• World stock markets tumbled Thursday, with benchmarks in Tokyo and Seoul losing almost 7 percent each. (AP)
• Five years after Federal Reserve Chairman Ben S. Bernanke helped stamp out the risk of deflation, the threat is returning as the financial crisis and a worsening economic slump pull inflation lower. (Bloomberg)
• The RBA said in a monthly bulletin today that it bought A$3.15 billion ($2 billion) of its own currency last month, the biggest net purchase on record, as the local dollar posted a record monthly decline.

• U.S. options trading slowed this month from a record pace after hedge funds collapsed and the biggest market swings since 1929 made equity derivatives too expensive to be used as insurance against stock losses. (Bloomberg)
Key Reports (WSJ):
8:30a.m. Initial Jobless Claims For Nov 18 Week: Expected: -11K. Previous: +32K.
10:00a.m. Oct Conference Board Leading Indicators: Expected: -0.6%. Previous: -0.3%
10:00a.m. Nov Philadelphia Fed Business Index: Expected: -38. Previous: -37.5.
10:00a.m. DJ-BTMU Business Barometer For Nov 8: Previous: -0.7%.

Quotable
“Early in life I had noticed that no event is ever correctly reported in a newspaper.”

  George Orwell

Best of CC: Below is a reprint of our 9 July 2008 Currency Currents where we examined the break down in the correlation between oil and the dollar—it was telling us something as we suspected.  It’s another example of why we pay close attention to intermarket correlations; it can be a very powerful tool for currency traders. 

FX Trading – $ vs. Crude…Hmmm! (9 July 2008 Issue)
Can we continue to hang our hat on the view that much of the bad news is already in the price of the dollar?  Well, based on the dismal views about the US economy, which we don’t dispute, which we seem to find everywhere we look, the short answer is yes.  But it’s not just that belief.  Something seems to have changed—though even this is a thin reed of reasoning we grant you.

Back in mid-April the US dollar index made its closing low (and its all-time low in mid-March, the day the Fed saved Bear Stearns).  At the time, crude oil was trading at $116 per barrel (heck, downright cheap in retrospect…LOL).  By now of course, everyone had caught on to the crude-$ connection that says the dollar goes lower when oil goes higher.  But, the problem with this new theory is that crude oil has rallied about $29 since mid-April, or a cool 25%!  However, the US $ index has rallied too—up 2%! 

Based on the crude-$ connection, that wasn’t supposed to happen. 

Chronology of key players’ recent trips to the Middle East (read Saudi Arabia):

• Vice President Dick Cheney – Mid-March
• President George Bush – Mid-May
• Treasury Secretary Hank Paulson – Late-May and Early-June

And on June 1, 2008 this from Reuters:

ABU DHABI (Reuters) - Treasury Secretary Henry Paulson said on Sunday leaders of Gulf oil producing states had told him that abandoning their currency pegs to the dollar will not solve their inflation problems.
Paulson, two-thirds of the way through a four-day trip to Saudi Arabia, Qatar and the United Arab Emirates, said leaders in the region have "quite an awareness that the peg does not influence inflation to a significant degree.
"They recognize that inflation is the overriding issue ... Ending the peg is not the solution to the inflation problem."

Hmmm…

Is it possible the Gulf States were treated to a litany of promises that the dollar was nearing a bottom and now is not the time to abandon said dollar pegs?  Again, we have no clue. But, it would be a nice fit with the ongoing lack of correlation between all-time highs in crude and the $ index cautiously trending higher.

Stranger things have happened.  Stay tuned. 

Regards,
Jack&JR

* Global demand rose 18% to 1,133.4 metric tonnes from 963.3 tonnes a year earlier.

* In dollar terms, the jump in demand was even bigger. Dollar demand for gold reached an all time quarterly record of $32 billion in the third quarter, a whopping 45% higher than the previous record … set in the second quarter.

* Identifiable investment, which includes purchases through exchange-traded funds and of bars and coins, climbed 56% year over year to 382.1 tons.

Hank Paulson has just about burned through $300 billion, and it's not clear what the public has got out of it. Perhaps things would be worse without the bailout but they're certainly no better. Wall Street banks have not significantly stepped up their loans to small businesses, college students, car buyers, or distressed homeowners. Much of the auto industry is on the verge of bankruptcy. And the rate of foreclosures is rising.What happened to all the money? About a third has gone into dividends the banks are paying their shareholders. Some of the rest into executive salaries and bonuses. Another portion toward acquisitions designed to raise share values. Another chunk for bailing out giant insurer, AIG. That's not what taxpayers bargained for.

Yard Work, Troubled Assets, Bankruptcy and Energy

I often mention that I live in Pittsburgh. Well, the truth is that I live in a leafy suburb of Pittsburgh. I grew up in the Steel City. But when I got married I moved…

My Puny Mogambo Mind (PMM) is actually retreating into a little Mogambo Inner Bunker (MIB) of its own, and I find that I avoid looking at what is happening at the hands of Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke, as all of this money is going to show up in an explosion of prices, including food and energy, and that is when societal hell breaks loose and it’s, “Game Over, Player One.”

So I was doing a pretty…

- But W. didn’t stop there. Apart from wanting governments to be “smarter” (who doesn’t?), he called for called for leaders to recognize that “government intervention is not a cure-all” for economic problems. So what was Fannie and Freddie all about? Or Hank Paulson’s Troubled Assets Relief Program. Or the bailout of AIG? If government is not a cure-all,…

- But W. didn’t stop there. Apart from wanting governments to be “smarter” (who doesn’t?), he called for called for leaders to recognize that “government intervention is not a cure-all” for economic problems. So what was Fannie and Freddie all about? Or Hank Paulson’s Troubled Assets Relief Program. Or the bailout of AIG? If government is not a cure-all,…

Constant readers know I’ve gone back and forth on this:  In September I figured the bailout bill smacked of making things up as he went along.  But on Monday I took note of the phone conversation he had two months before Washington Mutual collapsed, in which Paulson told WaMu’s CEO he ought to sell out to JPMorgan Chase (NYSE:JPM) because his company was in big trouble.

