Holiday reflections

I’ve just spent some time up in the Abel Tasman National Park, one of my favourite places in New Zealand. It’s a stunning coastline Park with a lovely walking track and numerous bays and beaches to swim or kayak in. It also has a stunning eco-lodge for weary walkers to rest up in and relax.

As I walked, sam and lay on the beach I reflected on the past year and wondered where we were heading. Looking at the end of 2007 didn’t fill me with optimism: G7 financial system in a state of collapse, the biggest asset bubble since 1929, oil at record highs and conflicts continue in the middle east and africa.

And opening up 2008 with huge falls in global stock markets….why can’t they fall another 10-20%. No reason at all. Will the latest stimulus plan work? Who knows? There’s been so many I’ve lost count as well as interest.

A good film to watch now would be Paul Gringnon’s Money as Debt. You can also find it on Google video. I highly recommend it especially for the scene where the bankers try to re-inflate the economy for the umpteenth time.

There simply isn’t an answer to this.

It just has to play out.

2008 Markets: Out of order due to financial tsunami

Well Christmas brought some quiet stability to the markets but the New Year has seen an immediate stampede for the exit. What is so interesting about the current economic malaise is that it’s very hard to analyze with any clarity. No one really knows what is going to happen because we’ve never had a crisis of this magnitude before.

We know the credit bubble has well and truly burst. We’ve seen it before with Japan but that was really a closed market and the response was non existent thus causing a 15 year depression. We have Central Banks who are very keen and swift to act but will their actions just make things worse. Henry Paulson today said a correction was inevitable given the price increases of the last 5 years.

Nice to know the guys running the country are on top of things….crickey! Can anyone explain what a stable economic system looks like. Clearly the current bunch of economic leaders haven’t got a clue.

Ambrose Evans-Pritchard argues that we are experiencing a 1929 type situation. I think he is spot on. The bailouts we’ve seen recently could well become more widespread. If that happens then quite clearly the stock markets will fall another 10%. The impact on BRIC (Brazil, Russia, India, China) will decide whether the global financial system collapses or not.

Immediate rate cuts will be forthcoming from the Fed, BOE and maybe even the ECB. All this nonsense about watching inflation needs to be ignored. Inflation will keep being a problem but its a diversion. 2 years out and land prices could be off by 30% or more.

Investing now is for the brave hearted, foolish and very wealthy following the maxim “The way to make a small fortune is to start with a large one”.

Fed ups the ante but market calls

Its like watching a disaster movie in slow motion. To see the Fed so far on the back foot is disconcerting to say the least. The recent $40bln credit injection has just left the market needing more and stocks floundering.

For the first time I am asking myself whether we have a Japan style bank crisis developing. My immediate response is to say no because we haven’t had the screaming bubble of the equivalence they experienced in Japan but one could look back to the bubble of 2000/2001 and feel it was merely reinflated by the post 9/11 easing. This easing further invigorated the property bubble and took it to new heights along with financial practices that were dubious at best.

We have a situation where the banking system, in the wider sense, is stuck with a serious number of non-performing loans and this number could easily escalate if the recent liquidity measures don’t work. In Japan the policy response was to duck it and hope it would go away. The US has addressed it head on so far but will they allow banks to go under and house prices to tumble further. The maintenance of confidence is crucial in any fractional reserve fiat based money system and so far it seems like the US authorities are no taking any chances.

What if this doesn’t work? Then we will have a serious problem and global stock markets will take a 20-30% hit. I’m not making any predictions but cash still works for me.

Fed to freeze mortgage rates……another fiddle

So the Fed joins the Bank of England in changing the rules. The word is that certain sub prime mortgages will have their rates frozen for 5 years. This will ease the pain of borrowers who in some cases face rises of up to 30% on their mortgage bill.

Did i mention that mortgage means “deathgrip”?

Anyway this just shows that for all the hi’ fallutin’ nonsense about free markets we actually live in a system that is far from free. Bush doesn’t really want to hand the next election to the Democrats though he’s done his best to do so in recent years.

But what we are seeing now, as we saw post 1930, is that the financial system can be changed if required and that the fundamental right to create money resides with the people via their representatives. If i owned shares in a bank i would be worried.

Come to think of it if i had money in a bank i’d be worred but humping around gold coins is so 13th century.

I can’t quite work out if this is the beginning of the end or the end of the beginning. I fear its the latter.

Fed readies for another cut as markets hit and hope

As the Fed prepares for another rate cut, probably 25bps, possibly 50, markets are resilient in the face of what is still a horrendous credit meltdown. With Merrill Lynch reporting a monumental loss last week, it is clear that banks are still clearing away the debris of the last few months and the real impact may not be felt for some time.

Never mind the jokes (you can’t bail out anything with a siv)around the Super SIVs: the great $100bln bailout plan hatched by some genius to support the market. Similar to the rescue plan post LTCM crash, it basically involved the market coming in to buy its own distressed assets. Liquidity is the mantra but holding up the market is the reality.

Everything is under water so its a game of smoke and mirrors. As I’ve said before its a rational response to a difficult situation. The social impact of a complete financial crash is not something anyone wants to see but the longer we put off the necessary surgery the worse it will be.

The credit bubble of the last 15 years is over. The balloon has too many holes in it and its a waste of time pumping more air into it.  Satayjit Das, author of Traders, Guns and Money lays it all out in this paper. Its worth a read.

Fed Cuts, Markets Soar, Panic over. Not.

So the Fed arrived late at the party with a scything 50bp cut all round. But they left a cloud of uncertainty to block out the ray of sunshine.

Bernanke is not known for his pandering to the markets and inflation is still mentioned as a concern. So this move is part of the restoration of confidence in the US economy and global monetary system. The G7 central bankers and finance ministers will have been wired into each other this past month and since the Northern Rock meltdown probably on 24 hour call.

They all depend on each other now.

How the Asian central banks must be laughing given the dressing down they received during the 1998 crisis and how the G7 bankers and IMF threw the financial risk playbook at them.

So where does all this leave us. Well pretty much in the same place except we know that G7 will underwrite the financial system. This is good for big guys and bad for small ones (or foreigners!). Small guys can fail and be picked up for a song by the big fellas……nice bit of wealth transfer (anyone remember Long Term Capital or Barings?).

But fundamentally there is still pain to come. The fact that asset prices have been inflated way beyond realistic levels means at some point they must retreat and money must be destroyed as the money supply contracts.

No amount of paper shuffling can change that. Pumping out more money will help in the short term to keep institutions from falling over and the system functioning but it cannot prevent the inevitable.

The best we can hope for is a gentle downturn in asset prices. And of course lessons will be learnt….just like in 1794 and every 18 years since