Daily Digest

Daily Digest - August 31

Monday, August 31, 2009, 9:15 AM
  • Could We Have Another 1987-Like Crash in the Not Too Distant Future?
  • And this is just the beginning. Chairman Ben has yet to be fully unleashed.
  • U.S. Markets Flashing Strong Warning Signals
  • Trained Monkeys for Hire (H/T Investorzzo, Video on page)
  • Dollar Stigma (H/T SaxPlayer00o1)
  • Town Hall Asking About Health Care (Video)
  • Rep. Frank Eyes Fed audit, Emergency Lending Curbs (H/T MachineHead)
  • 90 Day Yields (H/T FamerBrown)

Economy

Could We Have Another 1987-Like Crash in the Not Too Distant Future?

And this is just the beginning. Chairman Ben has yet to be fully unleashed.

U.S. Markets Flashing Strong Warning Signals

This begs the obvious question: if the previous, mind-numbingly optimistic description of U.S. banks mentioned above is accurate, then why are the lawyers for the Federal Reserve vehemently arguing that divulging the emergency lending-activities which these companies participated in a year ago could cause the collapse of these “strong and healthy” banks (see “Federal Reserve Fights Judge to Hide Secrets”)?

Trained Monkeys for Hire (H/T Investorzzo, Video on page)

After the Fed video Mish defines inflation and deflation...

Dollar Stigma (H/T SaxPlayer00o1)

Japan has the world's largest foreign exchange reserves after China. While the currency composition is not known, a large part of its $1 trillion reserves is considered to be in dollars.

About two-thirds of the total is invested in sovereign bonds, the government said last year. In terms of maturity, slightly more than a quarter is in bonds with maturities of five years or longer.

Nakagawa has said he was worried about the future value of the dollar and that Japan should consider asking the U.S. to issue debt in yen as Tokyo should reconsider how it piles up dollar assets.

Nakagawa's comments put the dollar under pressure in May, especially as China had also called for reserve system reform.

But analysts say he will not automatically get the finance minister post if the DPJ wins. Other prominent party officials have played down any sudden changes and say it is in Japan's interest to keep the dollar as the main reserve currency.

Town Hall Asking About Health Care (Video)

Rep. Frank eyes Fed audit, emergency lending curbs (H/T MachineHead)

OCTOBER TARGET

Frank said the audit and emergency lending provisions would be incorporated in broader legislation to revamp U.S. financial regulation that would likely pass the House in October. By seeking a compromise with Paul, Frank could strengthen the broader legislation's chance at passage.

As chairman of the House Financial Services Committee, Frank is a key player in the effort to overhaul U.S. financial regulation.

The Obama administration has proposed giving the Fed responsibility for overseeing firms whose collapse could endanger the entire financial system. At the same time, it wants to strip the central bank of its consumer protection function, and invest that authority in a new agency.

90 Day Yields (H/T FamerBrown)

[Note: the graphic that accompanies this audio piece is a bit over the top.]

11 Comments

Davos's picture
Davos
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Re: Dailt Digest - August 31

While I totally agree with Mish on the definitions of inflation and deflation.

I totally agree with why we are seeing asset prices tank in many sectors vis-a-vis debt destrcution.

Having said that: I do not think he is taking into account that we take in 2 trillion and blow over 4 trillion. No longer can we borrow that difference.

So now "we" print it. WE WILL NEVER EVER BE ABLE TO SERVICE OR PAY THAT DEBT.

That, IMHO will destroy the dollar.

cwixom's picture
cwixom
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Re: Daily Digest - August 31

Inflation is a great way for the government to take your wealth while making you think you have more money.  So this little snip form the RGE Monitor should make you feel good. 

Quote:

In a July 16, 2009, report, Morgan Stanley asserted that the pre-crisis period showed that "stabilizing consumer price inflation does not automatically stabilize asset prices." Moreover, in a June 24, 2009, report, the OECD noted that several nations have hit the zero bound of nominal interest rates, which highlights the shortcomings of the low-inflation-targeting framework. Among the possible options to reduce the downside risks of deflation are increasing inflation targets and "target[ing] a price level path instead of an inflation rate because a credible price-level targeting regime can practically eliminate the risk that policy rates may be constrained by the zero floor."

RedShift's picture
RedShift
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Video of the week: “It ain’t [America] no more, okay?”

See the video and commentary at:

Edit - deleted:  Sorry, I will not allow postings of material that refers to the Healthcare debate in terms of "final solutions" or any of that other scaremongering hyperbole as did the intro card for this one. 

If views cannot be conveyed using facts and logic, then this isn't the place for that material.  There are other places, but this isn't one of them.  

Also, material from overtly or distinctly partisan sources are usually discouraged here unless they manage to maintain a civil and agreeable tone.