I guess it’s possible Paulson knew bad things were going down, but he still didn’t know what to do about it.  And this morning, the making-things-up-as-he’s-going-along thesis seems inescapable.  I mean, really: The bailout bill was predicated on…

Monday’s activity showed another decline in gold open interest…down 2,312 contracts. Tuesday’s sell-off brought another o.i. decline in gold of 906 contracts. Without doubt, yesterday’s activity will show a further decline…

The buck was, however, a big winner against sterling. The British pound got whacked down to $1.4953 against the buck. That was the lowest level since 2002.

The pound was hurt by deflation-fighting comments from Mervyn King, governor of the central Bank of England. That led Richard Snook, of the Center for Economic and Business Research to comment that, “We expect to see interest rates fall to 1% by the end of 2009 … the lowest level since records began in the 17th century.”

Back on this side of the pond, all the buzz was about Hammerin’ Hank…

- Here’s the breakdown, from CreditSights, a research firm in New York and London, as reported in Forbes magazine.

The Fed

• $1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window*
• $1.8 trillion in loans to primary dealers through the Fed’s term auction facility since in January*
• $29 billion in Bear Stearns debt
• $60 billion of credit available to American International Group
• $22.5 billion to set up…

Dear Value Seeker,

Today the world honors its military veterans.

Veterans Day falls on Armistice Day, the day World War I officially ended.

The 40 million casualties of the “war to end all wars” is perhaps still the rawest example of humankind’s ability to screw up.

Ninety years on, we are still screwing up.

Fortunately, today’s losses are focused on corporate balance sheets and stock indexes rather than on the battlefield.

At least we have the Fed and the U.S Treasury looking out for our best interests.

Americans can sleep tight knowing Ben Bernanke and Hank Paulson are unloading their heavy artillery at the credit crisis.

Of course, the effect so far has been minimal. And their ammunition…

First comes word that Hank Paulson rewrote tax law without Congress’s say-so, giving the banks a $140 billion tax windfall.  Now one could argue the tax law Paulson circumvented was a dumb idea, but even mainstream analysts who don’t fuss over the plain language of the Constitution say Treasury overstepped its bounds here.  I hope conservatives who hailed the “unitary executive” philosophy of Team Bush might be rethinking things by now… but I doubt it.

Meanwhile, Paulson and Ben Bernanke have gone back on their promise to disclose just who’s…

- Italy may be the next country to ‘rescue’ its economy with taxpayers’ money. According the The Times the Italian government was working on plans over the weekend to pump as much as $26 billion into its biggest banks.

- Uncle Sam is about to bailout AIG from its bailout. Apparently, the original handout was too tough on poor old AIG. So now its going to get a sweeter deal. This from the WSJ:

The U.S. government reached a deal…

6.5% unemployment in October — worst since early Clintontime.  Worse still were the revisions of the August and September numbers.  And as Karl Denninger noticed, the number of unemployed plus the number of people working part-time who’d like to work full-time now tops 11%.  (And who knows what the real figure would turn out to be once John Williams applies Carter-era standards to the numbers.)

As I write, the president-elect is meeting with his “Transition Economic Advisory Board,” his temporary brain trust as it…

…Markets work. Raise prices and, ceteris paribus, you will reduce sales. Increase production and, ceteris paribus, you will lower prices. Bring on a correction and people will change their feckless ways.

But one scam gives way to another. During the Great Moderation we were…

…Markets work. Raise prices and, ceteris paribus, you will reduce sales. Increase production and, ceteris paribus, you will lower prices. Bring on a correction and people will change their feckless ways.

But one scam gives way to another. During the Great Moderation we were…

This strange exercise in financial kabuki theater will shut down sometime between the election and inauguration day, when the inaugurate finds himself president of the Economic Smoking Wreckage of the United States. What will happen?

I have thought for some time that things could…

This from the Daily Reckoning:

You’ll recall that the credit crisis began in the summer of ’07. Before that the ‘war’ between inflation and deflation had been an even match. But then, sub-prime debt came upon the battlefield like a new tank. In a matter of days, deflation seized the high ground and has been winning ever since.

Of course, you have to give the feds credit. They’ve fought a…

That’s because the amount of writedowns and losses from bad mortgages predicted for banks globally is expected to total $1.5 trillion. U.S commercial banks, however, have a total capital of only $1 trillion. This from Reuters:

Admittedly not all of those will be in the United States, and banks will generate capital in the coming years even as they write down assets and set aside more money for losses.…

Keynes, however, once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public.
Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here

Many of the macro-economic fundamentals of Spain today are very different from those of ten or fifteen years ago...........A lot of factors look better this time around. Compared to its history, Spain has low interest rates, low unemployment and a strong fiscal position........the 2007 levels of government debt, unemployment and interest rates are about half the level of 1993. Equally, a lot of factors related to debt levels, housing and bank funding are worse versus the last downturn. For instance, the relative size of mortgage debt or total private sector debt to GDP, or the size of the construction sector to GDP, were all about 60% bigger in 2007 than in 1993. As was the bank system’s loan-to-deposit ratio. And the housing PE has expanded almost as much. So when Spanish bank management’s argue that the world today is not like the early 1990s, they are right: some things are better, but others are worse. As Mark Twain noted many years ago, history may not repeat itself but it does rhyme.
Spanish Banks, How Bad Can It Get? - Citigroup, September 2008

As I suggest in the title, the contents of this post resembles more an online training session about how the recent proposals to refloat and reinforce the Spanish banking sector may work out in practice than a conventional blog post, but still, this is the weekend, and at weekends, as well as all that interminable football, hiking and tapas snacks in bars, people are supposed to enjoy complementary and value-enhancing activites like going on courses, aren't they? So why don't we have a try. But remember, this topic is only for those with the sternest of stomachs, and the greatest of abilities to find - now what was the word Krugman recently used, ah yes, beauty - in that otherwise most arid of landscapes, the world of financial book-keeping.

So, as is the custom in all good training sessions, let's all start by watching a video, just to get us in the mood, and into the swing of things as it were. I think after the viewing what follows may be a lot more digestable, and certainly it should be more comprehennsible. (The version is conveniently supplied with substitles in Castellano the benefit of any Spanish speaking readers who might drop by).




