Monday, May 12, 2008

Debt Rattle, May 12 2008: Canned ham radio

Dorothea Lange: Migrant cotton picker and her baby
Buckeye, Maricopa Co., Arizona November 1940

Ilargi: Can you see the bottom yet? I can't, I get lost in the echo's of hollow statements and values and home prices.

Look here, the Wall Street Journal has second thoughts:

The Biggest Housing Losers
You may not know it, dear reader, but Congress is playing you for a sap. During the housing mania, you didn't lend money at teaser rates to borrowers who couldn't pay, or buy a bigger house than you could afford. You paid your bills on time. As a reward for that good judgment and restraint, Barney Frank is now going to let you bail out the least responsible bankers and borrowers.

The Massachusetts Democrat's housing bill passed the House Thursday, and it makes us wish we had splurged like so many others. In the name of helping strapped home buyers, Mr. Frank is giving lenders a chance to pass their worst paper onto Uncle Sugar. If both borrower and lender agree to participate, lenders can accept 85% of the current appraised mortgage value and in return get to dump up to $300 billion of those loans on the Federal Housing Administration (FHA). Guess which loans they are likely to dump?

Looking at the details in Mr. Frank's 45-page first draft of this bill, FIS Applied Analytics estimated that taxpayer losses could reach as high as $27 billion, more than four times Mr. Frank's estimate. The next draft, clocking in at 72 pages when it passed Mr. Frank's committee, was miraculously scored by the Congressional Budget Office at "only" a $2.7 billion cost to taxpayers.

CBO lowballed it in part because it assumed that most people eligible for this assistance will not apply for it. It is true that some lenders may be wary of taking a 15% haircut off the top, but watch out if bankers and borrowers do take the taxpayers up on Mr. Frank's offer. This is especially likely because at the same time that Mr. Frank touts the lowball estimate, he is also making mortgage servicers an offer they can't refuse.

"I want to put the servicers on notice," the celebrated liberal declared at a recent hearing. "If we see a widespread refusal on the part of servicers to cooperate voluntarily in what we see as an important economic problem . . . they can expect much tougher regulation in the future." And they called Tom DeLay "the Hammer"?

The plan seems to get more generous by the week, at least if you're an ally of Mr. Frank. The monster he brought to the floor Thursday runs to hundreds of pages. State governments receive authority to issue $10 billion in tax-exempt bonds to subsidize home purchases and to help subprime borrowers refinance.

In a sop to builders, Mr. Frank also expands the low-income housing tax credit, and he creates a new refundable credit for certain home buyers. To help defray the cost to the Treasury, Mr. Frank raises taxes on multinational companies by delaying a scheduled reform. A law set to take effect this year would expand firms' ability to claim foreign tax credits and thereby avoid double taxation. Mr. Frank would put it off for another year.

Then there is the $230 million for housing counseling to be distributed by the Neighborhood Reinvestment Corporation. You might think that all of this money will simply be disbursed to left-wing activists in the nonprofit world. But at least $35 million is specifically earmarked for lawyers, who can then pursue foreclosure-related litigation. Now there's a way to help housing markets clear.

Also included is this addition to the Home Owners' Loan Act: "A Federal savings association may make investments, directly or indirectly, each of which is designed primarily to promote the public welfare . . . through the provision of housing, services, and jobs." Mr. Frank has got to be kidding. Federal savings associations are lenders regulated by the Office of Thrift Supervision, which was created in the wake of the 1980s savings and loan debacle.

Despite the sorry state of bank balance sheets, the Congressman is now telling federal thrifts to make investments on criteria other than risk and return. We can only imagine what else is buried in this tome, which deserves a Presidential veto. But the worst problem remains its invitation for bankers to dump their biggest losers on taxpayers. The Frank plan appears to take care of everyone in the housing market, except the renters and homeowners who lived within their means.

The global slump of 2008-09 has begun as poison spreads
The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year. As a "non-believer" in the instant rebound story, I am not easily shocked by gloomy reports. But the latest note by Standard & Poor's - The Bust After The Boom - gave me a fright.

The sick list is varied, though most for now are victims of the housing crash: Linens 'n Things, ($650m), Kimball Hill ($703m), Home Interiors ($310m), French Lick Resorts ($142m), Recycled Paper Greetings ($187m), and Tropicana Entertainment ($2.49bn). As the Fed's latest loan survey makes clear, lenders have dropped the guillotine. With the usual delay, the poison is spreading from banks to the real world.

Diane Vazza, S&P's credit chief, says defaults are rising at almost twice the rate of past downturns. "Companies are heading into this recession with a much more toxic mix. Their margin for error is razor-thin," she said. Two-thirds have a "speculative" rating, compared to 50pc before the dotcom bust, and 40pc in the early 1990s. The culprit is debt. "They ramped it up in the last 18 months of the credit boom. A lot of deals were funded that should not have been funded," she said.

Some 174 US companies are trading at "distress levels". Spreads on their bonds have rocketed above 1,000 basis points. This does not cover the carnage among smaller firms outside the rating universe. The California city of Vallejo (117,000 inhabitants) has just made history by opting for Chapter 9 bankruptcy, the result of tax erosion from a 26pc fall in local house prices. Half Moon Bay may be next.

"This is the tip of the iceberg: everybody is going to line up for Chapter 9 in California," said John Moorlach, Orange County board chief. US consumers are juggling plastic to put off their day of reckoning. The Fed survey said credit card debt had jumped 6.7pc in the first quarter to $957bn, or $6,000 per working American, despite usury rates near 20pc.

