occur as banks are either taking losses, taking profits, and or adding new long positions, which will be based on exactly what the Fed comes out with today...
Sometimes it's best to wait between 4-12 minutes to get a feel for how the price action will play out and to see how the banks will decide to respond and move the market... just some food for thought on that...
Please practice extreme risk and money management today... do not make a knee jerk trade on any of the pairs, especially the yen crosses... formulate a gameplan and stay consistent during these potentially volatile days ahead...
The Failure of Inflation Targeting
By Axel Merk, January 30, 2008
Inflation targeting is yet to be formally adopted by the Federal Reserve (Fed), but recent market and Fed actions already prove that it is a failure. At the whim of trouble in the markets, Fed Chairman Bernanke has made it clear that he is inclined to flood the markets with liquidity at any cost; he said: “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”
Contrast that with John-Claude Trichet’s comments: the head of the European Central Bank (ECB) recently said that during times of financial turmoil, it is imperative that inflationary expectations remain firmly anchored. The Fed’s increasing isolation is also apparent from recent comments by Mervyn King, the governor of the Bank of England who said that investors had been mispricing risk for far too long and that “the repricing of that risk … is not a process that we should try to reverse.”
Let me be clear: we have no problem with a central bank to switch into emergency mode per se. But the way the Fed has wobbled into emergency mode, claiming to be vigilant on inflation while debasing the dollar in the process smells of hypocrisy. A central bank’s role is to keep the financial system running, not to run the financial system. Ben Bernanke has very clear views on how the financial system ought to be running. In February 2004, when he was freshly sworn in as a Fed Governor, Ben Bernanke published a report called “The Great Moderation.” In this report, he praised how monetary policy has contributed to a reduction in volatility of output and inflation since the mid 1980s. At first sight, it seems difficult to argue with such analysis; this work may have contributed to his appointment as President Bush’s Chief Economic Advisor, and subsequently to his current role as Chairman of the Federal Reserve.
While we do not deny that low volatility has positive implications, where there is sunshine, there is shadow: in our assessment, the seeds of the current crisis have been planted in the process. Even if you are not an economics Ph.D., you may recall the saying “if there is one thing the market does not like, it is uncertainty.” The less uncertain the world is, the more daring speculators become. Homeowners believing their jobs are secure, or their wages will rise, are more likely to take out a high mortgage. Any speculator is willing to take out more leverage when the future seems certain. Financial institutions have become increasingly “sophisticated” over the past decade and introduced widely acclaimed Value At Risk (VaR) models; these models assess the risk of loss given different scenarios. Put simply, the less volatility, the less uncertainty there is, the more capital may be put at risk. In recent days, there has been talk that banks may require over hundred billion in additional capital should mortgage insurers be downgraded. That’s because the banks’ models suggest that less capital is required for assets classified as safe; however, if someone spoils the party and says the world is a risky place, banks suddenly have a greater portion of their capital at risk, requiring them to either sell off risky assets on their balance sheets, or to raise more capital.
READ THE REST
Inflation targeting is yet to be formally adopted by the Federal Reserve (Fed), but recent market and Fed actions already prove that it is a failure. At the whim of trouble in the markets, Fed Chairman Bernanke has made it clear that he is inclined to flood the markets with liquidity at any cost; he said: “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”
Contrast that with John-Claude Trichet’s comments: the head of the European Central Bank (ECB) recently said that during times of financial turmoil, it is imperative that inflationary expectations remain firmly anchored. The Fed’s increasing isolation is also apparent from recent comments by Mervyn King, the governor of the Bank of England who said that investors had been mispricing risk for far too long and that “the repricing of that risk … is not a process that we should try to reverse.”
Let me be clear: we have no problem with a central bank to switch into emergency mode per se. But the way the Fed has wobbled into emergency mode, claiming to be vigilant on inflation while debasing the dollar in the process smells of hypocrisy. A central bank’s role is to keep the financial system running, not to run the financial system. Ben Bernanke has very clear views on how the financial system ought to be running. In February 2004, when he was freshly sworn in as a Fed Governor, Ben Bernanke published a report called “The Great Moderation.” In this report, he praised how monetary policy has contributed to a reduction in volatility of output and inflation since the mid 1980s. At first sight, it seems difficult to argue with such analysis; this work may have contributed to his appointment as President Bush’s Chief Economic Advisor, and subsequently to his current role as Chairman of the Federal Reserve.
While we do not deny that low volatility has positive implications, where there is sunshine, there is shadow: in our assessment, the seeds of the current crisis have been planted in the process. Even if you are not an economics Ph.D., you may recall the saying “if there is one thing the market does not like, it is uncertainty.” The less uncertain the world is, the more daring speculators become. Homeowners believing their jobs are secure, or their wages will rise, are more likely to take out a high mortgage. Any speculator is willing to take out more leverage when the future seems certain. Financial institutions have become increasingly “sophisticated” over the past decade and introduced widely acclaimed Value At Risk (VaR) models; these models assess the risk of loss given different scenarios. Put simply, the less volatility, the less uncertainty there is, the more capital may be put at risk. In recent days, there has been talk that banks may require over hundred billion in additional capital should mortgage insurers be downgraded. That’s because the banks’ models suggest that less capital is required for assets classified as safe; however, if someone spoils the party and says the world is a risky place, banks suddenly have a greater portion of their capital at risk, requiring them to either sell off risky assets on their balance sheets, or to raise more capital.