Now For The Details


Well, we should now have all understood quite clearly what it is that extremely bright and intelligent investors do and don't do, but before we let ourselves forget the hard work that they all do we should not forget to offer a special vote of thanks to Moody's Investors Service, since thanks to them we now have, courtesy, of course, of the work of some of those aforementioned extremely bright and intelligent young people, a convenient summary of the principal measures contained in the recent Royal Decree Laws enacted in Spain.

Basically, the Spanish legislation follows the framework thrashed out in Paris on the October 12, and as such consists of four main components: 1) state guarantees of bank new debt issuance, 2) recapitalisation of banks, 3) coverage of the interbank lending market to increase liquidity, and 4) new temporary accounting rules.

The key measures agreed at the summit were: 1) a pledge to guarantee new bank debt issuance until the end of 2009; 2) permission for governments to shore-up banks by buying preferred shares; and 3) a commitment to recapitalize any "systemically" critical banks in distress. In particular, governments agreed to buy into banks to boost their finances and guarantee inter-bank lending. According to the substance of the agreement the guarantees should be offered on commercial terms, be available to banks of all nationalities (although national governments are to be allowed to attach their own conditions), and include assurances on providing credit to companies and households.

In terms of transnational agreement, the only truly "European" dimension to all this would seem to be the agreement to harmonise legislation and measures across countries. There are also reciprocal arrangements that each individual government will render assistance to bank outlets from other member country banks on their national territory. This could be considered as being structurally homologous to existing reciprocal social security agreements about access by citizines in one member state to health systems in another etc.

The only potentially important transnational decision which could potentially involve pooled financial support is the part of the agreement which commits member nations (implicitly although not explicitly) to collectively recapitalize any "systemically" critical banks which may find themselves in distress should the need arise, although even this commitment is not spelled out in detail, but since the system we are talking about here is the "eurosystem", and since the demise of Lehman Bros turned the term "counterparty risk" into an everyday household expression, then it is a committment which is likely to be acted on in the unfortunate circumstance that this should become necessary.

One interesting question which is raised here is who exactly the "we" are who are committed to the recapitalisation of any "systemically" critical bank which may find itself in distress in the event that the host country does not have the resources alone to carry out the resue left to its own devices. In principal, we would seem to be talking about the eurozone countries, since the evolution of the crisis in Hungary does suggest the eurozone is reluctant to intervene directly and come to the rescue of distressed systemic banks in the EU10 (in this case we would be talking about OTP, I think), although at the time of writing the ECB has extended a credit line to the Hungarian central bank to try to ease the shortage of foreign exchange there.

Of course, as we have seen in the case of German and French banks vis-a-vis the US sub-prime problem, in current account deficit countries, it isn't only the local banks who are affected when there is a sharp drop in property values, those banks who lend to the local market also take a hit.

Also, losses linked to depreciation of mortgage loans would not be exclusively supported by Spanish institutions. In fact, according to our estimates, the Spanish banks “export” close to 30% of the counterpart risks linked to mortgage loans.
Celine Choulet: Is the profitability of Spanish banks under threat? - PNB Paribas

Spanish banks have so far been conspicuously absent from much of the troubles that have struck banking systems over the past year. Of the EUR190bn that has been written off due to sub-prime related losses in Europe, little if any has come from Spanish banks. Consequently, the Spanish government has not felt the need to pledge capital injections in the way that the UK, Germany, France and some others have. The reason that Spanish banks have not suffered directly in the sub-prime debacle is that Spain has been a capital importer for many years e.g. Spanish banks have on net acted as intermediaries to bring money into Spain, rather than engage in buying US sub-prime assets.
Spain: A Matter of Time, Dominic Bryant, PNB Paribas, October 2008

Moreover, Moody's notes that, although the proposed government measures should help to ease the pressure on current liquidity constrains, Spanish banks are also experiencing a very rapid deterioration in asset quality driven (i) by their exposure to the real estate and construction sectors, which are undergoing a more pronounced and rapid correction than initially anticipated; and (ii) by an increasing decline in households' debt-servicing capacity as a result of both rising interest rates, growing unemployment, in some instances, aggressive growth strategies. Although Spanish banks display a relatively high risk-absorption capacity as a result of excess provisioning, Moody's notes that excess coverage is nevertheless rapidly declining and the fundamental credit trends in the system remain negative - and these factors underpin the likelihood of further downward rating adjustments.

Back in the good old days of Q2 2007, when Spain's economy was busy growing at a rate of about 4% per annum, corporate and household debts were increasing at a rate of about 20% per annum. 4% growth for a 20% rise in indebtedness (or an increase of about 30% in debts to GDP) doesn't seem like that good value for money when you come to think about it - and in the meantime Spain Incorporated's indebtedness to the rest of the world (via the current account deficit) was growing at a rate of 10% per annum. Fast forward to Q2 2008, and household and corporate debts were rising at a mere 10% per annum (and government debt had also started to rise, at this point at a rate of around 2% of GDP per annum, or 4% of accumulated debt), but Spain's economy had reached a virtual standstill (true it was still growing at 1% rate year on year, but quarter on quarter it was virtually stationary). So not only is this a horrible "bang for the buck" ratio, it is also totally unsustainable. Indebtedness has to be reduced, not increased, and this can be done in one of two ways, either by ramping up GDP growth (which in the present environment is out of the question in the short term) or by burning down the debt by paying (or writing) it off.

The exception will be bank obligations for which a clear substitution of risk will be made by the government for that of the bank, as in the case of explicit guarantees. In such cases, Moody's is anticipated to de-link the risk assessment from the bank and apply the appropriate government rating to the specific obligations, upon detailed review of the guarantee terms.

Bank mergers are likely in Spain and other European countries due to the international financial crisis, Spanish Prime Minister Jose Luis Rodriguez Zapatero said on Wednesday."During a serious crisis like this, it's likely that not only in Spain but also in other European countries, you will see mergers or restructurings," Zapatero said during a session of Congress.