Thank you.

- CHM

csadvisor's picture
csadvisor
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Franks Comments Re: Audit the Fed

See Mish's article on what Rep Franks said at the end of his comments about putting the bill to audit the Fed up for a vote

http://globaleconomicanalysis.blogspot.com/2009/08/what-barney-frank-really-said-about-ron.html

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JAG
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Re: Daily Digest - August 31

Davos,

Thanks for that article by Chris Puplava, I think his analysis was well done, and very timely.

Jeff

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Montana Native
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Posts: 162
Re: Daily Digest - August 31

Thanks for the link concerning the DPJ and the dollar. I have been looking for an article like this for a day or two.

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MikeJE
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China Trouble?

From Timesonline UK

 

Share prices in Shanghai slumped by 7 per cent yesterday amid fears that the “China effect”, which has helped to stoke growing global economic confidence in the past six months, is about to fizzle out.

The stampede out of shares came amid reports that the authorities in Beijing may be planning to protect state-run companies from their trading mistakes by allowing certain companies to default on derivative contracts struck for oil, coal and other commodities.

The massive stock plunge, which was driven chiefly by Chinese retail investors, also reflected concern that coming days will bring a litany of disappointment through official economic statistics. The slowing of bank lending and stimulus measures, some analysts warn, may show that the Chinese recovery has become an “unsustainable paradigm”.

“China is saving itself, not the world, even though it is aiding some economies at the margin,” Patrick Bennett, a Société Générale strategist, said. “Any risk appetite and investment in positions which have been based in the notion of China as the world’s saviour have been, and remain, ripe to be unwound.”

The gloomier sentiment reverberated round Asian and Western exchanges. Although London was closed for the Bank Holiday, shares on Wall Street declined, the Dow Jones industrial average falling 47.92 points to 9,496.28. Resources and consumer goods stocks slid and the oil price was marked down below $70 a barrel.

Fears over the demise of the “China effect” may already be starting to have an impact outside the Middle Kingdom, Tokyo Mitsubishi UFJ analysts said. Sharply falling Chinese imports of copper and coal have begun to take their toll on one of the most accurate gauges of global trade — bulk shipping rates. Analysts believe that the benchmark rate could plunge 50 per cent between now and the end of the year. The Baltic Dry Index, which has rallied strongly this year from its 2008 collapse, is expected to follow suit.

Shipping brokers in Singapore said that alarm was now returning to the market after China’s all-powerful State Council declared that it was studying the issue of overcapacity in the steel and cement sectors. That was seen as a signal that the roar of raw material imports may be muted to a low purr.

Rumours began circulating over the weekend that the Chinese regulator in charge of state-owned enterprises was considering giving certain companies — mainly airlines, steelmakers and other big users of derivative products — the unilateral right to default on those contracts.

The gambit would leave dozens of banks and brokerage firms that acted as counterparty to those derivatives contracts out of pocket. It is believed to be a response to huge losses incurred by Chinese companies as hedge books turned sour this year. Banking sources in Shanghai described the rumours as “puzzling and very disturbing if true” because of the implication for thousands of legally binding contracts struck worldwide with Chinese companies.

Potentially a source of massive disruption throughout derivative, forex and commodity markets, a state-sponsored default would be “unthinkably bad for the reputation of China Inc”, a senior banking official in Singapore said.

Chinese industrial profits in the first seven months of the year were 17.3 per cent lower than over the same period in 2008, according to official data.

Qian Wang, a JPMorgan economist, remained optimistic. “We believe that the plunge since early August, after the 103 per cent gain since late 2008, was likely triggered by excessive fears of aggressive policy tightening, while the fundamentals remain intact,” he wrote in a research report.

Causes for concern

The suggestion that Chinese firms could walk away from loss-making derivatives positions with foreign banks is not the first time that China has rattled Western companies in recent months

The arrest of four Shanghai-based executives of Rio Tinto on industrial spying charges after the high-profile collapse of Rio’s deal with the Chinese group Chinalco is viewed as political

After the implementation of new anti-trust legislation last year, China blocked a move by Coca-Cola to buy the local juice maker Huiyuan — a much-loved Chinese brand

Rules requiring foreign companies to disclose in detail how exports to China are made are to be strengthened. Beijing recently threatened to add IT and software to the list, sparking alarm in Japan and the United States

Davos's picture
Davos
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Re: Daily Digest - August 31

Another official of character.

Green slime comes to mind.

Paulson told this person (who is writing a biography, apparently) that he intended to use the TARP money to inject into the banks and not buy toxic assets a full ten days before he testified before Congress

Watch the above - six minutes and worth every bit of it.

