[MrBill]

It is certainly an interesting article/blog, but I do not know what to make of it? I am not sure that the Fed is not draining liquidity in one place, while that liquidity is not being replaced elsewhere in the system.

However, the premise seems to be that if the Citigroups of the world cannot borrow at Fed's discount window at 3.50% because they do not have enough quality collateral then they have to recapitalize via expensive preference shares that carry an annual rate of interest of 11% and are covertible into Citigroup stock at some point in time.

I am sure all those like MBIA that has to issue new equity at a 14% discount to their existing beaten down share price would be quite happy to replenish their capital through the money markets, at 3.12% Libor plus a small spread, if that liquidity was available. But banks are hoarding it themselves because they have to maintain their own capital adequacy ratios (CADs).

One year Libor has been discounted to 2.75% now indicating that money markets are expecting at least another 0.25% Fed easing. But that does not mean that any further Fed easing will be reflected in lower borrowing costs for corporates as banks may increase spreads despite the lower Fed funds target rate. The Fed cannot control long-term rates. They can only set targets and hope banks will want, need or be able to borrow and lend at or near those benchmarks.

With 50 to 150 bankruptcies in the US banking sector forecast - especially to those involved in construction lending for example - the banks will unable and unwilling to pass through those lower lending costs until they know their own CAD levels are covered including any loan loss provisions on non-performing loans and possible bond defaults that banks also have to make provisions for as part of their CAD calculations.

Total net TIC flows were $60.4 billion vs. $65 bio f/c vs. $149.9 bio previously. Net long-term flows were $56.5 billion vs. $73.5 bio f/c vs. $90.9 bio previously. Foreigner are not lining up to buy USD denominated debt. The good news continues to surprise to the downside! ; - )

[patience]

MrBill,
Ronmn just posted in the Housing collapse thread that FGIA (sp?) was downgraded yesterday from AAA 6 notches to junk status. More to come on the monolines, after hearings yesterday in the US Congress on the matter. NY Governor said they needed major help in 4-5 days. Bowl swirling? Looks like it could, very quickly.

[Euric]

[quote="MrBill"]


I'm not sure what purpose this comic has, but it seems to me it applies to Mr. Bill himself. In the 2.5 years that Mr. Bill has been a member of peakoil.com, he has written close to 4000 mostly long winded posts. I wonder if Mr. Bill can see himself in the cartoon.

Joined: Sep 15, 2005
Posts: 3930
Location: Eurasia

[MrBill]

$this->bbcode_second_pass_quote('Euric', '')$this->bbcode_second_pass_quote('MrBill', '
')
I'm not sure what purpose this comic has, but it seems to me it applies to Mr. Bill himself. In the 2.5 years that Mr. Bill has been a member of peakoil.com, he has written close to 4000 mostly long winded posts. I wonder if Mr. Bill can see himself in the cartoon.

Joined: Sep 15, 2005
Posts: 3930
Location: Eurasia

[patience]

MrBill,
I'm guessing we have a short term flight-to-quality to US debt, vs a long term aversion to US debt, or bonds, the longer the term, the more aversion, based upon:

1) Smart money is worried about monolines, equities and bank troubles.
2) Nobody knows how this will play out, so there is risk to long term anything.
3) Commodities are bubbling away, and look risky to me.

Meanwhile, the FED, the US Treasury, govt, and major banks are desperately playing hide-the-sausage to buy time, hoping for a miracle as they watch the debt bubble collapse. The politicos want to put it off until after elections, and the banks want to put off the reckoning forever, AKA, Japan.

I want to be as risk averse as possible, so when I became aware of the banking mess, I dumped ALL the paper investments some time ago and went to cash. The longer it sits there, the more we lose to price inflation, monetary/credit deflation notwithstanding. So, we bought food, and such things as we will need for the short term future. PM's look like they could go any direction to me, so we have avoided that. Until recently, I would have put some about half of our cash into muni bonds, but that is coming unwrapped as we speak. I only mention that as a reference for my goal here. I could put some money into steel for retail sale in our small business, but it has gone up 30% in the last couple months.

Does a safe harbor exist for spare cash? There are as many opinions on the future as there are belly buttons. I want to sit on the sidelines, without speculating, if that is possible. If not, I'll take my best shot at it, since doing nothing is also a decison.