Santander is little affected from an earnings or capital perspective should Spain have a repeat of 1985 or 1993 peak provisioning. BBVA appears more affected than Santander due its greater Spanish-gearing but this is neutralised by its higher generic provision buffer. The mid-caps (Banco Popular, Sabadell, Bankinter and Banesto) see their 2009E earnings wiped out if we see a repeat of an average of 1985 and 1993 peaks. But the benefit of generic provisions may allow them to ride out a repeat of 1993-1994 in 2009-10 but a repeat of 1985-86 would lead to capital challenges.
Spanish Banks, How Bad Can It Get? - Citigroup, September 2008

The regions under credit warning included Madrid, Valencia and Catalonia. Valencia is the most indebted per-capita region in Spain. The region has been ruled by the Popular Party since 1995, when Benidorm Mayor Eduardo Zaplana became President of the Generalitat Valenciana, the regional government......The region’s strategy has been to finance large infrastructure projects increasing the region’s debt to an extent that it is now the most indebted in the whole of Spain. The vision of grand projects has recently continued with the America’s Cup and the grand prix of Formula One.

In 2006, housing starts increased to 760,000 units, i.e. a rise of 6.2% compared to 2005, while the number of new homes built reached 658,000 (+11.5%). Due to these considerable stocks and the rise in the market for second homes (the Spanish coasts attract numerous foreign investors, particularly British), the number of residences per household exceeds 1.5 in Spain. The acceleration in housing starts, which has coincided with a fall in the number of new households formed, has pushed up the ratio of the change in residential construction to the change in the number of households to 1.53 in 2006 as against 1.33 in 2005.
Celine Choulet: Is the profitability of Spanish banks under threat? - PNB Paribas

And in the "bailing out the builders" case, the position is even more scandalous, since what we really need on the table at this point is a plan to downsize the sector, and close down at least half the industry (compensating on the way the banks for some of their losses, since if not...), not a lease of life to what are already effectively the living dead. Spanish construction currently represent 11% of GDP. On any rational criteria, the most that can be hoped for 3 years from now is 5.5 % - 6%, and it is not unlikely given the excess of building we have had recently that we may be down to 3.5% to 4% (which is the level to be found, for example, in Germany).

Immigrants like Fanny Palacios, drawn by Spain's once-booming construction and service industries, helped sustain the decade- long surge in house prices by scrimping and sometimes lying to qualify for mortgages. Now those last on the property ladder are losing the lives they built as the global credit shortage pushes interest rates higher. The single mother of two from Ecuador worked 12-hour night shifts caring for an elderly woman on top of her day job at a nursing home to meet her bank's deadline for 3,000 euros ($4,720) in mortgage arrears. "This is desperation," says Palacios, 30. "I have to pay whatever it takes. I won't let them take my home."

As I say, we don't have too many string vested gentlemen here in Spain, but we do have a lot of women who have come here to work as domestic care workers, who earn salaries in the 600-800 euros range, who have morgtage repayments which now exceed 900 euros a month, and whose husbands used to work in construction, before the "bust" came.

And we do also have numerous trances of debt issued by the Spanish bank conduits - like Santander's Hipotecario 4, Caja Madrid's RMBS III FTA etc - funds which were doubtless sold in their day as "high powered" and "enhanced" but which are now busily being scrutinised by the Moody's, S&P's and Fitch's of this world to see just where the scalpel has to be inserted.

The RMBS III FTA bonds are part of a 3 billion-euro transaction Caja Madrid sold in July 2007 - pooling mortgages with a loan-to-value ratio of an estimated 92 percent (you know, that pooling into tranches that most people thought hadn't been going on in Spain, since under the cedula system it is the whole stock of mortgages in the morgage book which back the bonds). The notes are among portions of debt from 13 separate transactions that Moody's Investors Service said it was reviewing for downgrade after a change in the way it assesses house price declines and risks of default for some Spanish mortgage bonds. Caja Madrid's loan default rate more than tripled to 1.89 percent of its total loans by the end of the second quarter from a year earlier.

Pimco's Euro Bond Fund, sold to savers in Hong Kong, is the biggest investor in Kutxa's 2007 bond issue with a 20.6 million-euro holding, according to a March 31 regulatory filing. Pioneer Investments' CIM Euro Fixed Income Fund, which is sold to Italian savers, holds 11 million euros of the bonds. Pimco, majority-owned by Munich-based Allianz SE, runs the world's largest bond fund and has $829.5 billion under management on behalf of corporate pension plans, public retirement funds and foundations. Pioneer Investments is the fund-management arm of Italy's largest bank, Milan-based UniCredit SpA (oh, oh, not them again), which oversees 190.5 billion euros for 40 million customers in 23 countries. Kutxa's 2007 bond has lost 8 percent since it was issued in February last year. That contributed to the Pioneer fund underperforming the JPMorgan EMU Bond Index by 2.7 percentage points over the past 12 months.

Traditional asset-backed Commercial Paper (ABCP) conduits are often viewed as those that are supported by liquidity facilities, where the ratings are linked to the liquidity provider's rating because the investor relies on the liquidity provider to pay in the event of a market disruption.

Beyond the expansion of this type of financing, breakdowns between the two securitization techniques remain fairly close in terms of outstandings and flows. Banks’ liabilities constitute an important underlying factor in Spanish securitizations: 27.7 billion euros in 2006, principally in the form of Cédulas hipotecarias (or covered bonds) (34.8% of new issues on the mortgage securities market). The direct securitization flow of mortgage debts (MBS) reached 48.5 billion euros in 2006 of which 38.9 billion in the form of residential mortgagebacked securities (RMBS). In 2006, MBS’s represented65.2% of new issues on the mortgage securities market.
Celine Choulet: Is the profitability of Spanish banks under threat? - PNB Paribas

Although they are not directly exposed to the American subprime crisis and have not encountered liquidity problems for the time being , the Spanish credit institutions are among the first to be affected by the sudden drying up of securitizations in Europe. On the one hand, the reversal of the asset securitization market and the interruptions in interbank transactions on covered bonds are forcing them to seek refinancing on the interbank loan market, which is expensive. On the other hand, Spanish securitization vehicles, victims of the paralysis of certain capital market segments and that may hold American subprime-related securities, could withdraw money from the back-up lines put at their disposal by the banks. This might then induce a forced reintermediation, the Spanish banks being constrained to absorb the losses from conduits that they are sponsoring off balance sheet.