READ THE REST
Forex Market Update - 29/01/2008 - FOMC Outlook
FX Insights Moderator,
Because of the Fed's emergency rate cut last week, the market analysts and economists have been thrown for a loop as to what Bernanke will pull out of his bag of tricks tomorrow... I will not offer any speculations on what Bernanke will do, but I've been preparing accordingly and have tried to position my accounts for the "worst case scenario.
"Now, the "worst case scenario" can certainly carry different meanings to different traders, but to me, whatever the Fed does tomorrow is the worst case scenario, of which I see three worst case scenarios... so, lets take a look at each one...
And just as an aside... you might be wondering why I have three possible worst case scenarios... well, as a trader, economist, and a taxpaying U.S. citizen, the only best case scenario for the U.S. economic situation is for the Fed to begin raising rates, for the gov't to begin reducing the deficit, and for our trade balance to shrink and our GDP to expand, but this is a different conversation for a different time...
Worst case scenario #1:
25bps interest rate cut -- a cut of just 25bps would be just half of what the market is forecasting, and this would be slightly shocking to all markets, including our market... the equities market will likely take a hit and not only see stock sell-offs, but would also see less money flow into stocks, which would turn the USD supportive against the EUR. I think the dollar would actually gain some ground back on the EUR should the Fed only cut by 25bps.
Worst case scenario #2:
50bps interest rate cut -- all markets are forecasting and expecting a full 50bps cut from the Fed. Should the Fed come through with what the markets want and expect, I believe the equities markets all around the world would react very favoribly to this move, more specifically, the Dow and S & P would respond with upward gains and momentum, which would then correlate into the EUR gaining against the USD. In addition, should the Fed cut by 50bps, the interest rate differentials would then turn into 100bps in favor of the euro vs. the dollar... this cut would bring the Fed's rate to 3.00% against the ECB's rate of 4.00%... I think it's quite significant to have a full 100bps interest rate differential between the EUR and the USD...
As you know, bank money flows to the nation that offers the higher rate of return, so I believe would could see renewed upward momentum and upward gains for the euro vs. the dollar. I really cannot imagine why banks would buy up dollars and sell-off euros with a 100bps interest rate differential... of course, we can't always depend on logic in the spot FX market, but the Eurozone now offers a better rate of return and it actually pays to hold euro longs, which is something traders look upon with favor.
Worst case scenario #3:
No interest rate cut -- yes, I absolutely believe there's a reasonable probability that the Fed will keep rates on hold tomorrow. I think it's a distinct possibility because of the emergency actions the Fed took last week... Bernanke's move, in my mind, diminishes some of the need to hack up rates any further tomorrow...
I believe a no cut would be tremendously supportive of the dollar vs. the euro... you see, concensus continues to grow that the ECB will eventually have to cut rates later this year and I am one of those that feels this way... M3 money supply is falling in the Eurozone and that will put less inflation pressure on the ECB... plus, I think we'll see the Eurozone's CPI come down from the highs of 3.1%, but lets not get off track here...
Should Bernanke hold rates steady, this would be a tremendous shock to all markets... our market does not handle shocking interest rate policy with any degree of emotional stability... a no cut could easily send the EUR/USD falling back to support levels between 1.45 and 1.43 in the near-term...
If the Fed were to hold rates tomorrow, global equity indicies would take a hit and I think we'd see some intense sell-offs and losses, which would naturally lead to the euro dropping against the dollar, due to the correlation between the EUR/USD, the Dow, the S&P/500, the S&P/500 and Dow futures, and the EUR/JPY (yes, the connection can run that deep). Then, we'd see traders begin to liquidate gold and oil positions, and possibly take short positions on those commodities to catch the down move, and those short positions in gold and oil would basically equate to taking long USD positions, which would then correlate into more USD support vs. the EUR...
A no cut would lead to some big, nasty crap hitting the fan in all markets, and ultimately I could see the dollar coming out of this smelling like a rose...
Fed psychology:
First, there's quite a bit of speculation that Bernanke made a knee-jerk reaction to last week's global equities sell-off, which was triggered by the nutjob trader from SocGen in France. So, to save face on his move to do an emergency rate cut Bernanke could certainly give the markets the 50bps cut they want, and this would be his way of saying, "last week's cut had nothing to do with the equities issues."
If Bernanke wants to send the markets the message that his biggest concerns are the U.S. economic situation and the issues within the credit markets and with the bond insurers/bond rating agencies, the FOMC will likely "vote" in favor of the 50bps cut. Of course, that cut will do zero to stimulate the economy nor will it offer much relief to the credit market and the banks, again, that's another issue for another time... but at least it would help Bernanke and the Fed save some face...