[MrBill]

I have been overweight cash now for quite sometime and share many of the concerns that you have. One I find most asset prices over-valued. And secondly I am worried about inflation in the long-term, so that cash needs to be deployed eventually. Normally, commodities would be the place to go for protection, but many commodity prices are also very high. There are a lot of places one could have invested two years ago, but that is of little help now.

I sold most of my non-core equity positions last summer/early autumn, and have been underweight stocks ever since. I have some core energy holdings, but about one-third my normal size. I believe this market will take a year or two to unwind, and that we have not seen the lows, yet, this year. Therefore, I am testing the waters, but only in small amounts, while keeping a list of stuff I would like to buy if the prices came back to 'normal' by historical or relative standards.



Two-thirds to three-quarters of the my assets are not in US dollars, but in euros mainly, and some Sterling and Canadian dollars. But even here the problem is finding something worthwile to buy? I have gone into German government bonds - bunds - as protection. They are still yielding near 4% in the 10y and will protect me against US dollar weakness. I also expect the ECB to start easing later in 2008.

However, that still leaves me over-weight in cash. I have twice as many bonds as equities. And twice as much cash as bonds. I have been paying down any outstanding debt - such as my mortgage - just because I cannot find anywhere else to deploy that money at moment. I would like to own more farmland, but that is another story. Prices there are not cheap either. And I am reluctant to overpay above and beyond what the land can actually produce. That would be, well, speculation on land prices. This is the time for capital preservation and not speculating.



I have instead been trading FX to take advantage of movement there without committing myself to anything in particular. Mostly I am trying to hedge any downside, by shifting from euros into, say Canadian dollars, if the price looks overdone one way or the other. More technical trading. However, last week was a loser for me. I made some money being long CAD against the USD, but lost being short EUR/JPY as risk takers put their yen carry trades back on. Also, JPM put out a report last week saying that yen was not likely to revalue as much as people thought, and that the market was overweight long yen in anticipation of yen strengthening.

I keep my positions deliberately small at the moment, so they cannot hurt me per se, but I still like to be right and get the market timing correct. That was not very successful last week, but I can take comfort knowing that if my short-term trades do not workout properly that my underlying position is larger, so net/net I am still on the right side of the trend.




But I share your concerns. Cash is undervalued, and if not for the threat of public policy induced inflation from excessive money supply growth and currency devaluation then I would be happy to sit on the sidelines and wait. Everything else is a speculative punt at the moment. Gold may hit the moon, but then again maybe it won't? Not with my money thank you very much! ; - )

[Revi]

I am investing in cast iron cookware. Seriously, I am. I figure that there is no downside. If the value goes down, I eat out of them. I bought the Griswold and Wagner book and am scouring yard sales from here to New Hampshire.

I think cast iron is the new precious metal.

It can't go down like the dollar.

You can make yummy things in it, even if the electricity goes out.

Here's a site about it:

http://www.griswoldandwagner.com/

Check out those prices.

It's the ultimate in a tangible asset.

[Micki]

MrBill, why not park some in Australian bonds?
Yields should be OK and currency should strengthen further against US and EU + many other european if they start cutting rates there.

(Or do you think AUD will drop like a rock if the slow down continues?)

[Petrodollar]

..Since this thread is supposedly about the "last days of the dollar," here's an interesting and extremely candid analysis by an "economist and banker" in Iran - apparently they are much more candid than the economic pundits heard here in the US regarding the current state of affiars...

http://www.globalresearch.ca/index.php? ... a&aid=8108

$this->bbcode_second_pass_quote('', '[')b]The Fall of the Dollar Empire

by Hamid Varzi

Global Research, February 17, 2008
Press TV, Tehran

An interview with Hamid Varzi by Monavar Khalaj

The following is an interview with Hamid Varzi an economist and banker based in Tehran about the US economic crisis.

Q.Please tell us more about the 2007 subprime mortgage financial crisis and why, how and when it began?

A.The crisis began in 2000 with Bush Jr.’s election that re-established the irresponsible “Supply Side” and “trickle-down” economic policies of the Reagan years. We are wrong to focus only on the subprime crisis, which has been conveniently blown out of all proportion in order to create the convenient and comforting impression that this is a manageable problem solvable through a simple reduction in interest rates and a 90-day government mandated delay on foreclosures (Hillary’s recommendation).