Over recent years, the spectacular growth of securitization, that has placed Spain in second position in Europe just behind the United Kingdom, continued in 2006. New issues grew again by 36.1% to 93.8 billion euros (as against +31.2% in 2005 and +33.5% in 2004), bringing outstanding amounts issued by Spanish securitization vehicles to 243.2 billion euros by the end of the year. ..........In the first quarter of 2007, new issues amounted to 40 billion euros of which more than half were in the form of mortgage-backed securities (MBS).
Celine Choulet: Is the profitability of Spanish banks under threat? - PNB Paribas

So how bad will it get? The head of the association of Spain's savings banks, the Cajas, has said that their NPL ratio could rise to 3% by end 2008 and 4% for 2009. Note the Caja's NPL ratio was 0.64% in June 2007 and has already trebled to 1.91% by June 2008. The commercial banks’ NPL ratio is lower at 1.28% in June 2008, but this is more than double the level of 0.49% a year ago. Banks have lower NPL ratios versus the Cajas as usually they did not expand as fast in the boom years and have greater geographic and client diversity (for instance, they have less exposure to developers). However, even if the banks' NPL ratios are lower than Cajas, and are low in absolute terms compared to European banks, there is no room for complacency. The banks' NPL ratio has increased dramatically: the four quoted mid-cap banks we follow (Banco Popular, Sabadell, Bankinter and Banesto) posted an almost 50% increase in their absolute NPL levels in just the last reported quarter (end 2Q08 versus end 1Q08). And their bad debt coverage ratios (Provisions/NPLs), while still high versus European peers due to generic provisions, also dropped dramatically.
Spanish Banks, How Bad Can It Get? - Citigroup, September 2008

This from Taipan Daily:

Treasury Secretary Hank Paulson didn’t want things to go this way.

As the ex-head of Goldman Sachs and a die-hard free-markets advocate, he didn’t want to become a de facto socialist (buying stakes in the banks) any more than George Bush did.

But he and Bush have no one none to blame but themselves (and maybe Greenspan) in being forced to swallow this bitter pill.

Commitment to principle is worthless without…

Who can we thank for the jump start in equities? The mainstream press is tripping over itself to hail the efforts of our dearest leaders. Political titans like Silvio Berlusconi, Gordon Brown, Hank Paulson and, of course, George Walker Bush.

Bill Bonner is more skeptical. He says a bear market bounce is not cause for celebration; it's cause for selling. Bill reckons the Dow will hit 5,000 before long.

More from Bill:

We begin by pointing out the obvious. A bounce in a bear market does not give cause for celebration. It gives cause for selling.

Sell the rallies, buy the dips. Buy low, sell high, in other words.

We’re selling stocks, generally. And this bounce is a good occasion to do so... because we think this market could go a lot lower.

Dow 5,000 is our target.

When the Dow gets below 5,000 we might be tempted to buy. Until then, it’s sell... sell... sell.

Mr. Market is a decent chap, after all. He always gives you opportunities to get out... or get yourself in deeper.

After the market crashed in ’29 for example, prices gained 18.8% over the next two days. Investors should have hit Mr. Market’s bid. Instead, many were convinced that the bottom was in. They took advantage of an opportunity to buy shares at ‘bargain’ prices – only to see them cut in half... and cut in half again.

And then, they had to live with their mistake for a long, long time. Prices did not return to the ’29 high until the 1950s.

There was a rally after the crash of Black Monday in ’87, too. Stocks rose 16.6% over the next two days. This time, buying turned out to be only a short-term mistake; stocks rose for the next 12 years.

The bunkum behind this bounce is that the pyromaniacs who caused this conflagration... and then fanned the flames... are now going to put it out. We recall, for provocation, that Goldman Sachs was a leader in developing mortgage backed securities and swaps – the dry tinder that set off this blaze.

We recall too that Henry Paulson was not only at the head of Goldman while this was going on, but actually pushing the company in that direction.

We recall also that that the US central bank – the Fed – has kept its key lending rate at below the rate of consumer price inflation for most of the last six years.

As for the rest of the world’s leaders: they are little more than careless gawkers... people who drove out to see the woods on fire... and then got caught by the backburn... Now, they’re lost in the smoke and feeling the heat.

Yet, we are supposed to believe that they are creating a new world financial order... and that it will be stable and prosper.

As to the former, we have no doubt. Governments are using this financial meltdown in the same way they used the meltdown of the twin towers in 2001 – to grab a little more power. The dumb fist of politics now pushes aside the greedy little ‘invisible’ hand of Mr. Market. Subtle swindles give way to heavy-handed larceny.

Whatever happens, now the financial industry will have to stand in line for pat-downs and strip searches. More people of low intelligence and low self-esteem will find employment protecting the homeland’s financial security. And those who didst ride so high on Wall Street will lie in the dust of Congressional hearings... or lie low in some offshore hideaway. We take all that – as nasty as it is – for granted.

But the second part of the bunkum is probably dead wrong.

Government control of an economy has never led to stability or prosperity. In fact, the record is fairly clear – the more the state meddles, the worse the economic results.

In extreme cases, such as the Soviets' 70-year experiment with a command economy, the results were so spectacularly bad that – at the end of it – Soviet industry had become ‘value subtracting.’ That is, it mobilized an entire economy to extract valuable resources... to ship them... to refine and process them... and to turn them into finished goods. And at the end of the day, the finished products were so badly made and so out-of-touch with what the market wanted that they were worth less than the resources that went into them!

No one is planning to recreate the Soviet system. Instead, they’re thinking that maybe a little political supervision would be a good thing. And who knows; maybe they’re right. We just don’t know of any theory or experience that leads us to think so.

But the fix is in and who are we to argue with it? Paulson is busily giving $700 billion of the taxpayers’ money away to his friends on Wall Street. The British are trying to save the City. And the French? What they don’t know about crony capitalism – at the public’s expense – is not worth knowing.