A 25bps cut or a no-cut could and probably would send our market the message that the Fed is growing more and more concerned with U.S. inflation and less concerned about what's happening on Wall St. This perceived concern about inflation would be very supportive of the dollar vs. the euro. You see, much of the euro's strength against the dollar is due to the fact that the ECB is so hell-bent on keeping inflation under 2%, which equates to tight monetary policy and hawkishness on interest rate policy...
The Fed and the ECB operate on opposite ends of the spectrum... Bernanke and his henchmen at the Fed are nothing more than subservient slaves to Wall St. and the trillion-dollar banking conglomerate that basically control governments and world markets, and because the U.S. still has the most powerful influence over the global markets and global economies, the subservient slaves at the Fed must do two things:
1. Manipulate markets
2. Price fix
Market manipulation and price fixing is accomplished through the Fed's monetary policy... if you want a good example of what price fixing is, look at what happened when Bernanke cut rates by 75bps last week... that move "fixed" prices on all of the equities markets and kept them from continuing to sell-off... I could give hundreds of examples, but you get the idea...
Now, the ECB has a totally different mission and mandate, which is ensuring price stability -- Trichet is almost to the point of being neurotic when it comes to inflation and price stability, but you have to understand why... the German Bundesbank is very influential, and Europeans, especially Germans still remember the days of having to cart in heaps of cash to buy milk and bread... so because the ECB is coming from that angle, they are naturally going to be very tight on monetary policy and less likely to ease on rates even when growth begins to suffer, which is and will be the case this year... so as I said earlier, this is one of the main reasons why the euro has been so strong against the dollar for the past few years...
EUR/USD trading:
All possible scenarios for what could happen are stated above... now, how this translates into trading is a different story because no one truly knows what the Fed is going to slap us with tomorrow...
On last Friday's and this Sunday's updates, we gave the key level, on the downside of 4680 - 4660... it hit 4660 right on the dot on Sunday and has since move towards the top of the range, but unable to breach the 4800 level...
Clearly the market has fallen into a "wait and see" trading range because the banks are speculating just as much as the rest of us and will likely need to see what the Fed decides tomorrow...
It would not surprise me to see some movement out of this range as we draw closer to tomorrow's decision... don't forget that we have key GDP data tomorrow morning, plus, some banks may try to square positions ahead of the FOMC decision and these money flows could cause some movement...
As far as trading goes, I grabbed a 4794 euro short yesterday and will certainly hold this trade, unless of course the market moves against me, in which case the trade will be closed for +1 pips and I may look to re-enter short at a higher position...
On the long side, I am still long from 4385 and will hold all longs that are still in profit below the 4700 level... other than that, I've spent this week trying to flatten out and free up margin just to protect against the unknowns... this is not a situation where I really want to get caught going the wrong way because tomorrow could be monumental...
I'd really like to grab some better euro shorts should the market go up and give an opportunity to do so... as mentioned above, I think in the end of all this the dollar could come out smelling like a rose, even though fundamentally and logically it shouldn't be that way...
I encourage you to do your own analysis of the market and weigh each possibility against the other... I could be way out in left field, but I wanted to at least give you my view on things...
FX Insights
Tuesday, January 29, 2008
The Future Imperfect?
Waving Goodbye to Hegemony
By Parag Khanna
Turn on the TV today, and you could be forgiven for thinking it’s 1999. Democrats and Republicans are bickering about where and how to intervene, whether to do it alone or with allies and what kind of world America should lead. Democrats believe they can hit a reset button, and Republicans believe muscular moralism is the way to go. It’s as if the first decade of the 21st century didn’t happen — and almost as if history itself doesn’t happen. But the distribution of power in the world has fundamentally altered over the two presidential terms of George W. Bush, both because of his policies and, more significant, despite them. Maybe the best way to understand how quickly history happens is to look just a bit ahead.
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The Business of Walking Away
By Mike "Mish" Shedlock
Previously I discussed the psychology of walking away in 60 Minutes Legitimizes Walking Away, Changing Social Attitudes About Debt, and a Crash Course For Bernanke.
This post will address the business of walking away.
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Previously I discussed the psychology of walking away in 60 Minutes Legitimizes Walking Away, Changing Social Attitudes About Debt, and a Crash Course For Bernanke.
This post will address the business of walking away.
READ THE REST
Inflation Warning
The Financial Times reports the following story:
IMF head in shock fiscal warning
My comment: The "shocking" part for me in this article is that the IMF MD is calling for defecit spending, interest rate cuts and more monetary inflation. This is what got the global economic landscape into the trouble it is in today! Watch your local Central Bank for rate cuts when it is actually supposed to be increasing rates. Deja vu anyone?
It's like a Doctor prescribing IcyHot/Deep Heat for Jock-Itch !
IMF head in shock fiscal warning
The intensifying credit crunch is so severe that lower interest rates alone will not be enough “to get out of the turmoil we are in”, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned at the weekend.