"My guess is that many Americans continue to run up massive credit card debt because they have little intention of paying it off," said Peter Schiff at Euro Pacific Capital. Quite.[..]

The bears at Société Générale are going into Siberian hibernation, issuing an "Ice Age" alert. They have slashed exposure to global equities to a minimum 30pc for the first time ever. Their weighting of super-safe "AAA" government bonds has been raised to a maximum 50pc. This is a bet on gruelling "Japanese" deflation. The bank expects equities to fall by 50pc to 75pc.

"Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist. "We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.[..]

China has hit the buffers. With inflation at 8.5pc, it risks political turmoil. Moreover, it has repeated Japan's mistakes in the 1980s, building too many factories shipping too many goods at slender margins into a crumbling export market. Lehman Brothers' Sun Mingchun says China will tip over in the second half of this year.

"With so much latent overcapacity, an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of [its] financial and economic system," he said. Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.

This Week’s Advice: Canned Food, Guns and a Ham Radio
The prevailing view among investors throughout the duration of the post-Bear Stearns recovery rally has been that the U.S. and global economy might continue to weaken, but economic performance would merely be lackluster, not terrible.

Strategists at Societe Generale say nuts to that in commentary today, lowering their recommended weighting for equities to 30% and boosting their weighting for bonds to 50%, saying “we are on the cusp of an equity meltdown that will slash and shred portfolios like Freddie Krueger.”

Soc Gen strategists have been bearish for about a decade, as they note in their commentary, as they expected equities to go through a period of “valuation de-rating similar to Japan.” Albert Edwards, strategist at the bank, increased his low equity exposure to 45% earlier in the year on expectations of a bear-market rally, but those days are long past as he considers the possibility of a further decline in stocks — and rants against those who would mindlessly advise buying equities.

“One of the clearest impressions that I will take away from working in this industry is how darned bullish everyone wants to be,” he writes. “To be sure, nobody likes to be a party-pooper but the bias towards optimism in this industry is truly staggering.” Seriously, Mr. Edwards. Tell us how you really feel. “With many of our favored technical indicators flipping from excess bearishness in January, to excess bullishness today it is time to sell and head for the hills,” he writes.

UK household energy bills could rise by 46% this year
The average energy bill for a British Gas customer could rise by as much as 46pc this year, market experts warned today. If oil and wholesale gas prices continue to soar, energy bills could hit £1,327 by the end of 2008, an unprecedented increase in one year, according to price comparison website uSwitch.

uSwitch made its prediction after British Gas gave a thinly veiled warning that bills would increase further this year. The energy supplier said that wholesale prices will rise 77pc this winter, at 85p a therm compared with 48p a therm last winter. Historically it has passed on about half of the wholsesale gas price increases, which would mean that customers could be faced with a 39pc increase to their annual energy bills.

uSwitch said that the best case scenario for consumers would be a 10pc, or £105 price rise this summer, followed by a further 15pc, or £173 hike in January 2009. That would take the average UK energy bill to £1,153 by late summer, and £1,327 at the beginning of next year - a £415 increase since the start of this year.
However, because the pressure on wholesale prices continues, British Gas may be forced to push both increases through this year, uSwitch warned. It said the largest previous spike was in 2006 when there was a 38pc or £277 increase in household energy bills.

Tim Wolfenden, head of home services at, says: “If Centrica – the parent of British Gas, Britain’s biggest supplier – is feeling such acute pressure over pricing then it’s safe to say that others are feeling it too. "Suppliers have been holding firm, but the cracks are beginning to show. It’s pretty clear that something has to give and that household energy prices are going to be shooting up again this year.”

UK taxpayer will be left footing bill in another Northern Rock-style crisis
The taxpayer will have to bail out savers if any of Britain's top 25 lenders runs into a Northern Rock-style crisis, the Treasury has admitted. New details have emerged that show the Financial Services Compensation Scheme (FSCS) can call on a maximum of just £4bn from banks and insurers in the event of a collapse. However, each of the top 25 banks and building societies has customer deposits far in excess of £4bn.

HBOS, Britain's largest deposit taker, had £111bn last year, reveal papers from the Financial Services Authority. Under the revised FSCS rules, changed after the run on Rock last year, customers are fully protected for the first £35,000 deposited at each institution. A consultation has since been launched to find the best way of funding the scheme and whether to increase the protection.

After questioning from Martin Lewis, the founder of, the consumer rights website, on ITV's Tonight programme, Yvette Cooper, the chief secretary to the Treasury, said: "If there was not enough money from the FSCS, the Government would lend the FSCS the money to ensure that all savers got all of their £35,000 back in full."

Mr Lewis said: "Having a maximum of £4bn is bonkers. If a big bank collapsed, that wouldn't be enough money to pay back £5,000, let alone £35,000 to all savers. It does mean yet again the taxpayer would have to foot the bill." The Treasury claimed it would recover any taxpayer money lent to the FSCS in subsequent years. At Northern Rock, £12.2bn of its £24bn of customer deposits was withdrawn after the Bank of England stepped in as lender of last resort.

Details of the shortfall may persuade the Treasury to introduce an element of upfront funding - a proposal included in the consultation that is anathema to the banks. Investment bank UBS believes the Treasury may require payments from the banking industry of £3bn a year for several years.

However, senior industry figures are understood to be aghast at the pre-funding proposal and have warned that additional costs from new demands on the banks were likely to be passed on to savers in the form of lower interest rates.

Banks also argue that no amount of funding could cover a run on deposits at the main high street banks, which each have £50bn or more in customer deposits. One source added that only smaller deposit takers were at risk, saying: "The bigger you are, the stronger you are."

