Another day, another finance company. Haven’t i written that before? Maybe but my memory is becoming blurred as groundhog day for the credit system is on a repeat cycle.

What we have now is an old fashioned run on finance companies. Clearly anyone who can read a balance sheet can see they don’t carry much cash so if you rock up asking for your money back you may be waiting for some time. Of course you should have checked that before you invested. As some argue this is a good cleaning out process which is long overdue.

Why should the RB bail them out? Well i would argue the RB is not worried about fnance companies going under but more concerned about the financial system freezing solid. So they opened their wallet and the banks were more than happy to plunder. But the poor finance companies can’t access this cash.

So here’s a story from a few years ago (verbatim from Fred Harrison’s “Boom Bust: House rices, Banking and the Depression of 2010″:

In 1794 “the City Council of Liverpool faced a complete collapse in the local banking system. On March 20, the Mayor reported that 58 merchants urged the council to secure a loan from the Bank of England to enable the City to survive “the distress which had engulfed the people”. Parliament issued a special Act which entitled Liverpool to issue negotiable notes for a limited period, to be lent at a rate of interest slightly below 4.5%. The citizens weathered the storm, thanks to what the Webbs described as “the boldest financial step recorded in the annals of English local government.

What caused this trauma? Speculation focused on the rent-yielding opportunities presented by canals”.

Oddly enough the same thing happened in 1812, 1830, 1848, 1866….and on and on.

As Samuel Taylor Coleridge wrote in 1817, in his Lay Sermon booms and bust seemed to occur “at intervals of about 12 or 13 years each {as a result of} certain periodical Revolutions of Credit”.

Thanks Fred for this great piece of research. Let’s hope the central bankers read it and then weep voraciously.

You have to feel sorry for Kiwi investors as another finance company goes bust. Today it’s the turn of Nathans Finance to declare itself out of the game. They used to send me stuff through the mail every month. Who knows how many were seduced by the slightly higher interest rates on offer.

It may sound like i’m enjoying this but i’m not. I wrote several letters to the powers that be well over 3 years ago exhorting them to sort out the non-bank financial sector but to no avail.

Ultimately it’s a case of caveat emptor. Before you invest in anything understand the risks. I am amazed how many financial “advisors” have put their clients into these flaky companies. I use the term advisor loosely here.  I seriously doubt whether many of them actually understand how the products they sell actually work and how to stress test them.

If you want higher yields then invest in a decent fund that buys the whole spectrum of bonds and therefore diversifies the risk. A couple of decent Kiwi funds are Fisher Funds and of course the self styled people’s champion, Gareth Morgan.

Check the fees and check what you are getting. Don’t listen too much to the experts. Learn about it yourself. There really is no free lunch out there except at the City Mission and if you’re down there the chances are you’ve blown your dough already.

It’s your money and your responsibility.

So the Fed yielded to pressure and cut the discount rate. Come borrow more they say….so much for a prudent approach to banking. But really they have no choice. They will just keep flooding the market with dollars for as long as it takes.

The market rallied as expected but it’s hardly a vote of confidence in the system. There will be an expectation of a cut in the funds rate at some point if credit woes continue. The problem is that the last few weeks have been so volatile that for many the opportunity to liquidate positions has not been possible.

Flight to quality has seen the $ rally except for that old favourite $Yen which has taken a pounding.

Who would want to own $? This flight to quality argument alway amuses me given the world is awash with $ and $ assets.

The volatility in the fx markets has been extreme reminding me of the Stg ERM debacle. It just shows that the leverage in the market creates an instability in the system which causes wild swings.  The range mileage in KiwiYen on Friday was the biggest i;ve ever seen in any currency pair…22 big figures in 24 hrs….thats 27.5% in absolute terms of up and down movements.

You would need Kevlar pants to trade that pair. I’ve been trading small amounts but cannot imagine much volume getting through at any reasonable spread.

This is market dislocation. The Fed can cut rates all they want but it wont help people who are under water whether owners of houses on 100% mortgages or funds with boatloads of credit on their books.

Another wild week beckons so expect more central bank ministrations.

The credit inspired boom of the last 15 years is now over. Markets are in severe dislocation and whilst underlying economies are very sound there is a serious problem in global banking liquidity.

On the good side we have record low unemployment and company profits are in good shape. But the driver of that has been consumption driven by an expanding money supply which has driven up asset prices and created a wave of paper wealth.

