I just launched an updated version of my blog, which can be viewed at:

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WWW.COVERINGDELTA.COM

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For subscribers who received an email regarding a recent interview of mine with Yanis Varoufakis, please be advised that this is now available on the new blog. All future posts will be made on my new blog. This older version will be taken down over the next few days.

I appreciate any feedback you can provide regarding the site’s functionality and any features you may wish to see added. If, for some reason, you find that your subscription service to the blog is not automatically transferred over to this new site, then you can always re-subscribe from the homepage. You can also use the contact section of the new site to email me with any concerns you may have.

Lastly, I have been away for the past few days (and will not be back in Athens until next week), and so posts have been sparse.

Demetri

The Banks Family from 'The Fresh Prince of Bel Air'

Many people want to say that 2011 is starting to feel a lot like 2008. I disagree. I think its worse.

2008 came as a shock to many people. No one believed that credit markets could freeze the way they did, and that major financial institutions like AIG and Lehman could fail the way that they did. No one believed that AAA debt could turn illiquid, and that the entire derivatives universe could come crashing down. 2008 was all about disbelief.

After 3 years of living in denial, financial markets are beginning to come to terms with the fact that markets have ceased permanently to function. The only reason we made it around the corner into 2011 is because we have been hooked up to government sponsored lifesupport. Now people are starting to question the lifespan of the respirator…

Think about this for a moment please. After 3 years of close to 10% official unemployment, 0% interest rates, and exploding government deficits, we find ourselves, once again, on the precipice of a renewed contraction in global GDP. How is this possible? I thought central banks could prevent depressions?

If central banks could prevent depressions and save the banking system, then why is the index of five-year bank CDS’s now trading wider than during 2008? Why are three-month interbank lending rates for euros are at their highest levels since 2009? Why have yields on 10-year US treasury bonds dropped below 2% if official inflation is over 3%? Why is gold trading at near 1,900 dollars per ounce? Why is Bank of America laying off 3,500 workers? So many questions…

I believe that the banking system is largely bankrupt. How do I know? Well, let’s take the metaphor of a black hole. You can’t actually ever see a black hole because it doesn’t emit any light, but that doesn’t stop you from being able to detect its presence. The same way that you can detect a black hole in space – by observing its gravitational effects on nearby objects – so too can you detect a black hole in the banking system, by observing its effect on money and credit in the economy. When banks are bankrupt, their desire to lend is reduced and their desire to hoard cash is accelerated. The closer you venture towards the event horizon, the stronger the effect.

Permanent zero (the Fed’s determination to keep interest rates at 0% for at least the next 2 years) is just one of many signs that the banking sector is insolvent. Banks actually borrow money at a lower rate than what they can make by keeping that money at the Fed on deposit. That’s free money. And what about the fact that investors are willing to loan their money to the US government at 2% every year for the next 10 years when official price inflation comes in well above that at 3.6%. And lastly, let’s not forget that the FDIC continues to insure all non-interest bearing deposits, regardless of the balance of the account and the ownership capacity of the funds for at least another 16 months. That’s unlimited coverage. Why, oh why?

Again, the answer to all of these questions is that the banks are bankrupt, and the only thing keeping them, the financial markets, and the rest of the economy alive is government sponsored life support, primarily through special loan facilities, central bank interventions, and fiscal spending up the ying-yang. The markets know this, but they have been willing to play along for the past three years because they figured the government could keep things from falling apart. Well, now it seems that the markets are starting to question the intelligence and resolve of their “public servants,” who are appearing themselves, more bankrupt by the minute. The only difference here is that politicians don’t go broke from lack of financial capital. They go broke from lack of political capital, and as people around the western world begin to catch onto this ponzi scheme of collusion between governments and banks, the ease with which these cleptocrats have been able to perpetuate their fraud is coming under sever constraints.

The only question that remains for me is, what is going to be the spark that is going to start the next bank panic, and what will governments do then?

Sound Money Interview of Richard Duncan (08-19-11)

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This is a Sound Money Interview from my show “Covering the Spread,” on 91.5FM WNYE (broadcasting across NY, NJ, CT, and PA). My guest for this show is economist Richard Duncan.

Richard Duncan is the author of The Dollar Crisis: Causes, Consequences, Cures (John Wiley & Sons, 2003), an international bestseller that predicted the current global economic disaster with extraordinary accuracy.  This widely acclaimed book has been translated into five languages.  It climbed to #10 on Amazon’s list of all bestselling books worldwide in October 2005. His latest book is The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth.  It was published by CLSA Books in December 2009.

Since beginning his career as an equities analyst in Hong Kong in 1986, Richard has served as global head of investment strategy at ABN AMRO Asset Management in London, worked as a financial sector specialist for the World Bank in Washington D.C., and headed equity research departments for James Capel Securities and Salomon Brothers in Bangkok.  He also worked as a consultant for the IMF in Thailand during the Asia Crisis.  He is now chief economist at Blackhorse Asset Management in Singapore.