Regulators under fire for ignoring red flags
During the critical 2004 political campaign when subprime and exotic lending was taking off, Mr. Bush was by far the top recipient of funding from all the affected industries — including Wall Street investment firms, commercial banks, savings and loans, credit companies, and mortgage and real estate brokers.

The $23.8 million Mr. Bush raked in from financial and real estate businesses that year was more than two times the $10.6 million received by Sen. John Kerry of Massachusetts, the Democratic presidential candidate and the second top beneficiary of financial contributions, according to

Some key lawmakers also were among the top recipients of finance company cash. Sen. Charles E. Schumer, New York Democrat who became Joint Economic Committee chairman when Democrats gained control of Congress in 2007, pulled in $2.65 million from financial firms. Sen. Christopher J. Dodd, Connecticut Democrat who became the Senate banking chairman, attracted $2 million.

Both of those Democrats, even while out of power in 2004, received more contributions from the financial sector than Sen. Richard C. Shelby, Alabama Republican, who was then chairman of the Senate Committee on Banking, Housing and Urban Affairs. Other Democrats who enjoyed the largesse of financial firms were Sen. Barack Obama, freshman Illinois Democrat, with $1.8 million in contributions; and Sen. Hillary Rodham Clinton, freshman New York Democrat, with $1 million.

The campaign contributions shed light on why Congress was sluggish in responding to the developing crisis. Mr. Dodd, while berating the Fed for not cracking down on abusive lending, spent much of last year campaigning for the Democratic presidential nomination and failed to push legislation through his committee addressing the housing crisis even as Mr. Frank shepherded a comprehensive bill through the House.

Mrs. Clinton has pushed for vigorous action to address the mortgage crisis, calling for a nationwide moratorium on foreclosures last fall, while Mr. Obama crafted his response to the housing crisis only this spring and took a less heavy-handed approach toward the industry.

While the politicians were blinded by the contributions to the risks created by the unbridled housing and lending bubbles, they were able to tell the public about the benefits of the housing boom and the easy loans that fed it.

Mr. Bush touted the "ownership" society as one with less crime and social ills and more jobs and opportunities, while Democratic lawmakers trumpeted that loans with low initial payments and easy terms enabled many disadvantaged Americans to stretch their incomes and become homeowners for the first time. Subprime loans, in particular, went disproportionately to black and Hispanic borrowers.

In addition, a community reinvestment law passed by Congress in the 1990s required banks to go to great lengths to make loans available to minorities. Many mortgage brokers who made loans to people who couldn't afford them rationalized that they were just doing what Congress and the federal authorities wanted.

No down payment? Still no problem
You probably thought nothing-down mortgage loans disappeared in the wake of the American subprime lending crisis, which has ensarled much of the world in a credit crunch. They didn't. Even more surprising, many Americans can still buy homes with nothing down thanks in large part to the federal government and a legal loophole that lets builders and bankers ensure a steady stream of asset-challenged borrowers for taxpayer-insured loans.

With quietly expanded powers, the Federal Housing Administration is already offering the next-best thing to nothing down on a house: a payment of just 3.0 percent will get practically any American with a pulse and a job a mortgage of up to $729,000, at least until the end of this year.

But for those who lack the wherewithal to put even a little skin in the game, there's a workaround: a not-for-profit organization can give prospective buyers the teensy downpayment. The spigot is wide open. Of the 180,881 loans that the FHA insured in the first half of fiscal 2008, 36.7 percent, or 66,337, were seller-funded. With home builders and sellers desperate to make sales in a slowing real estate market, this percentage is likely to grow.

The FHA has traditionally allowed family and friends to gift a downpayment to homebuyers. In the last 10 years, homebuilders and sellers have gotten into the act by funneling their upfront consideration through down-payment assistance not-for-profits. Technically wiping out a conflict of interest, the charitable outfit collects the cash and hands it over to the mortgage lender taking a bit off the top for all its trouble.

PMI, MBIA Are Sober Reminders
Quarterly reports from mortgage insurer PMI Group and bond insurer MBIA were a painful reminder of the reality of surging mortgage defaults and delinquencies, and the ongoing rot in the credit markets.

Despite plenty of bad news in the PMI report there was one bright point. The company's sales grew 7.3% to $315.9 million from $294.5 million reported in last year's corresponding quarter, well ahead of Wall Street's $288.8 million forecast. The gain largely came on the back of a 1.0% increase in net premiums to $255.3 million from $244.5 million. Still, the increase was due to higher premium rates as well as strong international performance helped by the weak dollar.

But that's where the good news ended. PMI posted a loss of $273.9 million, or $3.37 per share, far off from last year's gain of $102.0 million, or $1.16 per share. The results were also way off Wall Street's expected loss of $1.96 per share. So what happened? The Walnut Creek, Calif.-based mortgage insurer was hit hard by big payouts on default claims along with charges to write-off its investment in bond insurer Financial Guaranty Insurance Company, commonly known as FGIC.

Whenever there's a default and foreclosure, PMI has to shell out claims to investors that hold the mortgages. During a time when mortgage delinquencies and defaults quickly jumped, it's not the kind of policy you want to have. PMI's first quarter included mortgage insurance losses of $172.5 million due to more claims, added loss reserves and a charge on PMI's investment in embattled bond insurer FGIC.