The subprime crisis presages far greater problems down the road. It is already spreading to other forms of commercial paper, and even if the damage can be contained the relief will be only temporary because a much larger danger is looming on the horizon: The US economy has grown largely on the back of speculative credit derivatives that have risen exponentially to $35 trillion, which is more than double the size of the entire US economy! This is an approaching iceberg, and all you’ve seen (in the sub-prime scandal) is the tip. To return to your question, the first chart below proves that speculative commercial lending received a major boost with Bush’s election, and soared with his re-election.

Credit derivative volumes continue to soar. The notional principal outstanding of credit default swaps (CDSs) grew 33% in the second half of 2006, rising from $26 trillion to $34.5 trillion, following 52% growth during the first half of 2006, according to industry body International Swaps and Derivatives Association (ISDA). (Global Finance, June 2007). The ECB confirms the HI 2006 figure of $ 26 trillion. As you will observe, actual growth has far exceeded even the rapid growth foreseen by the British Bankers’ Association Credit Derivatives Report 2006 in which ambitious growth targets for 2008, forecasted below, have already been met. The bulk has been ‘created’ in and by the United States, and only a small portion of this speculative debt relates to subprime mortgage lending.

[patience]

There's no doubt in my mind that the US is in for a bad fall, nor that we are poorly equipped to deal with it. Mr. Varzi didn't comment here on any comparative conditions in any parts of the world except how Asia would fare in a collapse of the dollar.

From what I've read, our toxic finance disease has infected the UK, Europe and others to at least some degree, with banks in trouble in many places. He also neglected to mention that alot of Arab and Asian money has come to the aid of US banking and finance lately. It would seem to be a serious oversight, if he had not mentioned that, or we didn't see the whole text here.

He seems to indicate less of a threat to the rest of the world from the mess than what I've seen elsewhere. To me, it looks like a race down the drain. Am I sensing a slanted POV?

I think he's right that the dollar may fall relative to other currencies, but somehow I think we don't get the whole story here. What about the tankage that will occur elswhere in the world, and it's effect on the basket of currencies he speaks of?

[Lanthanide]

There has been all this talk about the "decoupling of the US economy" and how it appears that it hasn't actually happened, because all the world stock markets crashed at the same time.

But what if the underlying theory is correct - the US has decoupled itself to some extent, it just hasn't gotten bad enough in the US for this to manifest itself yet.

[Micki]

Most theories I've seen on decoupling involves volatility and possibly sharp drops first and only then decoupling.
This rebound may happen from much lower levels if panic breaks out.
Noone knows 100% what impact the US issues will bring to the rest of the world, so it is only when the dust settles we will see which ones can move on.

Much of the day to day reactions are based on US market news and/or overnight futures traded overseas.
If you are trading based on TA , it may be wise to stick to weekly charts to filter out noice and whipsawing.

[MrBill]

$this->bbcode_second_pass_quote('Micki', 'M')rBill, why not park some in Australian bonds?
Yields should be OK and currency should strengthen further against US and EU + many other european if they start cutting rates there.

(Or do you think AUD will drop like a rock if the slow down continues?)

[MrBill]

$this->bbcode_second_pass_quote('Lanthanide', 'T')here has been all this talk about the "decoupling of the US economy" and how it appears that it hasn't actually happened, because all the world stock markets crashed at the same time.

But what if the underlying theory is correct - the US has decoupled itself to some extent, it just hasn't gotten bad enough in the US for this to manifest itself yet.

[MrBill]

$this->bbcode_second_pass_quote('patience', 'T')here's no doubt in my mind that the US is in for a bad fall, nor that we are poorly equipped to deal with it. Mr. Varzi didn't comment here on any comparative conditions in any parts of the world except how Asia would fare in a collapse of the dollar.

From what I've read, our toxic finance disease has infected the UK, Europe and others to at least some degree, with banks in trouble in many places. He also neglected to mention that alot of Arab and Asian money has come to the aid of US banking and finance lately. It would seem to be a serious oversight, if he had not mentioned that, or we didn't see the whole text here.

He seems to indicate less of a threat to the rest of the world from the mess than what I've seen elsewhere. To me, it looks like a race down the drain. Am I sensing a slanted POV?