Source: The Bunkum Behind the Bounce

Hey, it could be worse. We could be in Iceland. No doubt you've seen all the stories about how the country is essentially bankrupt after an especially Dionysian binge on derivatives. I wondered how long it would be before we saw stories about Icelanders stockpiling food and toilet paper. That day has arrived. "Bonus, a nationwide chain, has stock at its warehouse for about two weeks," reports Bloomberg. "After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally." The CEO of the Icelandic Federation of Trade and Services sees shortages even sooner than that, the end of this week, if businesses can't get their hands on foreign currency to make purchases abroad.

Is this coming soon to a country near you? Even if it doesn't, Outstanding Investments editor Byron King sees a different trigger for shortages in the stores…

Our buddy Matt Simmons said the other day, "We should thank our lucky stars that people in other parts of the world are still willing to ship us oil in payment for dollars." And: "For as fast as the financial system melted down, the oil and gas network of the world could melt down even faster." Matt was referring to a run on the refined fuel storage tanks of the world: y'know, hundreds of millions of cars with an average of five gallons each in the tank, and everyone panics and decides to top off all at once. We'd drain the system within 24 hours… be unable to refill it in any conceivable (i.e., short) time frame…. and food supplies would run out — for lack of motor transport – within a week.

Meanwhile, the Associated Press has picked up the story of the National Debt Clock running out of digits, now that the figure has rolled over past $10 trillion. Funny how this coincides with the release of the companion book to I.O.U.S.A.

No, it's not funny at all. Forgot, economic satire is obsolete now.

Source: Monday Musings

He warned investors on Bloomberg TV that the US now faces a meltdown in financials that Hank Paulson's bailout bill won't fix. Roubini says the bill is merely a way of "privatizing gains and socializing losses."

He also warned investors that stock prices could fall another 20% and trigger a period of severe deflation.

Watch Roubini discuss the financial crisis on Bloomberg TV.

Soros predicted the crisis in subprime loans punctured the lung of the financial markets.

In the interview, Soros slammed Treasury Sectretary Hank Paulson. He said the onetime Goldman Sachs boss was part of the very Wall Street system of "financial engineering" that caused the crisis in the first place.

Soros also said the American consumer economy -- what he called the "motor" of the world economy -- has now been switched off.

Watch it here.

Soros predicted the crisis in subprime loans punctured the lung of the financial markets.

In the interview, Soros slammed Treasury Sectretary Hank Paulson. He said the onetime Goldman Sachs boss was part of the very Wall Street system of "financial engineering" that caused the crisis in the first place.

Soros also said the American consumer economy -- what he called the "motor" of the world economy -- has now been switched off.

Watch it here.

-- MarketWatch reports that "S&P 500 futures rose 14.9 points to 995.90, Nasdaq 100 futures rose 30.5 points to 1,350.50 and Dow industrial futures gained 136 points."

-- Global stock markets have also mostly rebounded from yesterday's pummeling. London, Paris and Hong Kong rallied 3% following the coordinated rate cut by global central banks.

-- Meanwhile, the euro gained on the dollar. The euro bought $1.3702 in morning European trading

-- Gold fell for the first time this week in London. Bloomberg reports that investors are selling the previous metal to raise cash as the liquidity crunch continues.

-- Hank Paulson's Treasury Department is considering "ways to inject capital directly into banks, possibly by taking equity stakes," reports the WSJ. The only problem is the Treasury "is trying to figuring out how to structure such capital infusions so that banks can recapitalize and begin lending."

-- The $55 trillion world of credit default swaps is very much on the minds of the feds. The talk is they are planning a central clearinghouse to remove the risk of a large counterparty failure. Reuters reports that the Federal Reserve Bank of New York "has summoned participants in the $55 trillion credit derivatives market to a meeting on Friday, which sources say will focus on determining which clearing house the market will support.

This from The Daily Reckoning:

If you want to know the Real, Real Reason (RRR) why we are being subjected to a $700 billion bailout of the economy, which is just the beginning, it is because the despicable Alan Greenspan, during his foul 18-years as chairman of the loathsome Federal Reserve, created all the money and credit that financed the stock market boom, the bond market boom, the housing boom and (worst of all) the growth-in-government boom.

And now, all those things are bid up waaaAAAaaaayyyyy past their real values, and buyers are scarce while sellers are many. So the owners of those depreciating assets suddenly realize that they either have to hold onto them and go bust, or find some moron with a lot of money to buy them. Oops!

Tragically, while stocks can go bust, and bonds can go bust, and houses can go bust (and they are), the growth-in-government boom cannot be allowed to go bankrupt, because half of the people in the country now receive a government check of some kind as their income every month (Social Security, welfare, etc.), AND the governments collectively "employ" half the workers in the country because half the nation's workers have incomes that derive from government spending either directly or indirectly!

So, the real reason is: Governments need the money! It's as simple as that!

I know you find it hard to believe me, since Total Payrolls is officially listed as $145.5 million, while government payrolls is shown as $22.5 million - but it's true, nonetheless.

Firstly, these "government payrolls" do not variously count such things as firemen, policemen, teachers or any of myriad "contracted out" services, which means that the contracting private-sector provider is a private company that gets all of its income from government, thus they are indirectly, but totally, employed by government.

Now, add in ALL of those "contracted" services that government buys, such as building maintenance, lawn services, office supplies, equipment providers, equipment servicing contractors, rented office space, security services, pornography downloads, storage space, and parking areas, all of which is counted as being "private employment", when in fact it is Pure Public Payroll (PPP).

Now, we apply the multiplier as these incomes provided by the government are received and then spent, providing another income to someone else, which is also spent, providing another income to someone else, which is also spent, providing another income to someone else, over and over, all the while being whittled down by taxes.

Since all multipliers range between 3 and 7, even a multiplier of 3 will be enough to enlarge the official 22.5 million government employees to 67.5 million, which is almost half of the total 145.5 million employed in the whole freaking country!

As proof, I offer the Energy & Scarcity Investor newsletter, where we get the report that "Last year, the Pentagon spent $316 billion on contracts with private firms", which is "more than it spends on actual weapons to fight wars."

So, not only do "military contractors account for more than half of all Defense Department spending - 57.6%", but there are a lot of these "private employees" in the "47,000 companies to choose from - running the gamut from blue chips to start-ups" that are getting, and living on, government money.