Richard has appeared frequently on CNBC, CNN, BBC and Bloomberg Television, as well as on BBC World Service Radio.  He has published articles in The Financial Times, The Far East Economic Review, FinanceAsia and CFO Asia.  He is also a well-known speaker whose audiences have included The World Economic Forum’s East Asia Economic Summit in Singapore, The EuroFinance Conference in Copenhagen, The Chief Financial Officers’ Roundtable in Shanghai, and The World Knowledge Forum in Seoul.

Richard studied literature and economics at Vanderbilt University (1983) and international finance at Babson College (1986); and, between the two, spent a year travelling around the world as a backpacker.

PS: In order to download the MP3, simply right-click on the link and then chose “download linked file” from the drop-down menu

I could not have said this better myself. Regular readers know that I have been harping on the new paradigm of credit risk that has put not only bank solvency into question, but the solvency of the sovereign nations’ balance sheets as well. What has this meant in practice? Well, what it means is that investors are increasingly using gold in order to hedge themselves against credit risk for assets that they feel they can afford to keep on their books ahead of any significant liquidation period, while they are using short-term government securities to protect themselves against the risk of bank bankruptcies and a systemic solvency crisis resulting in a freezing up of credit markets, which would limit their access to capital during the near-term.

Now for Michael A. Gayed’s take from Pension Partners, LLC:

Gold! Are a new class of investors treating it like Treasuries?

The evidence: A stunningly high correlation of Gold to 20+ Year Treasuries (Symbol: TLT) from July 21 through August 16 is 0.89. Over that period, Gold is up 12.3%, while Treasuries up 11.8% (not counting today’s spasm).

Contrast this to a correlation of 0.5 over the periods July 21, 2009 – July 21, 2011 and it appears Gold and Treasuries are now behaving as one and the same, moving in lockstep fashion. Of course, Treasuries are a much broader and deeper market, and a move in Bonds represents trillions of dollars of activity, versus Gold, which is orders of magnitude smaller.

Perhaps investors who might otherwise flock to Treasuries during risk-off modes are now flocking to Gold? After all, S&P cannot downgrade a metal…

Yields on the 10-year US treasury bond dropped to their lowest level in 70 years today…below 2%! This amid growing concerns in the eurozone that the debt crisis is only going to get worse, as growth in the center – Germany, France, and the Netherlands – halted to a standstill. And it isn’t just the eurozone’s growth that people are worried about. US manufacturing has come in at its weakest since March 2009, according to the latest data released by the Philadelphia Fed, along with higher jobless claims and higher than expected inflation. The slowdown in economic activity would normally not be anything to write home about if it were not for a) the amount of leverage in the financial system b) the amount of exposure that these over leveraged institutions have to sovereign debt, and c) concerns that monetary policy may have hit a wall in terms of effectiveness.

And this is why news that the ECB recently provided a $500 million loan to a eurozone bank – the biggest sum since October 2010 – is raising a lot of eyebrows, because it also suggests that eurozone institutions could be having a hard time raising dollars in order to meet their short-term obligations. It shouldn’t be surprising therefore, that New York Fed President William C. Dudley said the central bank is keeping a close eye on the capital state of European banks functioning in the US. This is not a good thing if you are concerned about counter-party exposure and interconnectedness in the financial system.

And this is really the point to take away here. Leverage is one thing, and counter-party exposure is another. If you lots of over leveraged institutions doing business with a lot of other over leveraged institutions, and it isn’t clear who is exposed to what, then a seemingly inconsequential bankruptcy (like a Greek default lets say) can have the undesirable effect of freezing credit markets as lending comes to a halt while demand for cash spikes causing a funding and capital crisis. It’s the prisoner’s dilemma. The default of xyz company or country (take Lehman as the prime example) is not in and of itself too much for the system to absorb, but because participants are over leveraged and uncertain about the solvency of their counter parties, they are going to do what is in their own best interests, and this means pulling back on loans while simultaneously increasing their demand for cash. This is how you get a freeze in credit markets. This was the point I made during the riots in Athens.

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After seeing gold break above 1,800 again today, and reading the news about Hugo Chavez looking to repatriate his gold and nationalize the mining sector in Venezuela, I was reminded of General Charles de Gualle, emitter of the famous “exorbitant privilege” speech that is so often repeated these days. Lets not forget that the General famously sent a warship to New York to pick all of Frances’s gold holdings there and repatriate them to France in 1971.

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This is my latest interview with RT. It gets better in the second half. I was trying to find a way to explain why focusing on austerity for austerity’s sake doesn’t do anything to address the real problem, which the fiat monetary system.

This is a great picture. Just think about this for a moment. The banks RAPE and PILLAGE by design. They aren’t places for holding your money. They are institutional thieves sucking capital from the productive economy and using it for speculation. When they make money they keep it. When they lose money, they ask for the losses to be socialized, but for the interest bearing securities to continue paying out!

