Money’s too tight to mention

As the credit crunch continues to spreads its woes my inbox is filling up with offers from NZ banks (all Australian owned by the way) to buy various types of debt with fabulous names:

- Perpetual non-cumulative preference shares

- Perpetual callable sub-ordinated bonds

All offering north of 10%. A no brainer for bank debt surely?

Well yes it is. Let’s face it if the bank goes belly up we’re all stuffed. How much is deposit insurance worth these days? Probably not much. But the reason behind this rush of issuance is more interesting.

Banks have plenty of cash on the books, known to us as our deposits, but recorded as unsecured liabilities in the bank’s balance sheet. Yes we are not really depositors but merely unsecured creditors.

So why do banks need to raise more debt or more to the point equity dressed up as debt? Well their balance sheets are under severe pressure and they need to meet the requirements laid out in Basel II which means they need more equity on the balance sheet in order to lend out all this cash.

This is not good news at all. It means banks are constantly trying to tidy up their financial position which is tenuous at best.

In the US mortgage backed bonds, normally AAA, are trading at their widest against US treasuries since 1986. There is some serious de-leveraging going on even in the most liquid and traditionally safe markets. This is a harbinger of further losses to come. Many players are now starting to realise that the financial system is in structural distress.

Suddenly owning a few dairy cows seems like a sensible investment.

Paper $ or Solid Gold?

Tough choice eh…..well not for jewelry lovers. The gold bugs have been enjoying the ride up in the price of gold as well as making fun of Gordon Brown who unloaded a huge brick of the UK gold reserves back in 2001 much to the chagrin of UK taxpayers.

But with the $ swift decline into obscurity the fans of something more solid than the US Treasurer’s signature on a piece of paper are clamoring fro the return of the Gold Standard as a way of preserving the value of paper and controlling the impulse of bankers to keep printing the stuff.

Well yes that does seem to be a problem. I’ve touched on this before when looking at how the Bank of England experienced several runs just after it was formed. Why? Because they printed way more paper than they had in reserves of gold. So gold or no gold, there is nothing to stop authorities or private banks printing paper or more accurately filling up spreadsheets with lots of numbers.

I’m ambivalent on this gold business. Storage issues, never mind the horrendous process of digging the stuff out of the ground, present problems as do the ability to carry it safely but really its a confidence thing.

Readers of this blog should hopefully know by now that money is an artificial construct. We can make it anyway we like. It’s created into existence in some form in order that we can exchange goods, services and labour in an efficient manner.

It is subject to the laws of supply and demand like any other product or service.

William Rees-Mogg makes some interesting points about it here but the reality is still the same gold or no gold. We must control the supply of money. 1:1 exchange for gold is a way to do that but its so last century. Surely we can come up with a smarter way of doing it.

My favoured approach is for a central monetary authority to issue interest free new money into the system directly. that supply of money (the only supply) could be controlled on an annual basis responding to set limits, constraints and changes in demand, population etc.

Goodbye interest, goodbye inflation and goodbye financial markets as we know them.

Gold bugs or not, we have to do something about the current system before it blows up and makes the 1930s depression look like an afternoon tea party.

Nationalisation of Northern Rock signals the End of Banking as we know it

It’s astonishing but not entirely unexpected. The British taxpayer is the proud owner of the Northern Rock and 100bln worth of loans. It’s a sad reflection on the state of the UK banking system that they can’t find a buyer for this.

But this simply hastens the decline of the banking system as we know it. In 10-20 years time we will look back on this and see how important this moment was. What the banking system or indeed money looks like remains to be seen but our trust in current arrangements must be questioned.

More importantly for football fans is the Northern Rock’s sponsorship of Newcastle. Surely the taxpayer won’t be happy about this. Supposedly the sponsorship is safe but they said that about Northern Rock.

Socked: Le Rogue Trader strikes again

Here we go again. Another “rogue trader” strikes at the heart of the capitalist empire this time racking up a fairly impressive $7bln odd loss. No that is completely out of this world. In fact it’s almost unbelievable…..he must have had some serious positions which only the 3 blind mice wouldn’t have noticed. Being French just adds to the frisson given they are supposed to be conservative players (which is not true at all) and gives the Septics something to stick to the Euro mob.
Naturellement the SocGen management disclaim any knowledge of this fraud. What do they think they get paid for? Certainly not for making money because they don’t. Their job is to manage traders and make sure risk limits are being enforced. I know this well since I was a trader who frequently ran up and bust risk limits and without fail would receive a phone call from somebody asking, politely, about the humongous $/Y position I has acquired. Positions always show up somewhere especially big ones. This one was a monster.
Bottom line: this stuff shouldn’t happen without someone knowing about it. Expect the usual cover up.

Markets bomb: What’s next?

Well the 20% drop I predicted in December has happened pretty quickly but that’s coming off a big high. We’ve had liquidity injections, stimulus packages and now an emergency rate cut of 75bps.

So far so good but what happens next?  Well if this was a standard asset bubble/recession I would imagine a lowering of rates globally, a bond market rally, a rise in unemployment and so on. But this is different because its really a money crisis.

I say money instead of credit because to all extents and purposes money is credit. But whereas money is secured on confidence, credit is secured on assets. Those assets are now worth a lot less than previously imagined (another word for risk analysis!).

We’ve seen some major US banks bailed out, a major UK lender go bust and be bailed out and a complete collapse of the US sub-prime market. The stock market reaction is simply an inevitable response. But don’t let that distract us from the real crisis which is global financial insolvency.

So the next issue will be a major US (or other) financial institution going to the wall. I mean a big player simply collapsing. To prevent this the Fed and other central banks will have to underwrite the whole system of interbank credit. A major collapse simply cannot be allowed to happen.

We may not even hear much about it but right now credit lines are frozen solid and at some point that pressure will cause an explosion somewhere.

So I wouldn’t be getting too excited about cheap assets just yet

Reverse Takeover: A Post-Imperial World?

I read today of Tata’s impending purchase of 2 of Ford’s great brands, Jaguar and Land Rover. Only last year Tata Steel paid $12bln for Anglo-Dutch steelmaker Corus. What’s going on here? What happened to the East India Company and all that? Queen Victoria would be spinning in her grave. It seems the plunder of Asia is over. And now it’s payback.

The Arabs are at it as well having bailed out Citibank not long ago and lets not forget the Chinese pumping in $5bln to keep Morgan Stanley afloat.

Those trade and petro dollars are finally being put to good use. The Arabs in the Emirates are showing their cousins the way foward by buying real assets instead of partying away the cash as they did in the 80s. The Chinese, always astute and long-term, are making obvious in roads into the US whilst continuing to make it hard the other way around.

Reverse colonialisation anyone?