From that interview (specifically, at 3:20 in):

Paulson told this person (who is writing a biography, apparently) that he intended to use the TARP money to inject into the banks and not buy toxic assets a full ten days before he testified before Congress.

He then testified before Congress to exactly the opposite.

This is about as clear an allegation of perjury (which, by the way, we've heard before - remember Kashkari making essentially the same allegation in his Congressional testimony?) as I've seen.

Now the questions:

I just watched the video, my night is complete, Dennis Kneale is in there cheeleading Paulson. Un-belive-able!!!

capesurvivor's picture
capesurvivor
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Re: Fascinating

I don't know where to put this, Davos, so I'll let you decide.

  DownsizeDC.org - "How can legal tender be illegal?" 08/27/09

................................................................................................................................................................

The government called three accountants to testify. The defense asked each one, “What is the proper way to calculate income for purposes of the Internal Revenue Code if you are paid in a gold coin that has a $50 face value on it?” All three of them responded, “I do not know; I’ll have to research that.” — Mike Zigler, reporting on the 2007 case against Robert Kahre that ended in a hung jury.

Robert Kahre is facing up to 296 years in prison. His crime? He hired workers on mutually-agreed terms, and paid them in gold and silver dollars rather than in Federal Reserve dollars.

First, some background . . .

* The face value of the U.S. Mint’s gold and silver coins are legal tender, meaning they must be accepted in payment of debt
* But a Gold Eagle coin that has “$50? printed on it is legal tender only up to $50, while its gold content is worth about $1,000 in Federal Reserve notes
* No law or IRS regulation requires that receivers of Gold Eagles and other U.S. Mint coins must report the market value of the coins instead of the legal tender value

After extensively researching the issue, Kahre . . .

* hired workers as independent contractors, so he would not pay the payroll tax for their labor
* paid them in gold and silver coins, whose face value – that is, legal tender value – was so low that the workers legally didn’t have to report it as income to the IRS

For instance, if a worker was annually paid in gold coins with a legal tender face value of $2,000, the market value of the gold content in those coins could be $40,000, but only the legal tender face value of $2,000 would theoretically count as taxable income. That face value of $2,000 is low enough to be non-reportable to the IRS. But . . .

Even though the coins Kahre used were legal tender, the Justice Department alleged that Kahre’s system was a fraudulent, tax-evading scam.

We agree with Jacob Hornberger who asserts that the federal government’s prosecution of Kahre is self-contradictory . . .

* if you owe $100 in taxes and pay with gold coins with face values totalling $100, the IRS will accept the payment as $100; it could then sell the coins on the market for twenty times that amount and keep the difference. The government will accept your payment as “legal tender.”
* but if YOU receive gold coins from someone else in a private transaction, the IRS says you must report the market value of the coins, not the face value. That is, YOU CANNOT TREAT THE COINS AS LEGAL TENDER.

The government fears that if more people took the law at its word and behaved like Kahre . . .

* people would demand payment in the Mint’s gold and silver coins and have far fewer reportable “dollars” in income, meaning fewer people would pay income taxes
* the market would soon prefer the coins produced by the Treasury Department’s Mint that are regulated by law – not the inflated dollars created by order of the independent Federal Reserve Board
* good money (gold and silver) would drive out the bad (paper Federal Reserve Notes and electronic keyboard strokes), whereas the federal government needs inflated, deficit-driven money to pay for its endless wars, failed welfare schemes, and expanding police state

No wonder the government views Kahre as a threat, and is willing to made a mockery of its own legal tender laws to destroy him!

DownsizeDC.org, however, believes Kahre was on to something. That’s why we endorse the “Honest Money Act,” which would repeal the legal tender law that gives the Federal Reserve a monopoly over the money supply. This bill, along with the “Tax-Free Gold Act” and the “Free Competition in Currency Act,” is a plank in our End the Inflation Tax Campaign.

Repealing the legal tender law would foster the creation of HONEST free market money, and protect people from the Federal Reserve’s endless onslaught of legalized counterfeiting, which constantly reduces the value of your money.

Tell Congress to pass the bills in our End the Inflation Tax Campaign.

........................................................................................................................................................

http://libertymaven.com/2009/08/27/how-can-legal-tender-be-illegal/7031/ 

 

 

Damnthematrix's picture
Damnthematrix
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Bombshell from my Australian forum

This seems like a pre-emptive strike on Wall St. China knows the US will effectively default on its T-bonds, and is not going to play their game.

While it is a bit disturbing to have contract law torn up, the likes of Goldman Sachs et al operate as an illegal price-rigging insider-trading cartel and are getting what they deserve.