Meanwhile, the rioting masses steal a few car stereos, break some storefronts and light some houses on fire, and because this particular manifestation of violence is easily connected by the mind to the perpetrators, we find ourselves more upset with the rioters than with the bank executives.

Same thing in Greece with the taxi drivers going on strike. They locked down the highway and spilled oil at the major Athenian port of Piraeus to prevent buses from transporting vacationers from the docks. It’s easy to be pissed at the taxi drivers for their visible misdeeds (striking is one thing, but preventing people from taking buses or going to the airport on time by blocking or slicking roads is unacceptable), but the amount of discomfort and economic loss caused by this union is a joke next to what the banks do every millisecond with their HFT.

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Paul Krugman never ceases to amaze me. He so emphatically expresses the Keynesian fallacy that all we need in order to live well and grow an economy is proper incentives sparked by increases in aggregate demand.

In this video, he references a commonly held illusion that World War II was responsible for getting the United States out of the great depression because it created aggregate demand for war supplies and therefore put people to work. I have dispensed with this absurd logic before, but just to clarify, there is nothing good about growth sparked by a boost in demand for war actives financed by subsidized government spending through absurdly low interest rates.

During WWII, not only was there still a high savings rate in America that had resulted from the hard lessons of the roaring twenties coupled with a desire by the citizenry to hold bonds for patriotic reasons, but the Federal Reserve made it its explicit policy to peg bond yields at a low rate of interest for the government to borrow and spend as it deemed fit. These three factors made it very easy for the US to deficit spend its way into high GDP growth, but at what cost?

WWII built a wartime economy that was never entirely dismantled after the war (ergo, the current military-industrial complex), and that still required great sacrifices in terms of lives and lifestyle (would people be prepared to accept the rationing of basic supplies in order to get us out of our current economic predicament?). Also, there was the psychological effect of binding together for a greater purpose that had a powerful influence on perceptions and on building a collective optimism about the future after the war was won. One cannot underestimate the tremendous effects of such collective euphoria on the boom that developed over the next 20 years.

The second point that Dr. Krugmann makes is that, in an extreme example, if aliens were thought to be planning an attack against the US in the near future, concerns about budget deficits and inflation would take the back seat and that our economy would be out of this slump in no time:

“If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months,” he said. “And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better–”

Again, this shows just how little respect Dr. Krugman and his mainline brethren who advocate for these type of deficit spending solutions have for a) the finite nature of the planet’s resources and b) the inability of an economy to be stimulated for one purpose, only to magically shift its productive capacity to a new one over night.

The earth can only provide so many materials for us to screw around with, and only so much arable land and potable water for us to consume. The idea that all we need to do is stimulate aggregate demand for something – ANYTHING – and that this is going to solve our problems shows that Dr. Krugman believes in a world of infinite resources, or at the very least, that he and his fellow Keynesian ideologues believe that they would somehow know when the earth would no longer be able to support more unproductive economic growth.

That’s the first point. The second point, goes to Dr. Krugman’s implication that all the productive capacity built up during the 18-month boom caused by the panic over the alien invasion could be shifted to a new purpose without a renewed depression: “And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better–”

What Paul Krugman was saying here was that we would be better off, even if there were no space aliens, because the work we did preparing for the Alien invasion would somehow help to get us out of the depression that we are in in the same way that WWII did. This is absurd. We would still need to go through a recession or depression as we transitioned from the wartime economy to the new economy, whatever that new economy was. This, of courses, is assuming that the weapons and shields we created during the 18-month building boom created some kind of new technologies that could be sufficiently repurposed for civilian use in a way that made their overall production a net-net benefit for the economy. This is a big IF.

Economies are infinitely complex, and the problem with central planning is that no one institution or individual can possibly know what the best and most efficient allocation of finite resources is. The problem with professional economists is that they are in the business of providing solutions to economic problems that they are, by the nature of their human fallibility, incapable of solving.

Eurostat released its latest GDP numbers for the euro area (EA17) and the broader EU27 today, which showed just a 0.2% increase for both in the second quarter of 2011. Almost every country in the EU27 showed near-zero growth, with the exception of the Nordic countries and a few nations in Eastern Europe like Latvia (2.2%), Estonia (1.8%), and Slovakia (.9%).

However, the two countries that made the biggest headlines were France, which showed zero growth, and Germany, which was at almost zero, coming in at .1% for the second quarter. And taking into account the fact that the German economy expanded by 1.3% in the first quarter of 2011, this drop to near zero is even more concerning.

Whether negative sentiment on Europe is warranted by the facts or not, I believe that market focus will shift back on the Eurozone, and the ongoing debt crisis there, which is ultimately not a crisis sparked by over-leveraged sovereigns, but of over leveraged and bankrupt banks, which can no longer afford to take any losses.

The euro, despite the dollar’s ills, is grossly overvalued.