In New York, bond insurer MBIA reported a first quarter loss of $2.4 billion, or $13.03 per share, from last year's profit of $198.6 million, or $1.46 per share. MBIA was forced to reduce the value of its insured derivatives holdings by $3.58 billion, leading to $2.96 billion in total lost revenue, compared with revenue of $729.9 million a year ago. Net premiums written tumbled to $97.3 million from $171.3 million last year.

Unlike traditional insurance on corporate or municipal bonds, the value of derivatives holdings--called credit default swaps--must be priced at the end of each quarter at current market value. Because the value of such products has tumbled in recent months, MBIA was forced to cut the value of its holdings, thus recording what in accounting terms is called an unrealized loss. Actual losses would only occur if MBIA sold the derivatives at less than the original cost.

MBIA Posts Loss of $2.4 Billion as Derivatives Slump Deepens
MBIA Inc., the bond insurer that lost 87 percent of its market value in the past year, posted a net loss of $2.4 billion as the slump in mortgage securities deepened. The first-quarter net loss was $13.03 a share, compared with a profit of $198.6 million, or $1.46 a share, a year earlier, Armonk, New York-based MBIA said in a regulatory filing today. Unrealized losses from derivatives were $3.58 billion.

The loss was MBIA's third straight and comes less than three months after the bond insurer successfully retained its AAA credit rating. MBIA, Ambac Financial Group Inc. and the rest of the industry have posted record losses after misjudging the value of collateralized debt obligations and securities backed by home- equity loans they guaranteed. MBIA, once a dominant provider of municipal bond insurance, had 2.5 percent of the market in the quarter, according to Thomson Financial data.

"We're not out of the woods yet," said Richard Larkin, senior vice president at Herbert J. Sims & Co. in Iselin, New Jersey. "I'm not sure AAA bond insurers will ever be viewed the same way as in the past." MBIA raised $2.6 billion in capital to help convince Moody's Investors Service and Standard & Poor's to preserve its AAA rating. Chief Executive Officer Jay Brown said this week the company won't need to raise more.

"We have adequate equity capital to get through this crisis," Brown wrote in a letter to shareholders published May 6. MBIA fell 21 cents to $9.22 in early New York Stock Exchange composite trading. The stock traded above $70 a year ago. MBIA's book value slumped to $8.70 a share on March 31 from $29.16 at Dec. 31, in part because of new shares sold in the capital raising.

MBIA estimates it will have $827 million of actual losses from paying claims on nine CDO transactions. "Earnings pressure will remain for several quarters as writedowns continue," Peter Plaut, senior vice president at Imperial Capital, wrote in an e-mail today. "This is no longer a AAA industry for the players that diversified into volatile financial derivatives."

Value to unlock
How are the mighty fallen. This time last year, as global financial markets were just beginning to feel the pinch from record late payments and rising defaults on risky US home loans, more than 2,000 anxious mortgage bankers and investors gathered in New York in search of strategies to weather the storm.

The keynote speakers were two titans of the mortgage industry and the securitisation business that bundled those loans into saleable investments: Angelo Mozilo, chief executive of Countrywide Financial, and Alan "Ace" Greenberg, executive committee chairman at Bear Stearns. A year later, losses that left Countrywide on the brink of bankruptcy are pushing the biggest US home lender into the arms of Bank of America, in a deal that may yet fall through.

A liquidity crisis at Bear Stearns in March forced a Federal Reserve-orchestrated fire sale of the country's fifth-largest investment bank to JPMorgan Chase. At this year's meeting of the Mortgage Bankers Association in Boston last week, attendance was down by half and speakers delivered presentations with titles such as "How to stay off the implode-o-meter" - a reference to a website that has chronicled the demise of 256 US mortgage lenders since late 2006.

But there was one ray of light to pierce the gloom. News broke during the conference that BlackRock, an investment manager, had struck a $15bn (£7.7bn, €9.7bn) deal to buy a portfolio of distressed subprime mortgage debt from UBS of Switzerland for 75 cents on the dollar. A sophisticated investor with deep pockets appeared to be calling the bottom, providing hope that the mortgage market might be beginning its recovery.

BlackRock, hired to manage $29bn of Bear Stearns' illiquid assets as part of the bank's shotgun wedding to JPMorgan, has in recent months established its reputation as an expert manager for such securities. In previous financial crises, the emergence of such buyers for assets that have collapsed in price has helped to signal a turning point. When America's banking system was hit by the savings and loans crisis in the early 1990s, for example, the tipping point occurred - at least in the eyes of many investors - when bidders arrived for the assets of the failed S&L institutions.

Similarly, after Japan's banking system went into a decade-long slump, one factor that helped set a floor on asset prices was the arrival of distressed-debt funds that were willing to start buying assets from Japanese banks. "Getting markets moving again, getting assets sold, is crucial for recovery," says Timothy Ryan, head of Sifma, the securities industry organisation, and a former regulator who was closely involved with the sale of S&L assets at the time.

So is something similar about to happen now? Policymakers, bankers and investors all want more buyers like BlackRock to emerge for mortgage securities and other risky assets, to provide a tipping point that ends the credit crisis. Yet thus far there has been only patchy evidence that this healing wave of purchases is under way.

Bank failures: How bad will it be?
Washington Mutual, Wachovia and National City are among the financial institutions that have announced huge losses and are looking for billions of dollars from private equity firms or others in the industry just to keep their doors open. In all likelihood, the bigger banks and savings and loan associations will survive the mortgage debacle and ensuing credit crunch, albeit somewhat battered and bruised.

But smaller banks may not fare as well, although it doesn't appear that we'll see a cascade of bank failures. Nevertheless, the increased risk has prompted the Federal Deposit Insurance Corp., or FDIC, to beef up its staffing in anticipation of banks going belly-up.