"OTC" stands for Over The Counter derivative ie a contract (based on the price of an underlying commodity) that is not traded on an exchange or thru a clearing-house, but is purchased directly "over the counter". There are literally tens of trillions of these OTC derivatives outstanding, they are completely unregulated, no-one knows their true value, have been created to suppress prices in league with the US govt and are the financial equivalent of nuclear weapons.

Alex
____________________________
From commentator Jim Sinclair
http://jsmineset.com

China tells the Wall Street OTC derivative manufacturers and distributors to go straight to hell.

China has invoked a "Stop Loss" on these fraud ridden instruments.

If you create a specific performance contract that you know under even the slightest pressure cannot perform, you have committed fraud.

My English bull dog Mia, bless her soul, figured out the non-performance characteristics of these financial WMDs.

This will have a MAJOR impact on the sociopath US manufacturers and distributors of OTC derivatives like CDSs that struck the world over with these weapons of mass financial destruction.

This could roll the financial world one more time. Doing the right thing is never easy. Doing the right thing takes character and courage. The Chinese are doing exactly the right thing and exactly what the West should have done years ago when long term capital flopped.

Now the rest of the BRIC nations will follow suit.

China's actions here are another reason why China is headed for the largest economy on the planet.

While the West enriches the creators of this disaster, China herein tells them, to go straight to hell, and that they will not get their money to enrich themselves more. China has invoked a "Stop Loss."

Here is an example of how China will act with regards to the dollar late this fall. You can take that to the bank if you can find a solvent one in the USA, GB or Euroland.

The Wall Street types who are talking heads surmise that China thinks and will act like the Wall Street Weenies. They are so very WRONG.

Screw with China and you will get bitten in the ass by a real dragon. China leads the BRICs.

This will have a MAJOR impact on the sociopath USA manufacturers and distributors of OTC derivatives that struck the world over with these weapons of mass financial destruction, enriching themselves in the process by many trillions.

If China's banks were the losers on these instruments then the winners, now not getting paid, are the sociopath USA manufacturers and distributors of OTC derivatives. These instruments were not created between Chinese banks, but made and packaged primarily in the good old US of A. Think it out. This is a stop loss for the Chinese.

I was correct 10 years ago when people denigrated me. I am correct on the price of gold as people still denigrate me.

I will have the last word with all these jealous fools.

Respectfully yours,
Jim

________________________________________________
China warns banks on OTC hedge defaults -report
Sat Aug 29, 2009 9:47am IST

BEIJING, Aug 29 (Reuters) - Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial
magazine said.

China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying.

It did not name the banks or the firms in question, but said Keith Noyes, an official with the International Swaps and Derivatives Association, had confirmed he was aware of the letter to the banks. He declined to comment further to Caijing.

It also cited a SASAC official as saying that almost every SOE involved in foreign exchange or trade had some exposure to derivatives such as crude oil, non-ferrous metals, agricultural commodities, iron ore and coal, although only 31 SOEs were licensed to do so.

Nobody at SASAC was immediately available to comment on Saturday.

SASAC took over the job of overseeing SOEs' derivatives trading from the securities regulator in February after several Chinese firms reported huge losses from derivatives, and quickly tightened the rules, ordering firms to quit risky contracts and report their positions on a quarterly basis.

More...
http://in.reuters.com/article/oilRpt/idINPEK33016020090829

________________________________________________
UPDATE 1-Beijing's derivative default stance rattles banks Mon Aug 31, 2009 7:42am EDT
By Eadie Chen and Chen Aizhu

 BEIJING, Aug 31 (Reuters) - A report that Chinese state-owned companies will be allowed to walk away from loss-making commodity derivative trades provoked anger and dismay among investment bankers on Monday as they
feared it may set a damaging precedent.

The State-owned Assets Supervision and Administration Commission, the regulator and nominal shareholder for state-owned enterprises (SOEs), told six foreign banks that SOEs reserved the right to default on contracts,
Caijing magazine quoted an unnamed industry source as saying in an article
published on Saturday.

While the details of the report could not be confirmed, it was Monday's hot topic in financial circles from Shanghai to Singapore as commodity marketers feared that companies holding underwater price hedges could simply renege on the deals, costing banks millions of dollars in profit.

The warning from SASAC follows a series of measures from Beijing this year to crack down on the sale of derivative products by foreign banks to Chinese enterprises, principally big consumers, who bought protection against higher prices last year only to watch the market collapse -- leaving them with losses.

While many companies including top airlines have come clean on the losses, some analysts fear another wave may follow.

More...
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSSP4732
7420090831?pageNumber=2&virtualBrandChannel=11604

Davos's picture
Davos
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Posts: 3620
Re: Fascinating

Hello CapeSurvivor:

I read that not too long ago. I think he may have some issues with minimum wage if they stick by the face value part. Pretty amazing, take care 

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