Daily Digest

Daily Digest - June 11

Thursday, June 11, 2009, 10:03 AM
  • Bank-run dark pools swelling in U.S. stock markets (H/T PineCarr)
  • BRIC Countries Kick Sand in the Face of 98-pound-weakling US Dollar (MachineHead Masterpiece)
  • Week #23, Bank Failure #37
  • Fantasy (Fidelity Speak) Translated Into Reality, from Biiwii.com Fidelity: Will Bond Yields Derail the Rally?
  • Lessons from Argentina's economic collapse (H/T iDoctor)
  • Big government spending programs having opposite desired effect...
  • Canadians: Real Estate for sale for less than a new car
  • Interest Rates and Equities Diverging
  • Hotel Owner "Walking Away"
  • The Team Obama Con Game Gets Official Notice
  • More on What the Consumer Is Up To

Economy

Bank-run dark pools swelling in U.S. stock markets (H/T PineCarr)

TORONTO (Reuters) - Big banks are executing an increasing percentage of U.S. stock trades within their own walls, capitalizing on the credit crisis and enticing the most active traders away from the traditional exchanges.

"Dark pools," where orders are anonymously matched so that traders do not alert the wider market to their intentions, have triggered concerns that stock pricing may not be transparent.

But the growth of those run by broker-dealers such as Goldman Sachs and Credit Suisse are squeezing other "dark" electronic trading venues, as well as exchanges, resulting in lower fees. [When everyone tries to be a crook, being a crook becomes less profitable]

The bank-run dark pools have only recently gained some traction in Europe, while other countries, such as Canada, are watching closely for signs of success or failure as U.S. equity markets fragment into some 40 venues. [Notice Canada NOT allowing dark pools.]

Although executives and market watchers expect to see new U.S. rules to ensure public and accurate pricing of stocks, they also expect the private pools to grow beyond the relatively small niche they now occupy.

"The dark pools are definitely going to grow; the wild card is any new regulation [dark pools unstated primary purpose is insider trading, and insider trading does not coexist well with regulation. In other words, if dark pools are effectively regulated, they will disappear.]," said Dmitri Galinov, director and head of liquidity strategy at Credit Suisse's advanced execution services, running the bank's CrossFinder dark pool.

Banks' internal dark pools have benefited from Regulation NMS, rules enacted in the last few years to help investors get the best price [the passage of Reg NMS extended the trade-through rule to all US exchanges that trade equities—including the NYSE (New York Stock Exchange), Nasdaq and AMEX (the American Stock Exchange). It was the most sweeping and controversial change to US markets in 30 years, and made manipulating all US exchanges far easier], and from the pricing of stocks in smaller increments, known as decimalization.

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 BRIC Countries Kick Sand in the Face of 98-pound-weakling US Dollar (MachineHead Masterpiece)

Well, there they go again, as Ronald Reagan used to say. The Russians, that is, sniping at our powerful, globally-respected currency. Get a load of this commie carping --

June 5 (Bloomberg) -- Russian President Dmitry Medvedev questioned the U.S. dollar’s future as a global reserve currency and said using a mix of regional currencies would make the world economy more stable. The dollar “is not in a spectacular position, let’s be frank, and its prospects cause various questions as do the prospects for the global currency system,’’ Medvedev, who today hosts an international economic forum in St. Petersburg, said in an interview published by the Moscow-based Kommersant newspaper.

A new world currency may be on the agenda when Medvedev meets counterparts from Brazil, India and China on June 16 at a summit in the Ural Mountains city of Yekaterinburg, the Kremlin said this month. “This idea has potential, even though some of my G-20 colleagues aren’t actively discussing it at the moment,’’ Medvedev told Kommersant. “However, for example, in the opinion of our Chinese colleagues it is quite a possible step. The most important thing is not to walk away from discussions on this topic.’’

Turning the ruble into a reserve currency is still a possibility, especially if some of Russia’s partners start making payments for their oil and gas in rubles, Medvedev said. Russia might consider setting up ruble-yuan swap positions similar to the recent accord suggested between China and Brazil, he said.

Kidding aside, let's examine some facts. At 2.85 billion, the population of the BRIC countries is more than nine times higher than that of the U.S. Their combined GDP is slightly larger, too.

Currently, the English-speaking financial centers of New York and London have carved out a role for themselves as global cross-rate middlemen. If you want to exchange rubles for yuan, typically you must do back-to-back transactions -- rubles to dollars, then dollars to yuan. Forex dealers love the fat spreads and dual commissions.

If the BRIC countries decide to walk away from this exploitative, anachronistic scam, there won't be a damned thing that the Anglosphere can do about it.

More significant than the eroding economic leadership of the U.S. is its eroding intellectual leadership. Bretton Woods I, circa 1944, was an Anglo-American production. Bretton Woods II, circa 1971-1973, was an abortion caused by U.S. default on its promise to redeem overseas dollars for gold.