In a dramatic volte face for an international body that as recently as the autumn called for “continued fiscal consolidation” in the US, Dominique Strauss-Kahn, the new IMF head, gave a green light for the proposed US fiscal stimulus package and called for other countries to follow suit. “I don’t think we would get rid of the crisis with just monetary tools,” he said, adding “a new fiscal policy is probably today an accurate way to answer the crisis”.
My comment: The "shocking" part for me in this article is that the IMF MD is calling for defecit spending, interest rate cuts and more monetary inflation. This is what got the global economic landscape into the trouble it is in today! Watch your local Central Bank for rate cuts when it is actually supposed to be increasing rates. Deja vu anyone?
It's like a Doctor prescribing IcyHot/Deep Heat for Jock-Itch !
Zimbabwe Economics
by Bill Bonner Bill Clinton should have gone to the Alps. Instead, the poor man went to the piedmont...to the aid of his wife in South Carolina.
At the annual Davos, Switzerland, conference of celebs, power-brokers, and do-gooders, Clinton was always a hit. In Carolina, he was a flop.
If he’d been in Davos, he might have given the meeting some of the magic of the old days. Every year, the movers and shakers gather to tell each other how to make a better world. Most just blather in a way that began naïvely, early in their careers, soured into cynicism in middle age, and finally becomes merely stupid. Some probably still think they can improve things. A few probably succeed.
But this year’s meeting seems to have had a defeatist tone to it. Probably because the news was bad.
Last Sunday, it was discovered that a young man at an old bank had managed to get himself into $50 billion worth of positions – most of them losing positions. This was more than half of the value of all of France’s gold and currency reserves. It was more than the entire value that had been built up by the bank over decades. How could it happen? What was wrong? How could banks be so fragile...and what could you think of the whole world’s financial system when it was built with bricks that cracked up so readily?
War vs. Peace
By Lew Rockwell,
There are many reasons why Ron Paul is a great hero, from his leadership against the recession-causing Fed to his opposition to income-tax theft. But this illustration, and thanks to David Kramer for sending it, sums up the most important reason we love and admire Ron, and despise his neocon opponents.
Money and the Economic Crisis
Money: Pathology and Reality
Recent daily articles on Mises.org and LewRockwell.com have addressed the economic downturn, and the unbearably bad response from Washington and the Fed. These people have learned all the wrong lessons from the Great Depression. There is nothing that the planners won't consider at this point: wage and price controls, floods of new money, exchange controls, protectionism, hundreds of billions in public works – you name it.
The good news is that all the literature necessary to combat this nonsense is in print. The Austrian perspective is there to make sense of the current economic mess.
(NB: I'll be making an effort to add as many of these books listed to my list of E-Books, which can be downloaded in PDF format) Note: DONE !!! :-)
Economic Stimulus Concerns
By Ron Paul,This past week in Washington there has been much talk about the economy. It seems by their actions the leadership and the Fed is finally willing to admit we have a problem, and we need to do something about the economic mess we are in. This is a good thing. However, they are still not being honest about the root cause of our impending crisis and want to deal only with symptoms, not the disease.
There are some positive aspects of the highly lauded economic stimulus package that has been negotiated. I am in favor of taxpayers getting some of their money back, however temporary tax cuts and one-time rebates will not “fix” the economy. What we desperately need right now is real deep significant tax cuts that are enabled by big spending cuts and reduction of government waste that is so rampant. Unfortunately, too many in Washington still believe we can spend our way into prosperity, which does not work and never has.
Countries build wealth through robust economic environments, in which jobs are created and businesses can operate at a profit and grow. When taxes bleed away profits and burdensome regulation hamstrings operations, our businesses and our jobs go overseas. The United States must foster a competitive business environment once again.
There are a few ideas out there for economic stimulus that I do support, such as making permanent President Bush’s tax cuts. I have also signed on as one of 49 original cosponsors of the Economic Growth Act of 2008 which will provide actual economic stimulus through private sector tax relief and job-creating business incentives. This plan features :
There are some positive aspects of the highly lauded economic stimulus package that has been negotiated. I am in favor of taxpayers getting some of their money back, however temporary tax cuts and one-time rebates will not “fix” the economy. What we desperately need right now is real deep significant tax cuts that are enabled by big spending cuts and reduction of government waste that is so rampant. Unfortunately, too many in Washington still believe we can spend our way into prosperity, which does not work and never has.
Countries build wealth through robust economic environments, in which jobs are created and businesses can operate at a profit and grow. When taxes bleed away profits and burdensome regulation hamstrings operations, our businesses and our jobs go overseas. The United States must foster a competitive business environment once again.
There are a few ideas out there for economic stimulus that I do support, such as making permanent President Bush’s tax cuts. I have also signed on as one of 49 original cosponsors of the Economic Growth Act of 2008 which will provide actual economic stimulus through private sector tax relief and job-creating business incentives. This plan features :
- Full immediate expensing for major business asset investments
- Reducing the top corporate tax rate from 35% to 25% to be aligned with average rates in Europe
- Indexing the capital gains tax for inflation
- Cutting and simplifying the corporate capital gains rate
Enactment of these dramatic tax cuts will free up money so employers can start hiring again. I would like for the unemployed to have the satisfaction of having a job again so the standard of living of the American family will go up. And even more than a one-time miniscule rebate check, I want you to keep more of your own money in the first place.