Interest rates have been hiked up to halt this boom. It’s too late. The record low rates in the US over the last 5 years created easy money that was too good to refuse. As rates were jacked up people realised they hadn’t done their sums properly.

Wave after wave of derivative offers, capital guaranteed notes and other “too good to be true” offers have come pouring forth. There is nothing so easy as making money out of money.

But mathematics will always intervene. Compound interest takes no prisoners in its tsunami like advance across personal and corporate balance sheets.

The central banks now have no option but to step in and sort this mess out. The risk of systemic crash is clearly a possibility now, not just in stock markets but banking systems.

Whether markets can recover from here is a moot point. They always do eventually whether its months or years.

If the consumer goes to sleep expect a recession plain and simple. It wont matter where you are or what you do.

The important point is that our financial systems need a serious revamp. The gross expansion of the global money supply, condoned by the global central banks, needs a full inquiry.

Nothing less will do.

For those not in New Zealand a lolly scramble comes at the end of the party when you throw heaps of sweets amongst the children and watch them go beserk. Of course once they have gorged themselves they fall in a heap as the sugar high follows by a big crash.

What we are seeing in the global markets is nothing short of a major fiasco. Banks wont lend to each other so the central banks have flooded the market with cash.

Come and get it they say. This is now starting to get silly.  They were at it again last night as well. When is it going to end?

Goldman Sachs came in with a $3bln bailout for a fund last night as well talking the deal up as a winner. Well of course there will always be distressed sellers in a credit crunch. We’ve seen it here in New Zealand with finance companies going bust with alarming regularity over the last couple of years.

The problem is that we haven’t even started to see the real pain. The real economy is quite strong globally as the spin offs from the asset price boom feeds through in consumption. But how long is that going to last. In New Zealand we are seeing housing activity level off and prices come off the top. Today we saw weak retail sales.

What I observe here is that many properties remain unsold as people will not take lower prices. This is not reflected in the data. Many properties are withdrawn unsold or just sit around in the hope some mug will pay up for them.

So at the moment we are in the distressed phase of the market sell down. People who have to sell must sell and we are starting to see that. The question is whether it slowly spirals out in the main market. We are clearly at a turning point in the economic cycle. Years of asset price increases, consumption driven higher on the back of that wealth effect, central banks with no control over the money supply, late to raise rates, now hammering rates rises home as prices peak, people locked in at high prices and high rates, wages and labour very tight………it’s a recipe for recession.

This is why the central bankers are still talking tough on inflation. They don’t want to start talking in worrying terms in case they “cause” a slowdown.

So expect the lolly scramble to continue.

But there will be a price to pay afterwards.

It’s been an interesting week or so since the RBNZ lifted interest rates t0 a wallet popping 8.25%. The Kiwi peaked above 81cts in a nice blow off move and post rate hike and carefully worded statement it has retraced as far at 75.5cts with the Yen cross taking a battering from 97.50 to 88.50. So much for safe carry trades.

The South Korean Finance Minister made some loud noises about the carry trade implications for the Won which was a bit firm for comfort.

Look really this is just a big game. And in all games there are winners and losers. As we see domestically in NZ with the collapse of yet another finance company, its usually the average risk averse investor who takes a cold bath.

Belgian dentists and Japanese housewives watch out!

All this because irresponsible and incompetent central bankers mismanage the global monetary system.

Leveraged money is like water….it will run down until it finds a place that can hold it. Anything that looks remotely fixed will attract attention..exchange rates, interest rates etc.

In a way speculators act in harmony with natural systems. Our world is in constant flux and it is normal for systems to move as new information is incorporated. Nowhere is this more obvious than the global currency markets…each breath of news is immediately received into the price no matter how minute.

So as soon as Alan Bollard said this is enough for now, then all bets were off and the market responded accordingly. Throw in the sub-prime meltdown in the US and it turned into a rout which could continue further. As i noted previously the Kiwi was at a level worth selling and could fall much further especially if the crosses get unwound.

We shouldn’t be overly concerned because we know the system is built to generate these crises every few years. According to Fred Harrison its every 18 years for the big bust  but currency debacles happen more regularly than that…..Asia, South America, Euro land, Russia…its par for the course.

So don’t be too alarmed. Just remember what Newton said…..whats goes up always comes down….eventually.