Now, virtually all innovative thinking on global monetary reform comes from the BRIC countries, while Anglo-Americans stand by sucking their thumbs, navel-gazing, and tweaking their high-speed presses. Does the unmerited privilege of seignorage make you poor and stupid? The evidence points that way, comrades.

 Week #23, Bank Failure #37

Bank of Lincolnwood, Lincolnwood, Illinois, was closed today by the Illinois Department of Financial and Professional Regulation, Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Republic Bank of Chicago, Oak Brook, Illinois, to assume all of the deposits of Bank of Lincolnwood.

Bank of Lincolnwood's two offices will reopen on Saturday as branches of Republic Bank of Chicago. Depositors of Bank of Lincolnwood will automatically become depositors of Republic Bank of Chicago. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until Republic Bank of Chicago can fully integrate the deposit records of Bank of Lincolnwood.

Over the weekend, depositors of Bank of Lincolnwood can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of May 26, 2009, Bank of Lincolnwood had total assets of approximately $214 million and total deposits of $202 million. Republic Bank of Chicago agreed to purchase approximately $162 million in assets. The FDIC will retain the remaining assets for later disposition.

...

The FDIC estimates that the cost to the Deposit Insurance Fund will be $83 million. Republic Bank of Chicago's acquisition of all the deposits was the "least costly" resolution for the DIF compared to alternatives. Bank of Lincolnwood is the 37th FDIC-insured institution to fail in the nation this year and the sixth in Illinois. The last bank to fail in the state was Citizens National Bank, Macomb, on May 22, 2009.

Fantasy (Fidelity Speak) Translated Into Reality, from Biiwii.com Fidelity: Will Bond Yields Derail the Rally?

Up until the past two weeks, the Federal Reserve, in its extraordinary efforts to push down mortgage rates to help the housing market, had kept a lid on long-term market rates by purchasing Treasurys. But this effort has led to concerns among some investors that this monetization of debt could lead to higher inflation down the road. --Not only 'could' it lead to inflation down the road, the monetization of debt is mainlining inflation right into the veins of FrankenConomy. It is inflate or die, but then, some dark recess of your soul knows that, doesn't it? But let's keep it sanitary for Fidelity's clients.

Lessons from Argentina's economic collapse (H/T iDoctor)

Editor's note: the article that follows is a very sobering account of the effect that the collapse of the Argentine economy (1999 - 2002) had on its citizens, as seen through the eyes of one of them. The economic collapse wiped out the middle class and raised the level of poverty to 57.5%. Central to the collapse was the implementation of neo-liberal policies which enabled the swindle of billions of dollars by foreign banks and corporations. Many of Argentina's assets and resources were shamefully plundered. Its financial system was even used for money laundering by Citibank, Credit Suisse, and JP Morgan (sound familar?). The net result was massive wealth transfers and the impoverishment of society which culminated in many deaths due to oppression and malnutrition. I am not sure the same thing is about to happen here, but I am sure that there is a distinct possibility that it might. Just food for thought - JSB)

Wednesday, 13 December 2006

For western countries such as the UK, the first major problems of Peak Oil, assuming there are no oil shocks, will not be the shortage of oil but the economic crises that will occur. Argentina is a recent example of a country that suffered a serious economic crisis, and although Argentina and the UK are not identical, anyone interested in how economic crises can affect individual lives will be very interested in the following vivid description of life for an Argentinian following the economic collapse.

My brother visited Argentina a few weeks ago. He's been living in Spain for a few years now.

Big government spending programs having opposite desired effect...

NEW YORK (AP) - The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.

But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.

That's the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk. Kick-starting the economy requires higher spending, but rising rates mean fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won't be able to afford.

To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.

Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.

"If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity," said economist Ed Yardeni, who runs his own investment firm. "Even worse, they could abort any necessary recovery in home sales and prices."

Yardeni coined the term "bond vigilantes" in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn't doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time.

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Canadians: Real Estate for sale for less than a new car

WINDSOR, Ont. - Real estate prices in Windsor-Essex are dropping lower than what it would cost to buy a new car.

Mark Imeson, president of the Windsor-Essex County Real Estate Board, says he has seen houses selling for just $25,000. He blames the low prices on the rising number of so-called power-of-sale properties, which have been taken back by the bank and turned over to the Canada Mortgage and Housing Corp. for sale.

Imeson says some houses are selling for what the lot alone is worth.

He says last month, the majority of real estate sales in Windsor-Essex were for less than $100,000.

But he also says the lower prices could be a catalyst for people thinking of moving into the area.