Sending out checks and cutting interest rates yet again is merely a shot in the arm when in actuality, the economy needs major surgery. I look forward to working with my colleagues in Congress to provide major tax relief to the American people.
What You Should Know About Inflation
I have added "What You Should Know About Inflation" by Henry Hazlitt to the list of Educational Economic E-Books, which you can download in PDF format.Just right-click on the link and "Save Target As..."
A quick overview of the book and what it's about:
The book's title—What You Should Know About Inflation—only hints at the extent of the issues that Hazlitt addresses. He presents the Austrian theory of money in the clearest possible terms, and contrasts it with the fallacies of government management. He takes on not only the Keynesians but also the monetarists, as well as anyone who believes that government debt accumulation and manipulation of interest rates are harmless.
So this book is about far more than inflation. He touches on a wide variety of macroeconomic topics, any area of economic policy that is related to the monetary regime, including budget and trade issues, as well has the economic history of inflation.
Neither does he neglect the moral cost of inflation:
It is not merely that inflation breeds dishonesty in a nation. Inflation is itself a dishonest act on the part of government, and sets the example for private citizens. When modern governments inflate by increasing the paper-money supply, directly or indirectly, they do in principle what kings once did when they clipped coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water. Notwithstanding all the pious pretenses of governments that inflation is some evil visitation from without, inflation is practically always the result of deliberate governmental policy.
Particularly interesting is the final section of the book in which Hazlitt critiques various proposals for monetary reform and then presents his view.
What is Hazlitt's own idea for monetary reform? He wants competitive monies, which he believes will be based in precious metal. He doesn't demand that governments get out of the monetary business altogether but merely that government permit everyone to choose to use any money and make any form of contract.
Hazlitt lays out a scenario that he believes will lead to a 100 percent gold standard rooted in private coinage. In effect, he argues that private markets can do for money what private services have done to a whole host of government ones: outcompete and displace them. It is a challenging thesis, particularly because it doesn't depend on any reform other than freeing the market.
- What Inflation is
- Some Qualifications
- Some Popular Fallacies
- A Twenty-Year Record
- False Remedy: Price Fixing
- The Cure for Inflation
- Inflation Has Two Faces
- What 'Monetary Management' Means
- Gold Goes With Inflation
- In Dispraise of PAper
- The Cure for Inflation
- Inflation and High Costs
- Is Inflation a Blessing?
- Why Return to Gold
- Gold Means Good Faith
- What Price for Gold?
- The Dollar-Gold Ratio
- Lessons of the Greenbacks
- The Black Market Test
- How to Return to Gold
- Some Errors of Inflationists
- Selective Credit Control
- Must We Ration Credit?
- Money and Goods
- The Great Swindle
- Easy Money = Inflation
- Cost-Push Inflation?
- Contradictory Goals
- Administered Inflation
- Easy Money has an End
- Can Inflation Merely Creep?
- How to Wipe Out Debt
- The Cost-Price Squeeze
- The Employment Act of 1946
- Inflate? Or Adjust?
- Deficits vs. Jobs
- Why Cheap Money Fails
- How to Control Credit
- Who Makes Inflation?
- Inflation as a Policy
- The Open Conspiracy
- How the Spiral Spins
- Inflation vs. Morality
- How Can You Beat Inflation?
- The ABC of Inflation
You can also purchase the paperback version here.
Enjoy!!!
The great fiscal stimulus package ... of 1929
Stephen W. CarsonIs the myth of the "do nothing" Herbert Hoover dying? Michael Kitchen at MarketWatch writes:
...Herbert Hoover -- only nine months into his presidency -- assembled leaders from the public and private sectors to create an economic-stimulus package. Among the measures, Time magazine reported at the time, was a promise from Congress to offer bipartisan support for a tax-cut package. The proposal called for $160 million in tax relief -- only about $22 billion if adjusted against the gross domestic product at the time, and therefore much smaller than the plan under consideration here in 2008. Read Time's original coverage of the plan.
Also on the table was an assurance from the Federal Reserve that it would provide cheaper credit.
Has someone been reading Rothbard? [Thanks Digg]
Monday, January 28, 2008
Fiscal Follies
Christopher WestleyYears of spending, inflating, taxing, and redistributing has left the US economy teetering on a recession that our best and brightest -- meaning the ones who created this mess -- claim requires a multibillion-dollar economic-relief package to quell fears, promote confidence, and spur recovery.
And, one might add, to keep things calm past election time, which is the real purpose of this bipartisan proposal.
It leaves you wondering about what happened to the 1990s boom, a credit-fueled expansion also influenced by a peace dividend. The end of the Cold War produced a floundering federal government that lost its rationalization to grow and found itself unsure of its purpose, thus promoting an era of relative peace and prosperity.