Ergo, the government desperately needs money, the Federal Reserve will create the money the government wants, the fresh government debt will be bought up, the money supply will increase, the value of the dollar will continue to fall, and gold will rise along with, and almost certainly more than, the rise in all other prices! Whee! This investing stuff is easy!

Source: Government Spending Spree

This from the LA Times:

The warning comes as California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.

The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch. If the state is unable to access the cash, administration officials say, payments to schools and other government entities could quickly be suspended and state employees could be laid off.

Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500-million bond sale, Massachusetts had to pull the plug halfway into a $400-million offering, and Maine is considering canceling road projects that were to be funded with bonds.

California finance experts say they know of no time in recent history when the state has sought an emergency loan of this magnitude from the federal government. The only other such rescue was in 1975, they said, when the federal government lent New York City money to avoid bankruptcy.

Read on here.

If the modified bill goes through, another $700 billion would be pumped into the world financial system. "That would mean far higher prices are ahead," according to Keith Fitz-Gerald.

Higher prices - inflation - means higher oil prices. Keith says there are five strong reasons why oil will rise.

We’re talking Econ 101 here: Every one of the bailout bucks dilutes the buying power of every other dollar already in circulation. That erosion in buying power is the textbook definition of inflation."

In fact, that’s just how it played out this week. When the bailout plan was rejected Monday, meaning those bailout bucks wouldn’t be joining the financial system, oil prices fell precipitously, since there would be no additional inflationary pressures. But when investors started to rethink that thesis Tuesday - meaning they believed some sort of new bargain would be reached - oil prices reversed course and rose in anticipation of that money possibly being pumped into the financial system.

Although a bailout could jump-start the financial markets for a while, history suggests that over time the "cost" of the liquidity Ben Bernanke and Hank Paulson have cobbled together may manifest itself in the form of far higher oil prices. Other commodities would rise significantly, too. Investors have only started to see this outcome.

So, what happened back on that Monday, September 22, when oil prices made that record one-day run?

My experience as a professional trader makes me think that somebody simply got trapped on the wrong side of the markets and was trying to cover a humongous position at any cost.

And what I saw on my screens seems to confirm that. It was a late-session spike at a time when traders either had to get in line for delivery or unwind their positions before the October crude futures contracts expired. With a mere 30 minutes remaining, there were no sellers to balance prices, while the market makers who normally would provide a modicum of orderly behavior were nowhere to be found amidst the chaos.

Five Points to Bank On

What’s likely to happen longer term? Simple. In fact, here are five points you can take to the bank.

• First, global oil demand is still accelerating and, according to the United States Energy Information Administration (EIA), will reach more than 115 million barrels per day by 2030 - even with conservation efforts and high prices stunting demand.

• Second, daily production has probably peaked right now at nearly 90 million barrels a day, or will peak in a few years at the very latest. While experts once debated the reality of the "Peak Oil" concept, they now accept it and only question when it will take hold.

• Third, the world’s fastest growing economies, China and India, are still increasing consumption at double-digit rates, and that more than offsets any conservation efforts that are under way elsewhere around the world. And their governments want to buy oil at any cost - even if that means there’s none left for us.

• Fourth, the world will learn one day - probably sooner rather than later - that Saudi Arabia’s vaunted reserves are nowhere near what it claims them to be, and those reserves are certainly not at the levels long held as "gospel" in the oil business. Matthew Simmons, chairman of the Houston-based investment bank Simmons & Co. International, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," has been most vocal about this alleged shortfall, and I respect his work, especially since I’ve spoken behind closed doors with several OPEC figures who privately acknowledged that this may be their worst nightmare. Simmons recently predicted that oil prices would rally to $500 a barrel.

• Fifth, Bailout Ben has dropped trillions into the system to stabilize the Wall Street while Paulson has broken out his bazooka which suggests that as much of 95% or more of oil’s price drop can be attributed to nothing more than the dollar’s rise since July. Nothing else has changed.

Should traders see through the smoke and mirrors or simply decide to run for the exits, we can expect to see the dollar shrink to new lows and oil to rise to new highs in a perverse flight to quality.

Only this time, this "quality" is literally quite crude …

Source: Five Reasons Why the $700 Billion Banking Bailout Will Translate into $250 Oil

What most people just don't get, says Chuck Butler is that the bailout "constitutes the single greatest case of ignoring the free market in modern history." And there is actually little justification for it.

"On a historical basis, many parts of the US economy are in awfully good shape," according to Chuck

This from The Sovereign Society:

We're told to believe otherwise because doom and gloom dominates what the mainstream media consistently reports.

One of the biggest fear indicators they use: Employment numbers. After all, Americans don't want to lose their jobs.

But look at the current employment situation on a historical basis: While U.S. job losses are on the upswing, they are fairly modest ... and should be expected in a self-cleansing market.

As my chart shows, taking into account only the last 40 years, today's unemployment rate sits relatively low compared to 1975, 1983, and 1993.

If we play our cards right we could see the current rise in unemployment top out around the same levels as it did roughly five years ago. That would be nothing to panic over.

Let's look at inflation - another economic boogeyman...

Current CPI in the U.S. sits just north of 5%. That's easily less than the roughly 6% to 7% back in 1991. And in 1980, for example, inflation reached almost 15%.

Countries, particularly emerging markets, would kill to have inflation as LOW as 5%!

More to the point, Americans can afford necessary food items as easily as ever. Here's a snippet from an article put together by the Federal Reserve Bank of Dallas last month:

Based on the average U.S. pay rate, it takes less than two hours of work to pay for 12 basic food items - tomatoes, eggs, sugar, bacon, milk, ground beef, oranges, coffee, lettuce, beans, bread, and onions.

That figure is nearly as low as it's ever been.

Consumption may finally be taking a breather, as it should, but discretionary items like computers, DVD players, cell phones, digital cameras and color TVs have become far more affordable. And that even includes those families considered "poor."

Moreover, despite my view that the U.S. government is dipping its hand way too deeply into the markets, making them increasingly less free, it's all a relative game.

Many other countries around the world are either officially in, or about to slip into, recession.