Interest Rates and Equities Diverging…

This is no typical recession. That average is found by looking at the Great Depression, the collapse of the Nikkei in 1980, and the collapse of our Nasdaq in 2000. Two and a half years from October of 2007 brings us to April 2010, plus or minus. It is my judgment that the fundamental conditions have not improved, but have in fact worsened. The underlying debt has gone largely without default and new debt is being added to the Federal Government like crazy… as in insane (what I call “Economic Mass Psychosis… (EMS – silent P) ” .

Because no REAL solution to the debt problem has been implemented, we are likely to encounter even more severe problems in the future.

We descended into the 666 SPX low in what many Elliot Wave (EW) experts (like McHugh and Caldaro) are calling the larger Wave A. They believe, and I am not one to argue, that we are currently in wave B up – the eye of the storm.

EW technicians are NOT always right, and if you review my article from this past January entitled, “Wave B... What a Wonderful World!” you will see that they believed at that time that we were in wave B but they now believe that was wave 4 and it was wave 5 that took us into the 666 low. Of course they could be totally wrong about that, it’s still just one possibility. If they are correct and this is wave B up, then wave C down – the devastating leg down – is still to come.

This chart from that article shows a typical bear market in Elliott Wave terms. You can see that I was thinking we were either in wave 4 or wave B - turns out we were probably in 4 and are likely in wave B now:

Hotel Owner "Walking Away" 

"At some point, you just stop the bleeding and hand the keys back." - John Arabia, an analyst with real estate research company Green Street Advisors

Sunstone Hotel Investors Inc. intends to forfeit the 258-room W San Diego to its lenders after its efforts to reach a compromise on the luxury hotel's $65 million securitized mortgage failed.

Sunstone ... bought the W for $96 million in 2006 ... Sunstone estimates the W San Diego is worth much less than the $65 million balance on its mortgage. At the end of last year, the hotel posted an occupancy of 69% and generated revenue per available room of nearly $153.
Much less than $65 million? That means the price has probably fallen 50% or more since 2006.

The Team Obama Con Game Gets Official Notice 

It has been noteworthy that some formerly more balanced outlets have swung to at least a high proportion of cheerleading headlines, in particular Bloomberg and the Financial Times (although with the FT, one might argue that it is attempting to cater to a US market).

But if one was paying only a teeny bit of attention, it would be hard to miss the persistent, nay insistent efforts of the officialdom to put the best possible spin on matters economic. The very fact that Geithner said not more than once that the stress tests were about restoring confidence was such a brazen admission as to be breathtaking. But on another level, it was spin within spin, since the idea that the authorities would openly talk of the tests as a ruse to restore confidence (which is what predetermining the answers, as Geithner also did) is tantamount to saying the skeptics are all wrong, and all we need to do is drown them out for saner heads to prevail.

While the "nary a bad word will be said", or to the extent it is, it is countermanded by an even more positive take, has gotten some notice in the MSM. But I cannot recall anyone taking issue with it frontally. So an article today in the New York Times, "The Economy Is Still at the Brink" by Sandy Lewis and William Cohan, is a badly needed contribution:

President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible...

Mr. Obama thinks that the way to revive the economy is to restore confidence in it. If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we’ve learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy.

Yves here. Put more simply, confidence is a necessary but not sufficient condition for recovery. Indeed, many readers have argued that boosterism will backfire when the policy measures come up short. This is, as we have said repeatedly, an effort to restore status quo ante rather than deal with serious, deeply rooted problems.

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More on What the Consumer Is Up To

Whether or not the current unraveling turns out to be a modern day version of the Great Depression -- which I've argued against because, among other reasons, the policy responses we've seen so far and those I expect to see in future point to another sort of unhappy ending -- spending won't fall to zero. People will still need to eat, put a roof over their heads, find clothes to wear, etc.

Given that, I try to help visitors to Financial Armageddon -- especially those who are investors or who make key business decisions -- keep tabs on what Americans are or are not doing with their money. Recent examples of posts on this subject include "Where the Axe Is Falling," "Green Shoots in Escapism," and "Proving Me Wrong" -- as well as the one you are reading now, which highlights an interesting New York Times article entitled "The Recession, Wal-Mart Style":

With the recession in its 18th month and unemployment now topping 9 percent, even semi-conspicuous consumption is a distant memory. Consumers are hunkered down. But when they do venture out, chances are they’re on their way to places like Wal-Mart and other big discount chains.

“Our sales — it’s like holding up a mirror to our society,” said John E. Fleming, the chief merchandising officer for Wal-Mart, the nation’s largest retailer.

So what are Wal-Mart, with 4,100 stores across the country, and other major retailers seeing?

Less browsing in the aisles, for one thing. Consumers now are “very disciplined in terms of making sure that they don’t go beyond what they have on their lists,” Kathryn A. Tesija, Target’s executive vice president of merchandising, told investors recently.