I think he's right that the dollar may fall relative to other currencies, but somehow I think we don't get the whole story here. What about the tankage that will occur elswhere in the world, and it's effect on the basket of currencies he speaks of?

[mefistofeles]

$this->bbcode_second_pass_quote('', 'N')ormally, commodities would be the place to go for protection, but many commodity prices are also very high. There are a lot of places one could have invested two years ago, but that is of little help now.

[MrBill]

I do not think commodity prices or even energy prices are too high per se...


... and I do think that excessive money supply growth is mainly to blame for the high asset prices and gathering inflationary pressures we are seeing at the moment. And as you say, the weak US dollar, is not helping, but nor is the currency manipulation by those oil producers and Asian exporters that try to keep their own currencies export competitive by not allowing them to appreciate against a weak US dollar.


But if I look at where we are in this business cycle then it is late in the day. Somewhere between 'denial' and 'fear' after which comes 'capitulation' and 'despair'.



Even if commodity, metal and energy prices were to hold-up in relative terms compared to housing and financial assets, in absolute terms we might still see a repeat of summer of 2006 when crude prices took a nasty 36% retracement in a very short period of time.

As a matter of fact copper and the other metals have already shown us some of that downside risk on the back of fears of a slowing global economy. Even though now they have recovered for the time being.

In the long-term that might be an excellent place to re-enter the market to play resource depletion and/or the Chindia global growth story, but in the short- to medium-term I would be very nervous. But then again my time horizon may be more trading oriented than long-term value investing. To be honest I think one's portfolio should be balanced and therefore have long-term and short-term positions in it to capture different trends, increase performance and lower variance.

Even T. Boone Pickens has had some nasty investment set-backs from time to time, and his beta heavy portfolio certainly did not outperform the market turbulence in January. He got killed. Fortunately, he has deep pockets.

But at this stage in the cycle I am more worried about capital preservation than missing the market bottom, as I really do not think we have seen it, yet. The popping of the dotcon bubble took more than 2-years to unwind from top to trough, and I think the underlying global financial imbalances are much worse this time around.

Physical commodities will probably outperform other assets going forward, but we may yet see better entry levels. And also ETFs aside playing individual commodities exposes one to all sorts of basis risk. So even if one gets the direction right the roll-overs and seasonal spreads can still kill you! ; - )

p.s. my coal stocks have gone up so far, so quickly that they are scaring me! What goes up fast can come down fast, too. Think PetroChina! ; - ))

[seahorse]

Mr. Bill,

I personally believe coal stocks/prices will continue to rise long term. As you know, demand for electricity is rising exponentially. I've kept the Olduvai Gorge thread going, not necessarily to say its right, but to point out all the serious issues of increasing world demad for electricity. Because demand is fierce, and bc continued increasing NG supplies is questionable, demand for coal will continue to rise. I'm a small player, but back in 2004 I bought some coal stocks, ACI, BTU and a few Canadian. I also bought some RR stocks, the ones that transport coal for the companies I bought. ACI has had a stock split during that time. I believe coal will continue to do well.

For the same reason, I believe gold will continue to at least hold its own, simply bc I believe David Walker (head of the US GAO is right), the US is going bankrupty, and that can't be good for the US dollar or treasuries.

[MrBill]

$this->bbcode_second_pass_quote('seahorse', 'M')r. Bill,

I personally believe coal stocks/prices will continue to rise long term. As you know, demand for electricity is rising exponentially. I've kept the Olduvai Gorge thread going, not necessarily to say its right, but to point out all the serious issues of increasing world demad for electricity. Because demand is fierce, and bc continued increasing NG supplies is questionable, demand for coal will continue to rise. I'm a small player, but back in 2004 I bought some coal stocks, ACI, BTU and a few Canadian. I also bought some RR stocks, the ones that transport coal for the companies I bought. ACI has had a stock split during that time. I believe coal will continue to do well.

For the same reason, I believe gold will continue to at least hold its own, simply bc I believe David Walker (head of the US GAO is right), the US is going bankrupty, and that can't be good for the US dollar or treasuries.

[MOCKBA]

$this->bbcode_second_pass_quote('MrBill', '
')I like coal and railways, too. That is why I bought Consol when it was looking cheap back in August.