And on a relative basis, because their governments are much more entrenched in the market than Uncle Sam is in ours, their ability to recover is hampered even more.

Why is this an important part of the dollar equation? Because it means that, despite all our warts, it's quite possible the U.S. might still win the global economic beauty contest by getting judged the least ugly.

PS: There are massive changes in store for the world economic system, and currencies will be the battlefield where this change actually takes place. Join Jack as he explores one of the most profitable sub-niches of the currency world and explains how to turn those changes into triple-digit profits. Click here to find out more.

Source: What Could Have Been a $700 Billion Slap in the Face

For example, AIG (AIG) is paying a very steep interest rate for its bridge loan and for the privileged taxpayers who get most of the equity in the firm. However, the decision was made that they had to get ahead of the whole problem and deal with it on a systemic basis after the markets started to seriously unravel.

The credit market comes to a screeching halt.  So a week before Congress is set to adjourn, he recognizes the crisis and comes out with a bare-bones proposal (2 ½ pages), which pretty much says, "Give me $700 billion to buy just about any asset from anybody I choose, at any price I choose (assuming the seller is willing) and then sell it off to anybody I choose at any price I choose.  Oh and there shall be no oversight of this by any other agency or court of law." 

Congress is outraged and the public is overwhelmingly against the proposal.  Chris Dodd makes very substantial revisions to the plan, including lots of oversight proposals, equity participation for the taxpayers for firms that participate in the program, caps on CEO pay to ensure that the capital being supplied to these institutions is not siphoned off to their bank accounts, and doing the deal in installments so Congress has a chance to evaluate how things are going before the whole wad is blown.  The Administration was very receptive to most of these changes, and it looked like a bi-partisan agreement was about to be reached.  Within the first hour of the first Senate Hearing it was clear that the Paulson plan was dead and the discussion was really about the Dodd Plan. 

The Dodd plan was far from perfect.  It looked like the deal was going to leave out changes to the bankruptcy law that would allow homeowners some relief if they were willing to go through the very onerous procedure of declaring bankruptcy.  It was also flawed in that it overly focused on addressing the problem of too much leverage from the asset side of the equation rather than the equity side. 

However, it is clear that something had to be done.  There was a meeting at the White House to try to hammer out some of the final details.  The meeting quickly broke down after the head of the House GOP, John Boehner, announces that he is going to oppose the deal, and at the last minute drops a brand new proposal on the table.  These proposals were not mentioned at all in any of the hearings that have been going on this week.  The Boehner plan, as best I understand it, calls for the elimination of even more regulations, cutting capital gains taxes and insuring these assets rather than buying them. 

We got into this mess because of a lack of regulation.  Insurance is available on these assets privately in the form of the ABX indices.  They are one of the canaries in the coal mines that have been warning about the problem.  The cost to insure has gone through the roof as risks have risen. 

Hank Paulson is right on this -- the Boehner plan will not work.  We need to act quickly and we need to get it right.  Congress needs to be kept in session to hammer out a plan, and it should be based on modifying the existing Dodd plan, most notable by directing more of the money into the equity side of the equation.  The House GOP has just made sure that nothing will be done soon. 

The end of the quarter is coming up, and that will allow people to withdraw cash from hedge funds, causing them to have to sell and deleverage.  That has been exacerbated since in the middle of all this, the SEC has made the fundamental investment strategy of almost every "true hedge fund" illegal by banning short-selling.  After all, they are called hedge funds because they hedge overall market risk by buying some stocks and selling short others.

The market is going to tank today, but do not try to bottom-fish it.  Right now, TIPS look like a safe place to hide.  High grade Muni bonds look good, but make sure that the credit rating is based on the underlying credit, not because it is insured -- insurers MBIA (MBI) and Ambac (ABK) could be strained further.  On a tax-adjusted basis they look very cheap. 

On the equity side, look at the gold miners.  There is a very good chance that the only card left to play is monetization of debt by the Fed, which will lead to much higher inflation.  Gold miners like Barrick Gold (ABX), Harmony Gold (HMY) Kinross Gold (KGC) and Newmont Mining (NEM) would be the natural beneficiaries of this.

Read the full analyst report on MBI

Read the full analyst report on ABK

Read the full analyst report on ABX

Read the full analyst report on HMY

Read the full analyst report on KGC

Read the full analyst report on NEM

Congress is making "tremendous progress" on a U.S. bank bailout bill, Rep. Paul Kanjorski, the chairman of the House of Representative's subcommittee on capital markets, a Democrat from Pennsylvania, told CNBC. An agreement on a bailout bill is "almost an accomplished fact," [...] Kanjorski said.

The news sent US stocks skyrocketing this morning. The Dow (DJI) climbed over 200 points in barely an hour of trading. Justice Litle says there are 5 things every investor needs to know about the Paulson plan.

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

The $700 billion dollar figure may have been plucked from nowhere but, according the The Wall Street Journal, it may be the "greatest trade ever". Here's why:

It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates - in effect, "talking their book." While normally this creates a threat of inflation and a run on the dollar, and we may see dollar exchange rates turn south near term, don't expect it to last.

First, with Goldman Sachs and Morgan Stanley now operating as low-leverage bank holding companies, a dollar injected into the economy will most likely turn into $10 in capital (instead of $30 when they were investment banks). This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets, will become a safe haven for capital.

Europe is threatened by an angry Russian bear. The Far East, especially China, has its own post-Olympic banking house of cards of non-performing loans to deal with. Interest rates will tick up as the economy expands -- a plus for the dollar. Finally, a stronger economy driven by industry instead of financials means more jobs, less foreclosures and higher held-to-maturity payouts on this Fed loan portfolio.

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion - the greatest trade ever.

Note that first sentence: "It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again." It should send shivers down the spine of investors holding dollar assets.

According to Rude Awakening editor Eric Fry - and we think he's bang on the money with this one - investors should "Sell the dollar, sell the dollar, sell the dollar"...

The U.S. Treasury will absolutely, positively increase the money supply to rescue the financial system…Which means investors must try to protect themselves against an almost certain inflation.

So what’s an investor to do?

Sell American stocks, bonds and currencies; buy foreign stocks, bonds and currencies. And, of course, buy commodities.