Food, of course, is high on those lists (discretionary items like clothes and furniture are not). But consumers are cracking their wallets only so far. Many are trading down to private label groceries. At Wal-Mart, sales of refrigerated pizza were up last month compared with a year ago. Lower grades of meat are outselling the higher-grade, pricier cuts. A recession protein hierarchy has emerged, with ground beef trumping steak, and chicken trumping beef. Some consumers are forgoing protein altogether, opting for pasta.

“We’re seeing a movement away from protein into carbohydrates,” Mr. Fleming said. “It stretches the dollar a lot further.”

Retailers generally don’t divulge details of their sales by category of goods. But they were willing to discuss trends. One stood out: consumers are discovering there’s no place like home.

“This whole idea of staying home and entertaining at home, we’re seeing that everywhere,” Mr. Fleming said, “from the ‘take and bake’ pizza to the $5 movies.” Ms. Tesija noted that “sales of popcorn poppers and microwave poppers are very strong.”

Retailers say consumers are trying to make being cooped up as painless as possible. Mr. Fleming said that would explain why even in this economy, sales of flat-panel and high-definition televisions at Wal-Mart are strong. After all, the retailer’s $378, 32-inch RCA LCD television is more affordable than a vacation. (Which may be why retailers like Macy’s say luggage sales are among their weakest categories.)

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21 Comments

Skyblue's picture
Skyblue
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Re: Daily Digest - June 11

http://www.asianews.it/index.php?l=en&art=15456&size=A

 

 

US government securities seized from Japanese nationals, not clear whether real or fake
Bonds worth US$ 134.5 billion are seized. This is the largest financial smuggling case in history. But are they real? Concern over ‘funny money’ or counterfeit securities is spreading in Asia. The international press is silent. Quote:

Italian authorities have not yet determined whether they are real or fake, but if they are real the attempt to take them into Switzerland would be the largest financial smuggling operation in history; if they are fake, the matter would be even more mind-boggling because the quality of the counterfeit work is such that the fake bonds are undistinguishable from the real ones.

What caught the policemen’s attention were the billion dollar securities. Such a large denomination is not available in regular financial and banking markets. Only states handle such amounts of money.

The question now is who could or would counterfeit or smuggle these non-negotiable bonds.

In order to stop money laundering Italian law sets a ceiling of 10,000 euros per person for importing or exporting money without declaring it. The penalty for violating the law is 40 per cent of the money seized.

If the certificates were real, for Italy it would be like hitting the jackpot. The fine alone would amount to US$ 38 billion, five times the estimated cost of rebuilding quake-devastated Abruzzi region. It would help Italy’s eliminate its public deficit.

 

 

 

paranoid's picture
paranoid
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Re: Daily Digest - June 11

Davos did you see this yet?

http://www.moneyandmarkets.com/the-biggest-victim-of-the-debt-crisis-34125

The Biggest Victim of the Debt Crisis

Martin D. Weiss, Ph.D.

Just as we’ve been warning, the United States Treasury is the next and largest victim of this great debt crisis.

Right now, the Treasury’s finances are collapsing … its bond prices plunging … its interest rates surging.

Indeed, the Treasury’s financial crisis looms so large, it could wreck more havoc on the economy and deliver more pain to average Americans than the subprime mortgage disaster, the housing bust, the banking crisis, and the collapse of General Motors put together …

It could create a rising tide of interest rates that wipes out the effects of any stimulus, undermines any recovery, and sabotages any new bailouts …

But unlike GM, Fannie Mae, Citigroup, AIG, and the many others that the U.S. Treasury has bailed out in recent months, there is no institution on the planet big or rich enough to bail out the U.S. Treasury itself.

Further, unlike all prior episodes in this great debt crisis, the Treasury’s financial troubles cannot be covered up, papered over, or kicked down the road like an empty tin can.

T-bond prices are plunging!

Already, Treasury bond prices are crashing, and doing so with greater speed that at any time in history.

Already, interest rates, which automatically go up when bond prices fall, are surging, with the rate on 10-year U.S. Treasuries nearly DOUBLING in a half year — the most dramatic surge during any recession since the founding of the Republic.

And already, the interest rates on 30-year fixed mortgages, auto loans, commercial loans, and other debt are going through the roof.

This Is a Game Changer!

If you’re not paying attention to this new phase of the debt crisis, you’re making a grave error. And if you’re not taking swift action to protect yourself, you’re taking your financial life in your hands.

In this issue, I’ll show why it’s going to get worse, why the Federal Reserve is powerless to stop it, how it will impact each major sector of the economy, and what you must do immediately to protect yourself and your family from the inevitable fallout.

Why This Is Just the Beginning of the Treasury’s Crisis.
Why It’s Going to Get a Heck of a Lot Worse This Year.
And Why It Could Continue for Years Beyond 2009.

It’s widely known that America’s federal deficit is out of control.

But so many dire deficit warnings have been issued so often, they now fall mostly on deaf ears. Wall Street pundits roll their eyes. Washington politicians laugh at those who would cry “wolf.”