Oh, how things changed in the 2000s, with new monsters to destroy and new justifications for centralized power! FULL ARTICLE
The 'big' house price slump may be upon us
By Angela Monaghan
Roger Bootle, economic adviser to Deloitte and a Telegraph columnist has warned that the "big one", referring to a sharp fall in house prices, may be upon us and that there is a risk the economy will slip into a full-blown recession.
The UK is facing its bleakest period of growth since the recession of the early 1990s. Mr Bootle, who is also managing director of Capital Economics, said that a "prolonged" economic downturn of more than a year may force employers to "wield the axe more sharply than in briefer downturns."
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Roger Bootle, economic adviser to Deloitte and a Telegraph columnist has warned that the "big one", referring to a sharp fall in house prices, may be upon us and that there is a risk the economy will slip into a full-blown recession.
The UK is facing its bleakest period of growth since the recession of the early 1990s. Mr Bootle, who is also managing director of Capital Economics, said that a "prolonged" economic downturn of more than a year may force employers to "wield the axe more sharply than in briefer downturns."
READ THE REST
Government the Destroyer: The Broken Window Fallacy
[This talk was delivered at the 2008 Mises Circle in Houston.]
The claim of the Austrian School that has scandalized members of other schools for 150 years is the following. The propositions of economics are universal. The principles apply in all times and all places, because they derive from the structure of reality and human action.
What brought about economic growth, inflation, or the business cycle in China in 300 BC are the same institutions that drive phenomena in the United States in AD 2008. The circumstances of time and place change, but the underlying economic reality is identical.
That claim has made other economists — to say nothing of sociologists, historians, and politicians — scatter like pigeons. The Historical School poured scorn on this idea, and Carl Menger, the founder of the Austrian School, fought them tooth and nail. The Chicago School of positivists found the claim preposterous, and Mises and Hayek and Rothbard battled them.
The Keynesians have long been outraged, and the postwar Austrian generation reasserted the truth. The socialists, who posit that rearranging property titles will transform all of reality, say that the claim is absurd, capitalistic nonsense.
But there it stands. No matter where or when, the essential prerequisite for economic growth is capital accumulation in a framework of freedom and sound money. The consequence of price control is shortage and surplus. The effect of money expansion is inflation and the business cycle.
The effect of every form of intervention is to make society less prosperous than it would otherwise be. The list of universals is endless, which is why every age needs good economists to explain and articulate the truth.
Well, I would like to add that there are universal fallacies too.
Frederic Bastiat pointed to one: the belief that the destruction of wealth fuels its creation. He explains this by means of an allegory that has come to be known as the story of the broken window. Most famously it was retold as the opening of Henry Hazlitt's Economics in One Lesson, which is probably the bestselling economics book of all time.
A kid throws a rock at a window and breaks it, and everyone standing around regrets the unfortunate state of affairs. But then up walks a man who purports to be wise and all knowing. He points out that this is not a bad thing after all. The man fixing the window will get money for doing so. This will then be spent on a new suit, and the tailor too will get money. The tailor will spend money on other items, and the circle of rising prosperity will expand without end.
What's wrong with this scenario? As Bastiat put it, "It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented."
You can see the absurdity of the position of the wise commentator when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?
It is not a good thing to destroy wealth. Bastiat puts it this way: "Society loses the value of things which are uselessly destroyed."
It sounds like an unexceptional claim. But herein rests the core case against everything the government does. Perhaps, then, we can see why the allegory is not better known. If we took it seriously, we would dismantle the whole apparatus of American economic intervention.
Countrywide Financial Corporation and the Failure of Mortgage Socialism
by Eric Englund
Angelo Mozilo is the Chairman, President, and Chief Executive Officer of the failed Countrywide Financial Corporation. Mr. Mozilo co-founded this company, nearly 40 years ago, in 1969. To be in business for almost forty years, and to become America’s top private home-mortgage lender, are testimonies to genuine business acumen. However, success can breed arrogance, and a sense of supreme power, to the point where a corporate chieftain believes his personal will can override the free market and reshape society according to a grand vision – which, for Angelo Mozilo, entailed making America a better country by bringing home ownership within reach of all and sundry. For Countrywide Financial, unfortunately, Mr. Mozilo’s dream of social engineering demanded that sound credit-underwriting principles be abandoned. And now, Countrywide Financial Corporation’s failure stands as a monument as to how integrating egalitarianism and political correctness, into a business plan, is downright poisonous.
February 4, 2003 marks the day when Countrywide Financial’s shareholders should have dumped every last share of their stock. For on this day Angelo Mozilo made a presentation, at The Joint Center for Housing Studies of Harvard University, titled The American Dream of Homeownership: From Cliché to Mission. This is the day that Mr. Mozilo revealed to the world that political correctness had infected his mind. He openly declared that sound credit underwriting was tantamount to judgmentalism and, therefore, anti-egalitarian. How dare anyone judge anyone else – credit standards be damned. Subprime mortgages, accordingly, were going to be a blessing for America since everyone deserves a house. Oh how political correctness feels so good. He worshiped the mortgage socialism hatched in the New Deal along with every federal-housing program introduced in the succeeding decades. A true credit professional would have been horrified by this speech; which indubitably was met with approving applause by the pseudo-intellectual, limousine liberals populating Harvard University. February 4, 2003 is the day Countrywide Financial’s Board of Directors should have fired Mr. Mozilo.