The FDIC insures approximately 8,500 institutions; 79 of them are on the agency's secret list of problem banks as of Dec. 31, 2007. Being on the problem list doesn't mean that a bank will fail; in fact, the agency says historically about 13 percent of banks on the list fail. The greater problem is that the damage done to financial institutions in 2007, and continuing through 2008 and perhaps beyond, may add many more names to the list.

"When you get on that list it means the regulators are working more closely with you on a supervisory basis," says FDIC spokesman David Barr. "We're trying to work with the institution to recognize the problems and have them work out their difficulties so they get off the list." Community banks are the institutions raising the most concern, because, some industry analysts say, they are the ones that may be at the most risk

When Should the Fed Crash the Party?
In the darkest days of the Depression, Treasury Secretary Andrew W. Mellon, one of the richest men in the United States, opposed any government action to stem the tide of plunging business activity and soaring unemployment. Instead, he urged a policy of supreme indifference. “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he said.

“It will purge the rottenness out of the system,” he added, and values “will be adjusted, and enterprising people will pick up the wrecks from less competent people.” John Maynard Keynes, for one, thought that prescriptions like Mellon’s were preposterous. The economist called those who held such views “austere and puritanical souls” who believed that it would “be a victory for the mammon of unrighteousness” if general prosperity were not “subsequently balanced by universal bankruptcy.”

Keynes perceived too much good in prosperity to treat it as the enemy, and he revolutionized economic theory to prove his point. Keynes won the argument, and government intervention to overcome rising unemployment and falling profits has been standard operating procedure forever after. Nevertheless, the debate over intervention is not ancient history. It replays in today’s headlines.

As the world economy wrestles with the credit crisis and a shattered housing sector, there are those who grumble that too much prosperity caused the excesses that became the root cause of all our troubles. Now, they fear, aggressive countercyclical policies will lead to inflation and threaten a run on the dollar. In some ways, this view derives from Mellon’s dark advice.

Just recently, William Fleckenstein, a successful investment manager in Seattle, said: “Part of me keeps hoping we’ll just let financial gravity take over and have this brutal crack-up. We’d have a decent foundation instead of the balsa wood structure we had coming out of the last bubble.”

This school holds Alan Greenspan responsible for current problems. Critics of Mr. Greenspan, the former Fed chairman, contend that he pressed the panic button as the year-over-year inflation rate plunged from 3.6 percent year over year in May 2001 to only 1 percent just 13 months later. Such a precipitous decline had not occurred since the 1930s.

In response, the Fed sliced its key interest rate to 1 percent from 4 percent over the next 24 months and held it there until June 2004 — accompanied by a rapidly expanding money supply. Now, Mr. Greenspan’s critics contend, his determined creation of excess liquidity has left his successor, Ben S. Bernanke, with a mess. In this view, Mr. Bernanke is making matters only worse by carrying out extreme interventions.

They see him taking the risk of higher inflation to break the credit crunch and to prevent the economy from falling into what he fears could be a steep decline with deflationary consequences. As James Grant, a well-known expert in fixed-income markets, warns, “Maybe the policymakers’ response to the crisis accounts for the parallel bull markets in gold and bonds.” Did Mr. Greenspan’s Fed make the right decisions? Did it set a bad example for Mr. Bernanke to follow?

It is important to remember that deflation is devilishly hard to deal with. When people expect prices to decline, they tend to hold back from spending, which only makes prices fall further. The policy choices open to the Fed are limited. It can try to stem the tide by cutting interest rates, but once the interest rate falls to zero, there is no place else for it to go. Then the authorities have no choice but to open up the monetary spigot, a route that can haunt them later by creating inflationary pressures or asset bubbles.

Ilargi: Another lovely tidbit I've been warning about forever. Insane as it is, your pension fund managers are now sitting at the crap shoot table. I put it this way: Anyone born after 1950 has virtually no chance of getting a pension -when they're 65- that amounts to much of anything. You'll be better off panhandling.

Growing deficits threaten pensions
The funds that pay pension and health benefits to police officers, teachers and millions of other public employees across the country are facing a shortfall that could soon run into trillions of dollars.
But the accounting techniques used by state and local governments to balance their pension books disguise the extent of the crisis facing these retirees and the taxpayers who may ultimately be called on to pay the freight, according to a growing number of leading financial analysts.

State governments alone have reported they are already confronting a deficit of at least $750 billion to cover the cost of the retirement benefits they have promised. But that figure likely underestimates the actual shortfall because of the range of methods they use to make their calculations, including practices that have been barred in the private sector for decades.

Local governments use these same techniques for their pension funds and face deficits that further contribute to what some investors and analysts say may be shaping up to be a massive breach of faith with a generation of public employees.

This gap is growing more yawning with the years. It has already presented taxpayers with a whopping bill that is eating up a vast portion of government budgets at the cost of other services. In Montgomery County, for instance, pension and retiree health care costs are already higher than the combined budgets for the departments of transportation and health and human services. Eventually, officials responsible for the funds will have to choose whether to continue paying out or renege on benefits promised to retirees.

By their own assessment, state and local governments acknowledge that their funds for retiree benefits are increasingly falling behind, with the number that are severely underfunded soaring to 40 percent in 2006, a five-fold increase from 2000, according to the U.S. Government Accountability Office.

But even these grim calculations are based on assumptions that some analysts consider too aggressive, including projections about how the investments of pension funds will fare and how long retirees will live.
"Very small shifts in actuarial assumptions can generate huge changes over time," said Susan Urahn of the Pew Center on the States, which has studied the issue. "It is not very transparent, and even where it is transparent not many people understand it."