What they don’t realize is that this time, due to a series of devastating facts they’ve chosen to ignore, the day of reckoning is here:

Fact #1. Sheer size. According to the government’s official estimate, the federal deficit for fiscal year 2009 will be $1.84 trillion, or 13.4 percent of GDP!*

It is the worst deficit in U.S. history.

It means the deficit has now exploded to a level which is so far beyond the range of anything we’ve experienced before, it’s impossible to imagine any scenario in which it does not have a devastating impact.

Fact #2. The actual deficit could be much larger. The administration’s $1.84 trillion deficit forecast presupposes a dramatic turnaround in the economy, which, by definition, is virtually impossible with the government running trillion-dollar deficits!

How can the administration possibly predict an economic turnaround when its own Treasury Department is sucking nearly $2 trillion in funds out of credit markets — the same credit markets that derailed the economy late last year?

Similarly, how can the government predict a turnaround when its own borrowing frenzy is already driving up mortgage rates and undermining real estate, the one sector that’s most responsible for the economy’s decline in the first place?

Fact #3. No end in sight. Since the United States declared its independence nearly 233 years ago, the only time the federal deficit approached or exceeded 10 percent of GDP was during major wars — the Civil War, World War I, and World War II. But in each case, the deficit financing began promptly — and ended promptly — with the war.

Unfortunately, that’s not the case this time. Although the U.S. is fighting wars in Iraq and Afghanistan, their cost represents only a small fraction of the budget shortfall. Even if the Iraqi and Afghan wars could be ended tomorrow, America’s great budget crisis would still be just beginning.

Worst U.S. Deficit in History

Fact #4. Today’s deficits are far worse than those of the Great Depression. America’s first big, multi-year peacetime deficits came in the 1930s. Tax revenues plunged with the sinking economy. And in the years that ensued, government expenditures — mostly for a series of programs to bail out the economy — went through the roof.

But even with a 90 percent collapse in the stock market in 1929-32 and even after three years of double-digit GDP declines that make today’s look mild by comparison, the federal deficit in 1933 was just 3.27 percent of GDP, less than one-fourth of what’s projected for this year.

And subsequently, even when the U.S. government embarked on the most ambitious stimulus and bailout programs of its 150-year history, the biggest single deficit — in 1936 — was 4.76 percent of GDP, only about one-third the size of today’s.

Fact #5. Structural deficits. Our nation’s second encounter with giant peacetime deficits was in the 1980s, but with a big difference: This time, there was no Great Depression. This time, the government’s fiscal woes were mostly structural — deeply ingrained in the bloated size of government and in our society’s dependence on government for much of its sustenance.

And even then, the federal deficit never rose to more than 5.63 percent of GDP, less than HALF its size today.

The big difference today: Our current structural deficits are far larger than in the 1980s because the government is now liable for $65 trillion in future payments for Social Security, Medicare, government pension benefits, and other obligations that are now kicking in at a quickening pace.

Fact #6. Massive new commitments. Beyond the $1.84 trillion of red ink projected for 2009 and beyond the trillions more in future obligations, the U.S. government has just assumed responsibility for nearly $14 trillion in new loans, commitments, and guarantees to bail out brokers, banks, insurers, auto makers, and the broader economy.

If just one of these suffers greater-than-expected losses, we could see wave after wave of new demands on the government to honor its guarantees, bloating the deficit far further.

Why the Federal Reserve Can’t
Stop Treasury Bonds from Falling

I can assure you, it’s not for lack of trying.

In a massive attempt to boost Treasury bond prices launched March 25, the Fed has now bought $145.5 billion in Treasury notes and bonds, the most ever in such a short period of time. But despite all the Fed’s buying, T-bond prices have continued to plunge and interest rates have continued to surge.

Plus, in an even larger effort to support mortgage prices — and to suppress mortgage rates — the Fed has poured a whopping $507 billion into direct purchases of mortgage-backed securities (MBSs). But again, even after spending more than a half trillion dollars to bid them up, mortgage prices have still collapsed and rates have still surged.

In sum, the U.S. Federal Reserve has failed to stop this new phase of the crisis, and one of the key reasons is obvious:

To buy bonds, the Fed must print money. But the more it prints, the more it fans inflation fears and the more it chases away bond investors, who realize they’ll be paid back in cheaper dollars.

Some pundits seem to think the Fed can simply print all the money it wants to finance the massive deficits. But in the real world, it doesn’t work that way.

The reason: As I explained last week, the government has not one, but TWO debt problems simultaneously:

A. The NEW debt problem: Massive Treasury borrowings of close to $2 trillion just to fill the gaping holes in the current federal budget.

B. The OLD debt problem: $14.5 trillion in Treasury securities, government agency securities, and MBSs outstanding.

The problem: If just 10 percent of those are dumped on the market, it would trigger the sale of $1.45 trillion worth, easily overwhelming the Fed’s purchases.

