Man the Pumps: Central Banks run up the white flag

With rumours continuing to circle around main street financial institutions in trouble, the Fed along with other central banks piled in another $200bln worth of liquidity in a vain hope to stem the tide. It certainly worked sparking a massive rally in the US market which was looking very weak indeed.

I wrote 6 weeks ago that the Fed would have no option other than to underwrite the whole financial system. This is exactly what they are doing. The worrying aspect of this approach is that it leads the market to depend on continuing liquidity to provide confidence and prevent what would be happening without intervention, namely a full scale rout with several institutions going under.

This creates extreme moral hazard. Even though many financial institutions have clearly acted irresponsibly and in some cases in other ways, they will not be allowed to fail unless a “deal” is worked out where they will be “acquired” quietly for a nominal sum and so the system stays solidly in place and the illusion is maintained.

F.William Engdahl lays out his thoughts on the origins of this mess. It’s focus is the US over the last 100 years and is interesting to read though he makes some strong accusations about the actions of certain people.  The extent to which small cliques have organised and run the financial system is open to questions but there is no doubt that the US prevailed at Bretton Woods on the strength of pure self-interest.

So what now? Well I would say more of the same. But gravity is a powerful force and its hard to imagine these markets not falling further and more de-leveraging taking place in credit and carry trades. I’ll discuss shortly what a new global currency system might look like because the current one is about to explode.

National Security: $ on the verge of a nervous breakdown

It reads like a Tom Clancy plotline: The Senate Select Committee On Intelligence gets briefed on the national security implications of a collapse in the $. Suddenly there is a realisation that the US is very exposed not just economically but politically. Those who have read “Debt of Honour” will be familiar with the plot which involves a crashing of the US financial system using a coordinated attack on the $ and the Treasury market. Alas this is now not fiction but real time.

The $ is being abandoned wholesale and the US intelligence service is right to be focusing on what this could mean for national security just as the Pentagon did when they commissioned a report on the security implications of climate change back in 2004.

With Gold heading towards $1000/oz, Oil above $100/bl, the $ in freefall and the financial system in a mess, one could be forgiven for thinking that things couldn’t get much worse. Well stock prices still have plenty of room to fall and probably another 10-15% is about right. Property will continue to sag also.

But the main problem is the US getting the big fat raspberry from the rest of the world. It’s stretched militarily, politically it’s pretty much lost all credibility and now economically its kaputski, as its Russian pals would say.

Who caused this mess? Well according to some it was Sir Alan. No not Alan Sugar of Asmtrad and Spurs fame but Alan Greenspan. This little piece on his actions in 1987 paints an interesting picture.

Let’s hope someone with half a brain is in charge back in Washington otherwise this could get very messy.

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

G7 get jiggy on the Yuan

The G7 communiques are out (i can’t find a link at the moment as i have it direct from a trading platform) and there is one clear story and several cloudy ones. The main thrust is that they would like to see the Yuan quicken its appreciation. Well looking at China’s trade surplus that’s pretty obvious. One only has to remember the famous Yen “endaka” from 1971 to 1995 when the $ fell from 360 to just below 80 Yen.

How far will the Yuan rise is anyone’s guess. The day it floats and becomes fully convertible will see a huge increase in volatility and speculative financial flows. However a floating Yuan would actually be beneficial in regulating global imbalances in trade and economic growth.

The Chinese are well aware of it and are probably not minded to open the doors to the Magic Kingdom just yet. They hold the balance of power at the moment and wont be pushed until they are ready. Still continued pressure will eventually tell.

However, it’s not just the Chinese getting a telling off. Some mention has been made of Asia as a whole and of course this refers to Japan. Whilst there was no specific mention of the Yen this will certainly not be lost on those with substantial short yen positions. There was mention of an improving economic situation in Japan and that exchange rates should reflect fundamentals.

The risk inherent in global carry trades was mentioned specifically by Juncker (Luxembourgs PM) saying they wanted the market to be aware of the risks of one way bets, specifically in the foreign exchange markets.

Paulson (US Treasury Sec) mentioned clearly and loudly that the US believed in a strong dollar. Added to that were moans from the ECB crew about the strength of the Euro and how they were bearing the brunt of $ weakness.

The Canadians jumped in on this wagon too noting the Loony is now 3% stronger than the Greenback. Strange times indeed.

So what does all this mean. Well for me it could means the $ depreciation is nearing an end or at least getting into the red zone. From a market perspective i would say NZ/Yen is due for more pounding (back below 80 again) given this is regarded as the major one way bet in the fx markets. The Euro may reverse back to 1.35, the C$ back above parity and the A$ probably could do with a small dusting (maybe down to 85cts).

Stocks could also get pounded this week. Who knows? It’s not a week to be hugely long and comfortable.

FX rates are elastic things and when they get stretched the bounceback (as we saw in August) can be pretty fierce.

P.S. Others may interpret the communique differently so feel free to give me some of your views.

Why it is necessary to have confidence in the banking system

The recent Bank of England action is completely necessary though wrong in terms of moral hazard. In order to understand why this is the case i exhort you to read John Tomlinson’s paper which is in the research section or here. In his paper  he explains how a bank works in terms of taking in deposits and lending out money. He dissects carefully the balance sheet of Barclays Bank and shows how solvency is merely a trick of the imagination.

Of course readers of this blog will already know that money is merely a ficition, one with a deep and dark history. As Trevor commented in the previous post, the general public relies on he integrity of the system and the honesty of those who operate it.

Can we have confidence in those people? I think not. Not because they are dishonest  but because they refuse to acknowledge a system that is unstabl, inequitable and ultimately inefficient.

Please read and ask questions, comment, spread the word and ponder.  What does your money mean? Do you really have any savings, wealth or assets? Don’t rely on the system to support you. It has failed regularly since the Bank of England was first formed and wil l continue to do so until some serious surgery has been performed.

Astonishing news: Bank of England changes the rules

I just heard this news an hour ago and frankly was astounded. The Bank of England will ,if necessary, guarantee all deposits held with Northern Rock. This a major change to the current depositors insurance scheme.

Wow! In a stroke they have just removed any risk from the banking system. They have in effect nationalised Northern Rock without actually doing so.

Actually this is a good thing since it further exposes the myth behind our banking system. Mind you they didn’t rush to bail out the depositors of BCCI  when that failed.

So where to from here? Well that’s anyones guess but this wont finish here even with the  blank cheque provided the the Old Lady.

Max Hastings writes a lovely piece here. Finally as the party comes to an end and the hangover kicks in, will there be some reason?

I hope so. It is a great opportunity to look closely at the money system we currently have. Do not look to our central bankers to provide the lead or even our politicians. We the people will have to provide ideas, answers and solutions on how to proceed. The monetary reform movement has been growing by the day and now it is time to stand up and be heard.