Pension funds generate money from worker contributions, government payments and the returns from investing that money. These funds pay an annual pension salary and health benefits to retirees for as long as they live. But with workers retiring earlier and living longer, governments have been struggling to keep up with the promises they made.

Many are taking out loans to restock their pension funds, which is akin to using a credit card to cover monthly mortgage payments. Others are passing the bill to future generations by using sunny projections of what their investments will return, claiming they do not need to dedicate more money now to their pensions.

Such "accounting nonsense" has been "pushing the envelope -- or worse -- in its attempt to report the highest number possible" for their investment returns, wrote billionaire investor Warren E. Buffett in a recent letter analyzing pensions for shareholders of his company. Taxpayers ultimately will pay the price when these forecasts prove wrong.

"Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed," he wrote. "In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep."

AIG's Tough Road Back
Wall Street is losing patience with insurance giant American International Group and its CEO, Martin Sullivan. AIG's surprisingly large first-quarter loss, reported Thursday, jolted its stock (ticker: AIG), which fell $3.87, to $40.28 a share, in heavy trading Friday, renewing speculation Sullivan may be booted. In 2005, the mild-mannered Englishman replaced the brilliant, imperious Hank Greenberg, who'd been forced out by an accounting scandal.

AIG, which is near a 10-year low of $38 set in March, might not slip much more because its earnings power in 2009 probably is at least $5.00 a share. But Citigroup analyst Joshua Shanker, who has a Neutral rating on the stock and a $47 price target, wrote in a client note Friday that a recovery could take time because of "weakening fundamentals" in AIG's core insurance operations, and still-difficult conditions in the credit markets.

In February, AIG reported a fourth-quarter loss of $5.3 billion, or $2.08 a share, but suggested that the worst was over. We bought into that argument when the stock traded around 45. Things have worsened since then. AIG reported a first-quarter loss of $7.8 billion, or $3.09 a share, after taxes. Excluding write-downs in its investment portfolio, the red ink was $1.41 a share, far worse than the consensus estimate of a 76-cent loss.

Core insurance profits were disappointing, reflecting tough conditions in the property and casualty market. AIG's shareholder equity has slid by $24 billion in six months, cutting the insurer's book value to $31.93 a share from $40.81. AIG is joining the parade of wounded financial companies by selling $12.5 billion of equity to bolster its capital.

All this is a big blow to Sullivan, who a year ago boasted that AIG had $15 billion to $20 billion of excess capital. Like other financial companies, it bought high and sold low, repurchasing $5 billion of its stock last year at an average price of $67. Then there was AIG's dubious decision Thursday to lift its dividend 10%, to 22 cents a quarter. Shanker called the move "ill-timed." The higher dividend will cost AIG $200 million annually. Many had expected a dividend cut to save capital.

AIG long deemed itself superior to other P&C insurers, but it's now capital-starved, while its rivals have ample capital. AIG isn't just a P&C insurer. It sells life insurance in the U.S. and abroad, leases out aircraft, issues mortgages and peddles various financial products. The financial business has been the main problem area; it guaranteed complex mortgage derivatives backed by subprime mortgages, producing almost $20 billion in losses.

California man losing nine homes in mortgage mess
A California man who has defaulted on nine homes and expects banks to foreclose on all of them, forcing him into bankruptcy, says he now considers it a mistake to have invested in the real estate market.

Shawn Forgaard, a 37-year-old software company project manager, bought one home for his family to live in and nine more as investments. He stands to lose all the investment houses in the mortgage meltdown but says he has come away wiser from the experience.

"Everyone stumbles. I'm not going to hide or run or live in denial, or with regrets," Forgaard told Reuters in an interview. "On the surface it looks like total devastation but it's just the opposite. I'm confident our lives will be much, much richer as a result."

Forgaard bought a house in Santa Cruz, about 60 miles (100 km) south of San Francisco, in 2000. Four years later, using $800,000 in stock options, he began snapping up investment properties, putting 10 percent to 40 percent down on negative amortization loans -- in which payments do not cover the interest so that a borrower's balance grows over time.

It was those "neg-am" loans, which include triggers causing payments to balloon if the debt reaches a certain percentage of the original balance, that would come back to haunt him. "I knew I was sitting on time bombs," Forgaard said.

"I knew the market was going to go soft and I knew that property values would decline. But I figured that I had enough equity to survive the storm and sell or take the loss and refinance. "I didn't anticipate a downturn of epic proportions such that home values are 40 percent less than they were," he said.

Ilargi: Ouch. But a good lesson.

Helldorado: How expats dream life in the Spanish sunshine has turned into a property nightmare
Sitting in a hotel on the Costa del Sol, a handful of expat Brits are watching the sun set on their dreams of a new life in Spain. Gathered inside the ballroom of the Hotel Alanda on Marbella's Golden Mile, they are stony-faced as one by one their homes go under the auctioneer's hammer for thousands of pounds less than they paid for them.

Fittingly described in the auction catalogue as "distressed sales", these properties were once the pride and joy of their owners. Some are holiday homes, others were intended for retirement: all were bought with hope, optimism and excitement. But the stories behind their "for sale" signs are the most stark warning yet that the Spanish property bubble has finally burst.

Here in Southern Spain, bitter expats talk about "Helldorado" - paradise that has mutated into a nightmare. Tumbling property prices, a glut of new properties still flooding onto the market and rising Spanish interest rates are taking their toll. Added to this, illegal building practices mean that 100,000 coastal homes are now under threat of demolition. And to make matters even worse, the pound has fallen almost 12 per cent against the euro over the last year, leaving many British residents even further out of pocket.