The dilemma: The main reasons investors sell — fear of inflation and damage to the U.S. government’s credit — are, themselves, fueled by the Fed’s money printing and bond buying.

End result: The more the Fed buys bonds, the more it risks triggering massive investor selling.

So if you’re counting on the Federal Reserve to bail out the U.S. Treasury Department, forget it.

In the government’s grand balance sheet, printing money does nothing more than shift debts from one government account to another. It does not create wealth. It certainly does not stop bond prices from plunging and interest rates from surging.

Far-Reaching Consequences

Never underestimate the impact of surging rates — especially with near double-digit official unemployment and the worst debt crisis since the Great Depression.

Rising rates in this environment will be pure poison for:

  • The nation’s insurance companies loaded with long-term corporate and government bonds.

     

  • The nation’s banks counting on low interest rates to raise funds for close to nothing.

     

  • Utilities that must continually borrow huge amounts of long-term money to finance their massive investments in power plants and facilities.

     

  • Home prices that can only fall when available credit in the nation is hogged by Uncle Sam’s massive borrowing and when mortgage rates rise.

     

  • You! Stocks, long-term bonds, and virtually all types of real estate properties are extremely vulnerable to surging interest rates.

Your Action Plan

FIRST: Get the heck away from long-term bonds and shift to shortest term securities.

SECOND: Use the resources provided with my new book, The Ultimate Depression Survival Guide, to find a truly safe bank near you … or to bypass banks entirely.

THIRD: Use any temporary market recoveries as an opportunity to SELL off assets you don’t need, such as investment real estate and vulnerable stocks. Keep your 401(k). But within your 401(k), shift to the safest, shortest term alternative available.

FOURTH: To profit from falling bond prices, consider inverse ETFs designed to rise as Treasury bonds fall.

Good luck and God bless!

Martin

* The 13.4 percent of GDP assumes the following: Deficit — the $1.84 trillion projected by the administration; GDP — the 3.3 percent GDP decline proposed by the banking regulators in their bank stress tests. However, the actual deficit in that scenario could be larger.

Davos's picture
Davos
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Re: Daily Digest - June 11

 Hello Paranoid: Yup, I emailed it to someone and didn't post it, thanks for the hat tip/reminder, take care.

grl's picture
grl
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Re: Daily Digest - June 11

 Wow, I am trying to figure out that Argentina post. I just got back from there maybe two weeks ago. My daughter has been spending a semester abroad in Buenos Aires and she and her friends have traveled all over the country. My personal experience in Buenos Aires was that it was a bustling European type city full of beautiful, happy people. The shops and restaurants were full, people party at the clubs until daylight, the streets are full of walkers at all hours of the day and night. I felt as safe as I would in NYC (which I visit often). Were there petty criminals you had to watch out for? Yep, just like every other big city. I, personally had no problems at all and the people were very nice, but my daughter had one friend whose Ipod was pick pocketed in the subway and another who had his cell phone stolen. That's it ... out of about 200 kids over the course of four months. (and they aren't particularly cautious) And btw, I didn't just stay in the wealthier areas of the city. I walked all over alone, as I tend to do when I visit a city, including areas that were sketchy. My daughter visited far outside of the city, to the north in Salta and to the south (I forgot the region). She had only good reports and adored every area she visited in Argentina. I sent her this Silver Bear article and her response was: "Is this a joke?" 

Davos's picture
Davos
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Posts: 3620
Re: Daily Digest - June 11

 Hello Grl:

That article is circi 2006, Mike Pilat I believe posted it sometime ago as well. I put it up because I feel that this is going to play out as a currency crisis. If I'm not misstaken, they are over the worst of it and I even think Casey Research reccomends it as a place to buy another home in for when things go bad here.

There are several folks on this board from that area, I'm certain they will chime in. But again, that article was Dec 2006. 

Take care

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Re: Daily Digest - June 11

grl It is good to hear her experience is not like the native that wrote this article. Many times it is hard to see how hard life can be if you are not living in their shoes. Remember this was 2001 with the break in their economy which now has had some time to adjust. He wrote this I believe in 2006.

Get off the beaten path in Brazil & Colombia where it is more of a wake up to reality than tourist or more protected areas. Is she supporting herself by the money she makes working there or is someone sending her dollars from the USA. These things will make a difference.

I have traveled a lot in these Latin countries & the people are happy & well adjusted to adversity. Many are proud & you really have to know them well for the whole story from what I have seen.

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Re: Daily Digest - June 11

Hi Davos,

Thanks, as ever, for your daily digests - I know you modestly claim that you only do paste and links but a fantastic resource for Chris's site. I found the "Bank-run dark pools swelling in U.S. stock markets (H/T PineCarr)" really disturbing - if it's true, yet another way of obfuscating what's actually going, as if the Plunge Protection Team and banks buying each others' stocks isn't enough...