Over the years, Angelo Mozilo has been handsomely rewarded by Uncle Sam’s mortgage socialism. Here’s how it works. Countrywide Financial makes a conforming home loan, sells it to Fannie Mae or Freddie Mac (both are government sponsored enterprises), and has its coffers replenished in doing so; hence, allowing Countrywide to keep churning out loans. Countrywide, in turn, remains the mortgage servicer on each loan and earns a fee for doing so. These fees most certainly add up when you are servicing $1.5 trillion in home loans (not all of which are Fannie and Freddie loans). Needless to say, Countrywide had other sources of revenues but mortgage servicing was top-shelf when it came to profitability.
Thus, it is no wonder why Mr. Mozilo waxed fondly, in his Harvard speech, regarding America’s foray into mortgage socialism. After all, it made him very wealthy. Here is an excerpt:
Our Nation took another important step in 1938 – in fact, 65 years ago this week – when Fannie Mae was created to buy those FHA loans, and as a result, the secondary mortgage market was born. We took a few more giant steps in the 1940s with the G.I. Bill in 1944 and the Housing Act of 1949, which stated the goal of "a decent home and a suitable living environment for every American family." We witnessed the Fair Housing Act in the 60s, the creation of Freddie Mac in 1970, the expansion of Fannie Mae’s activities, the Community Reinvestment Act in the 70s, the introduction of adjustable-rate mortgages in the 80s, and more recently, the National Affordable Housing Act of 1990.
We have traveled so far – thanks to a mortgage-finance system that remains the envy of the world; thanks to a constant stream of creative and innovative mortgage products, and efforts directed at encouraging the offering of loans to those who have been previously shut out; and simply put, thanks to housing being an enduring public policy objective and the lasting commitment to that objective symbolized by our partnership.
We have transformed from a Nation of renters to a Nation of homeowners. The overall U.S. homeownership rate, which was at 44 percent in 1940, hit 68 percent by the end of the third quarter of 2002.
One can only imagine Mr. Mozilo’s broad smile as he delivered these words. Between his compensation and stock sales, Angelo has made hundreds of millions of dollars. Socialism certainly can be beneficial for an elite few.
Do you remember President George W. Bush’s initiatives to increase homeownership in the United States? His administration definitely played a role in creating America’s housing bubble. When speaking about housing assistance, President Bush evoked the emotion of envy and declared that the U.S. had a "homeownership gap." Angelo Mozilo, being a kingpin of political correctness, couldn’t resist playing the envy-card to an approving Harvard audience. He stated:
It started with the New Deal, and now, we’re in a new century. But through it all, one thing has remained, more or less, constant. This constant is our challenge. And this challenge is to increase the access to affordable housing. And in order to do this, we must close the homeownership gap that still exists.
As President Bush said last October:
"Two thirds of all Americans own their homes, yet we have a problem here in America because fewer than half of the Hispanics and half of the African Americans own their home. That’s a homeownership gap. It’s a gap that we’ve got to work together to close for the good of our Country, for the sake of a more hopeful future. We’ve got to work to knock down the barriers..."
While the number of minority homeowners has advanced recently, climbing from 9.5 million in 1994 to 13.3 million in 2001 – an increase of 40 percent – the fact remains that it is still not at a level equal to that of white homeownership. And as President Bush pointed out, the homeownership rate for African Americans is 47 percent and for Hispanic Americans it is 48 percent, a stark contrast to the homeownership rate of 75 percent for white American households. That means there is currently a homeownership gap of over 25 points when comparing white households with African Americans and Hispanics. My friends, that gap is obviously far too wide. It has been far too wide for far too long. And when adding new factors into the equation – like an influx of new immigrants or continued reduction in the supply of affordable housing – it has the potential to become far worse.
Credit underwriting has nothing to do with race, creed, skin color, gender, or religion. Sound credit underwriting has everything to do with the "Five Cs" of credit – i.e., character, capacity, capital, collateral, and conditions. Under pure capitalism, a credit underwriter is not concerned about making people happy by lending money regardless of a person’s creditworthiness. An underwriter’s primary objective is to make profitable loans and this demands nothing less than effectively assessing risk on a case-by-case basis. This, undeniably, requires underwriters to exercise learned judgment. Ah, but to say this in the cradle of political correctness (Harvard) would have been met with resounding "boos."