"It's heartbreaking," says 59-year-old Daria Langrish, whose apartment has been on the market for the past year. She and her partner Rod bought it three years ago for £147,000. A year ago, it went on sale for £195,000. Today, it is on offer for £143,000 - with all its furniture. "We can't believe how hard it has been to sell," she explains.

"We bought our flat three years ago hoping to retire here. The plan was that we would sell our home in England and move out to Spain, but after my mother died we promised we would care for her elderly sister, which means we have to stay in London." Like many Brits, she and her partner bought the flat after remortgaging their home in New Southgate in North London. "We can't afford to keep both places on indefinitely. It just costs too much," she says. "Everyone tells you that property in Spain is such a safe investment, but that's just not true any more. I'll be grateful if we can just break even."

For so many years it seemed that the property paradise on offer in Spain was safe from the usual fluctuations of the economy. Since the 1990s, developers have swamped stretches of Mediterranean coast with apartments and villas in a boom fuelled mainly by British buyers. House prices have risen 270 per cent in the past decade as discontented Brits, spurred on by TV shows such as A Place In The Sun, sought a sunnier quality of life. Many of them stretched themselves to get mortgages on homes they believed were cast iron investments.

Now, however, they are finding the value of their properties crashing. The signs are everywhere. In the Costa del Sol, one estate agency is closing down every week. Half the 80,000 estate agents in business at the beginning of 2007 were closed by the end of the year. Demand for cement is at its lowest level in 11 years as developers stop building. And yet by the end of this year, there will be an estimated one million unsold properties on the Spanish market. Another two million lie empty.

Add to that the global credit crunch and mounting Spanish interest rates, and as one real estate agent put it this week: "It's like the UK situation on steroids." Thousands of Brits who saw the opportunity to make a quick buck out of Spain's property boom have had their fingers burnt. Many bought flats "off-plan", putting down 30 per cent, and hoping to sell before completion and make a vast profit. But "flipping on", as it is known, goes horribly wrong if the property will not sell at all.

Credit-Default Swaps: Weapons of Mass Speculation
Don't know much about derivatives called credit-default swaps, or CDS? There's no reason one should. Even today, CDS, which represent bets on the default risk of various debt issues, remain an obscure corner of the global-finance market, inhabited mostly by big banks and brokerages, hedge funds and other institutions. Denizens of the CDS market strike customized insurance deals covering all manner of debt, from corporate, sovereign and municipal bonds to asset-backed securitization paper.

There's no formal clearing house for this over-the-counter market. Nor is there much public reporting of the pricing of the trades. But don't be fooled by the low profile of the business. In the decade since credit- default swaps were invented, the market has exploded in size, to some $62 trillion of CDS deals outstanding from just $1 trillion in 2000, according to industry estimates. This dwarfs the size of the underlying bond issues.

Beyond concerns about its size, the CDS market seems to have become a weapon of mass speculation that is destabilizing international debt and even equity markets. That looks to be true in the subprime-debt-induced crisis of recent months that still has the credit markets in a deep-freeze. At the height of the crisis, in the first quarter, the price of credit-default insurance for key financial companies zoomed to once-unimaginable heights, signaling rightly or wrongly the imminent default of their debt issues.

The run-up was induced partly by panic among debt holders and others seeking to hedge their financial exposure at any price. But other factors, some suggesting a deliberate attempt by bearish investors to sow doubt about a company's financial condition and thus push up CDS prices, may have played a role. In the CDS market, a well-placed rumor of trouble, or snippet of negative analysis, can have an outsized impact on positions, because much like a put, the investor risks only the premium to control the action on a potentially large position.

Buying CDS protection is the ultimate bear bet, and the incentive of CDS holders to accentuate the negative, particularly to the financial press, is almost irresistible. There are intimations, at least, that such activity occurred. The Securities and Exchange Commission reportedly has launched an investigation of the role rumor-mongering might have played in fomenting the fatal liquidity crisis at Bear Stearns. Similarly, Lehman Brothers was afflicted by a spate of rumors in the weeks before and after the bail-out of Bear in March, reportedly prompting another SEC probe.

One has only to look at the charts of one-year and five-year credit-default prices for both Bear and Lehman, collected by the price-reporting service Credit Market Analysis, to see the fast, sharp rise, and fairly sudden decline, in the companies' CDS quotes. For Bear Stearns, at least, the spike in the price-protection costs triggered a fatal feedback loop.

In a separate example, New York Insurance Superintendent Eric Dinallo saw fit during a mid-February CNBC interview to tell William Ackman, head of New York hedge fund Pershing Square Capital Management, to be careful with some of his criticisms of monoline bond insurers Ambac and MBIA. Dinallo cited, among other things, a New York State law that prohibits false statements about the financial condition of state-regulated insurance companies.

Ackman has since become less vociferous in attacking the two companies. He declined to discuss his current positions in Ambac and MBIA, though sources say that in the past he has bet the ranch on the demise of both holding companies, with long positions in the one-, five- and 10-year credit-default swaps, and short positions in the companies' stocks.

Ilargi: Oh brother, what a great idea. Why didn’t I think of that? If Canada's Joe Ultra Light Molson Six Pack doesn't get saddled with the lenders' gambling debts, they can't compete internationally. And that's unfair, goes without saying. Gives a whole new meaning to the word "logic", doesn't it? Put 'em all on a chain-gang, I'd say.