Skyblue,

I loved your post, it made me laugh out loud - I hope those bonds are genuine!

DavidC

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Re: Daily Digest - June 11

Don't know if anyone's seen this: www.house.gov/apps/list/press/tx14_paul/audit.shtml

HR 1207 has now exceeded the majority level in the House. The momentum just took off this past week. Currently 222 cosponsors.

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Re: Daily Digest - June 11

Here's a good synopsis of what took place in Argentina from the horses mouth.  Search Google for this blogger as well and you'll see many items as well as much from others.  It's quite amazing!

http://ferfal.blogspot.com/

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Re: Daily Digest - June 11

Hello David C, thx 4 the kind words, pleasure to contribute and read the posts, and often get more from them then from the article. take care

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Re: Daily Digest - June 11

 @Davos

The argentina article is slander. First off, viruses generally do not mutate in South America.  The general concensus on viruses is that they mutate somwhere in asia, head west through the trade routes to Europe, and then off to the states and Africa. From here Viruses then head south to,  you guess it South America.

Point being....dont get me wrong, I really am thankful for you daily blog....  I know its hard finding content on a daily basis.  But posting old misleading blogs that not only effects a persons veiws of  a country, but might scare people from every visiting such beautiful country wrong.

@ Paranoid 

, "there is no institution on the planet big or rich enough to bail out the U.S. Treasury itself"

Dr. Weiss is flawed in his argument thus making his energy towards the subject a fruitless endevor. The fed has the power and balance sheet to, with the click of a button, buy as many T bonds as it wants. The fed's power is mythical... Why its F&%@ing the market so bad i dont know. What i do know...    "Its all part of the plan"    What the plan is im just beginning to grasp. 1984 The book...........  Perhaps more on that another day.

BY the way          LIFE GOES ON    

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Re: Daily Digest - June 11
Skyblue wrote:

http://www.asianews.it/index.php?l=en&art=15456&size=A

What caught the policemen’s attention were the billion dollar securities. Such a large denomination is not available in regular financial and banking markets. Only states handle such amounts of money

Apparently it's confirmed by Guardia di Finanza

They seized 10 "Kennedy Bonds" and other securities with $1B face value each. If these are real, that's quite intringing since apparently only states handle such large denominations... 

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Humanity's Choice: A Series of Exits—Not a Fork in the Road

Published Jun 11 2009 by Energy Bulletin

http://www.energybulletin.net/node49200
Archived Jun 11 2009

Humanity's Choice: A Series of Exits—Not a Fork in the Road
by Chris Clugston
Conventional Wisdom: A Fork in the Road

The ecological and economic prognosticators who warn of a potentially unpleasant
future for the human enterprise typically portray humanity as being at a fork in
the road on our evolutionary journey. They contend that we are at a pivotal
decision point at which we must make an "either/or" choice between a positive
future outcome and a negative future outcome.

Unfortunately, "doomer" prognosticators have been making such claims since
before the time of Malthus. Yet despite the fact that humanity has always taken
what doomers consider to be the negative fork, Homo sapiens are more numerous
than ever, and enjoying, on average, better material living standards than ever.
As a result of repeatedly sounding "false alarms", doomers have lost all
credibility, and have been essentially eliminated from "rational" discussions
regarding the future of humankind.

Unfortunately for humanity, the doomer perspective is correct; it is the fork in
the road metaphor that is flawed. <MORE>

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Humanity's Choice: A Series of Exits—Not a Fork in the Road

Mike,

Corrected link for your story is: http://www.energybulletin.net/node/49200

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Re: Daily Digest - June 11

RGE - Is Eastern Europe on the Brink of an Asia-Style Crisis?

The collapse of the Thai baht in July 1997 helped spark the Asian financial crisis. Could events in Latvia spawn a similar contagion? Eyes are focused on this small Baltic economy, amid growing talk of a devaluation, due to the potential for spillover effects into its fellow Baltics, Sweden and the broader Eastern European region.

Strong trade and financial linkages, not to mention similar macroeconomic vulnerabilities, mean a Latvian crisis would almost surely have knock-on effects on neighboring Estonia and Lithuania, as detailed in this RGE EconoMonitor post in early May. A Latvian crisis would also have negative spillover effects into Sweden via Swedish banks’ heavy exposure to the Baltic trio. The wildcard is how a Latvian crisis would affect the greater Central and Eastern European (CEE) region. Direct trade and financial linkages between Latvia and CEE economies, outside of the Baltics, are limited. Nevertheless, many of these countries – particularly Bulgaria and Romania – share similar macroeconomic vulnerabilities with Latvia, meaning a crisis there could ‘wake up’ investors to the potential for crises in the rest of the region.

What’s the Matter with Latvia?