To be sure, Mr. Mozilo did not disappoint his fellow limousine liberals. He goes on the attack and smears credit underwriters as being judgmental – the antithesis of political correctness. Considering that Countrywide had become the largest private mortgage lender in the U.S., the following words depict a man who had taken leave of his senses:
I have two issues with our industry’s current underwriting methodology. The first is that the automated underwriting systems kick far too many applicants down to the manual underwriting process, thereby implying these borrowers are not creditworthy; and the second issue is that once arriving in the hands of a manual underwriter, the applicant is subject to basic human judgment that can be influenced by the level of a borrower’s credit score.Let’s address my first issue. I acknowledge that credit scoring uses proven statistical methods to provide lenders with the ability to quantify the risk of extending credit. And there is little question that the technique effectively and efficiently separates those with very good credit from those with questionable credit.However, far too many borrowers are being referred to an arduous manual and cumbersome underwriting process. To me, that is clear proof that the level deemed to be an acceptable risk by our automated underwriting systems is much too high. While many of these borrowers may ultimately be approved, it is because the manual process, or human underwriter, has analyzed non-traditional factors such as the borrower’s rent and utility payment history, which should be imbedded in the automated underwriting process.Now, let me address my second issue, and that is the manual underwriting process itself. While Countrywide’s own internal evidence supports the notion that manual underwriters are approving a good majority of the loan applications that get referred, the fact of the matter remains that a human is involved in this step of the process thereby creating the possibility that a decision is made based upon the level of the borrower’s FICO score.Thus, the current protocol intentionally creates an environment where borrowers with lower FICO scores are subject to being disproportionately affected by the manual underwriting process. I say we need to amend these systems to do more than just approve the "cream of the crop," by creating a system that says "no" only to those deemed unwilling to make their mortgage payments.We must understand that the credit scoring system we have built is still imperfect, and that if we are to have any chance at closing the homeownership gap, we must make a serious investment in improving its capacity and capabilities. We must do this through improved automated underwriting models that take into account more variables, and measure true indicators of risk and willingness to pay. We need an ongoing educational process, not only at the primary market level, but also in the secondary markets and with mortgage insurers to help lead this effort to recalibrate the scoring system. And finally, it must be recognized that borrowers with credit scores below what is currently defined as "creditworthy" levels can still be acceptable credit risks. Thus, the credit score bar dividing creditworthy from high-risk borrowers, must be substantially lowered by the GSEs, the secondary market in general, and with bank regulators. The GSEs have made good progress over the last few years in expanding their credit criteria, but I encourage them to become much more aggressive in this regard.
What Angelo Mozilo desires to accomplish is to replace human underwriters with computers. He never mentions the Five Cs of credit because sound credit underwriting requires human judgment; which can be aided with, yet never replaced by, technology. In Mr. Mozilo’s daffy world of credit progressivism, he may as well distill the mortgage application down to a one-page document containing a single question: Are you willing to make your mortgage payment? If the answer is "yes" then the loan is approved and if the answer is "no" then it is declined. Under such circumstances, a computer would work perfectly.
As I have asserted before, political correctness is an enfeebling infection of the mind. Mr. Mozilo’s vision of politically-correct, and "enlightened," credit underwriting was nothing short of daffy. Yet, one can only imagine how approvingly this pabulum was met by his Harvard chums.
Angelo Mozilo had no intention of disappointing his fellow travelers. There was hope as to closing the homeownership gap. It was something called the subprime mortgage. In his bizarre mind, the more subprime mortgage originations there were, the better off America would be. To wit:
Historically low interest rates along with new, creative and flexible underwriting techniques are continuing to fuel a record period of growth for our industry. According to the Federal Reserve, the amount of overall mortgage debt outstanding is nearly $6 trillion. And, increasingly, the sub-prime market is boosting that number and the industry as a whole. During the first nine months of 2002, sub-prime originations rose an estimated 26 percent over the same period in 2001 – outpacing the overall market.
Had Mr. Mozilo delivered this speech today, he would have immediately been fitted into a straightjacket and then driven to the nearest loony bin.
Countrywide Financial and many other financial institutions ended up throwing all credit standards out the window in order to package and sell as many subprime mortgage-backed securities as possible. To be sure, many did not do so sharing Mozilo’s politically-correct and egalitarian hallucination – they just wanted to make a fast buck.
An important distinction to convey here pertains to the fact that Countrywide and others were not selling all of their loans to Freddie and Fannie. The aforementioned mortgage-backed securities were purely packaged and sold under private labels. When America’s housing bubble was expanding, buyers of such subprime securities obviously felt there was no downside. Such are the delusions that materialize when central bankers flood the world with the opiates of easy money and credit.
Regrettably, by completely ignoring underwriting fundamentals, Countrywide and its ilk have set up so many borrowers for failure (as have the king and queen of mortgage socialism, Freddie Mac and Fannie Mae; both of whom, by the way, may be on the brink of their own financial meltdowns). The pain and anguish of losing a home, and having one’s family displaced, will be visited upon countless families. Of course, such borrowers must look in the mirror when the urge, to pass around the blame, emerges. Nonetheless, Angelo Mozilo’s dream has transmuted into a nightmare for millions.
My, oh my, aren’t political correctness, egalitarianism, and social engineering wonderful? You be the judge.
January 28, 2008
Eric Englund has an MBA from Boise State University and lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. You are invited to visit his website.
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