Once an investor darling, Latvia’s booming, double-digit growth earlier this decade was accompanied by massive imbalances - a current-account deficit approaching 25% of GDP (among the world’s widest) and an external debt load that peaked at over 140% of GDP. T he correction in these imbalances would have been challenging under any circumstances, but the global financial crisis and consequent drying up of capital inflows have raised the likelihood of a full-blown balance of payments crisis. Latvia’s currency, the Lat (LVL), is pegged to the euro within a ±1% fluctuation band, and such pegs do not tend to survive harsh economic adjustments like that now underway. In countries with flexible exchange rates, domestic demand does not have to bear the full brunt of correction in external imbalances as currency depreciation can shoulder some of the burden.

...

Latvia money mkt freezing up, o/n rates at 100 pct | guardian.co.uk

LONDON/RIGA, June 10 (Reuters) - A wave of interventions by the Latvian central bank to buy the lat currency and hold it within its peg to the euro has caused the local foreign exchange and money market to freeze up and interbank rates have shot up to 100 percent or more, dealers said on Wednesday.
"No bank is making any lat offers," said a trader at one Latvian bank.
He said all banks wanted to keep hold of lats to meet reserve requirements due to the shortage of the currency, which central bank interventions have sucked out of the market.

...

 

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Re: Daily Digest - June 11

Karl Denninger notices that foreign central banks are buying about half of long term treauries. He imputes why would they do that unless they expect deflation at a time when the crowd is expecting bad inflation ahead. While they still have a lot of power to manipulate the market, this may be another surprising turn in the markets. We saw that last year when our sources expected a fall in the dollar below 72, only to see it rapidly rise to around 90, driving commodities down. Rising interest rates are the banks worst case scenario. So expect them to do everything in their power to keep interest rates down.

It's become evident that that when the banks draw lines in the sand, they stop at nothing to hold thoses lines: $1,000 gold, $16 silver, 4% ten year treasuries, 5% 30 year treasuries and so on. Manipulation like this cannot be sustained and it won't. Hold on to your gold and silver.

30y-Bond-Results-Beware

 

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Re: Daily Digest - June 11

Ray,

It also seemed to me that the auction, at $11 billion, was quite small by recent standards.  It almost seems like a set-up:  run an auction small enough to control, get all your buddy central bankers to take half the offering and shazam, long term interest rates are contained.

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Re: Daily Digest - June 11

Patrick / et al - I wonder if you could provide a little more analysis on yesterday's auction. For the first time ever, I went to the Treasury's website, printed up the results, and tried to study the words and numbers to discern meaning from the page. Mostly, it was Greek to me. I looked up definitions of the words and terms, and tried to understand the ratios of bids to accepts. I tried to find analysis on the web, but mostly, the news was positive. Is it spin? It'd be helpful to some of us if you could provide a "dumbed-down" version of what happened.

Thanks, in advance. The more knowledge you guys put forth to guys like me, the more we can understand the complete picture.

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Re: Daily Digest - June 11

 Hello Jimbo0972:

My applogies for not putting a note in with that post.

Again, the intent was to show the regret the author expressed by not haveing been prepared.

I am utterly convinced this is going to play out in a currency crises for the US, and I posted that article becuase it is a somewhat recent benchmark/roadmap/similiar play. 

Again, I think Casey reccomneds Argentina as a place to set up a home for when things get bad in the US since they have been through it already. There is a post on this thread about that. Take care

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Re: Daily Digest - June 11

Hi tx_floods,

I am no bond-market trader or expert by any means.  I only started educating myself on bonds this year and almost everything I've learned about them has been on this site, mostly through Chris's posts.  Below are two good threads on the subject, and I'm sure if you do a site search you'll find much more.  Also, Strabes seems to be the resident-expert on all things bonds, so you may want to pick his brain unless he's retired to an undisclosed location in Mexico by now.

http://www.peakprosperity.com/blog/mysterious-actions-bond-market/19891

http://www.peakprosperity.com/forum/us-t-bill-breaking-support-level/17788

There, now that all my disclaimers are out of the way, here's my two cents:  The auction seemed small to me.  I do not have data to back this up, I just remember auctions in the $25 billion on up range in recent weeks, when they were auctioning shorter-term debt.  The bid-to-cover is the total amount of money bid compared to the amount of debt being auctioned.  The higher the ratio, the better the auction (from Uncle Sam's point of view) results usually are since the more demand there is, the lower the average yield will be, however there wasn't much being auctioned this time to begin with, so it doesn't carry much weight for me on this auction.

This is the first 30y auction in a while, and it seems to me that it was weak, despite how the media is spinning it.  If it had been a bigger auction, the results would have been more credible.  It's similar to the volume of trade for a stock.  Low volume is always suspect, whereas heavy volume signifies a "credible" market price for whatever the share in question is.

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Re: Daily Digest - June 11

Thanks, Patrick. I'll start reading those threads.

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