In Canada, as in many other countries, elected officials have completely forgotten who they're supposed to represent; in fact, they have done so to such an extent, nobody even questions them on it anymore.

Banks want Bank of Canada to take riskier assets as collateral
Canada's Big Banks are leaning on Finance Minister Jim Flaherty to hurry up with legislative changes that would empower the Bank of Canada to better deal with the credit crisis. Toronto-Dominion Bank chief executive officer Ed Clark, RBC CEO Gordon Nixon and their counterparts at the country's four other major banks are worried they are being left at a disadvantage against their international rivals because the Bank of Canada isn't allowed to accept riskier assets such as corporate debt as collateral for short-term loans.

"Within Canada, the tools are seen to be relatively limited compared to what other jurisdictions can do," one banker said. Mr. Flaherty proposed expanding the Bank of Canada's toolkit to match that of the U.S. Federal Reserve, and other major central banks, in his February budget. Three months later, the proposal, buried in a broader budget implementation bill, is under review at the Commons finance committee and won't come to a vote in the House before the end of the month - at the earliest.

At a meeting with Mr. Flaherty in Toronto last month, the executives stressed the cause of the strain in credit markets is the inability of banks to find private lenders willing to accept asset-backed commercial paper (ABCP) and other risky assets as collateral for the cash they need to back their own lending. Monetary authorities in the U.S. and Europe, which don't face the same constraints, have aggressively sought to inject liquidity into financial markets by doling out cash on a short-term basis at auctions while accepting a long list of collateral, including assets backed by student loans.

The Bank of Canada has set up similar programs, but by law can accept only government-backed debt and securities with durations of less than 180 days as collateral. Those aren't the assets banks are struggling to move. "I think banks would like nothing less than to be able to post ABCP as collateral, and to post some lower-rated investment products," said Eric Lascelles, an economist at TD Securities Inc.

Ilargi: Vancouver is North America’s, perhaps the world’s, most expensive real estate market. Let’s say it bluntly: anyone still looking to buy a home there, to live in that is, is such a blind bat they deserve what they’re going to get.

Vancouver housing dreams clash with reality
We look at the choices and compromises people must make in order to own a home today. It is increasingly common to see children raised in condos, married couples living in their parents' basements, young professionals taking on second jobs, workers commuting long hours and the growth of the 40-year mortgage. We look at how they do it It wasn't supposed to be this hard.

As a second-generation Filipino-Canadian, Mary Ann Masesar was taught the key to middle-class wealth was owning a home.
To acquire that status symbol, all one needed to do was stay in school, work hard and get a good job. Only, it doesn't happen that way any more. As a Vancouver nurse, Masesar belongs to an exclusive club of the top 10 per cent of Canadians who earn more than $69,000 a year, according to Statistics Canada.

But that modest dream of owning a house -- or something bigger than a downtown studio -- seems virtually impossible in Vancouver's current housing market. With the income-to-house-price ratio the highest it's ever been in B.C., the overwhelming perception -- particularly in Vancouver -- is that the market has changed the definition of "middle class" and displaced the working poor.

It is increasingly common to see children raised in condos, married couples living in their parents' basements, young professionals taking on second jobs, workers commuting long hours, the growth of the 40-year mortgage (which 65 per cent of first-time buyers are now using, according to a RE/MAX report) and the realization for some that an inheritance is the only way to a single-family home.

Of course, there is another running narrative here: Those who are simply not willing to compromise and are waiting for prices to come crashing back to earth. Masesar, 32, has been waiting 10 years for this to happen. She now regrets waiting so long. "I want to stay in Vancouver because I love this city, but housing is becoming an issue. I want space, I want a home, I want a big family, I want a big house -- the whole shebang. But can I stay in Vancouver to do that?" she asks.

Urban geographer Warren Gill says Masesar isn't alone. "The fear, which has been going on for many, many years, is that this is going to be executive city and there's going to be no room for anyone else," says Gill. "Will it be like San Francisco, where all the firefighters and police officers can't afford to live in the city, so they live outside? I mean, I think these are useful questions to ask."

Inflation At Worrying Heights In China
Beijing is going to have to do more to curb inflation, perhaps at the price of reducing growth and employment.
The Chinese National Bureau of Statistics said Monday that the consumer price index rose 8.5% in April compared to the same month last year, up from 8.3% in March. Surging food costs were the major contributor, rising 22.1% year-on-year in April.

Non-food prices were only up 1.8%, which should provide some comfort given the global spike in the prices of oil and minerals. Meat and poultry prices were up 47.9%, 2.1 percentage points higher than the 45.8% increase recorded in March; seafood products were up 16.1%; fresh vegetable prices climbed 13.6%; and fresh fruit costs rose 12.1%. The increase in grain prices was in line with international markets, mounting 7.4% in April, and egg prices were up 3.6%.

High food prices are of particular worry to the government as they hit the country's poorest the hardest, threatening to stoke unrest. The CPI for 2007 was 4.8%, far below the current pace but also far above the government's annual target of 3%. Earlier in the year. officials had said they were confident that they could hold inflation to 4.8% in 2008. For the first four months of the year, the CPI was up 8.2%.

Sydney properties halve in price
House prices in some parts of Sydney have almost halved as battling borrowers struggle to keep up with increasing interest rates. The falls - in Sydney's west, the Hills district, and Sutherland Shire - are far steeper than previously thought, and show the devastating effects of the RBA's rate-hiking spree.

In the past six months, 30 homes across Sydney have been sold for at least $100,000 less than was paid at the height of the property boom, many as a result of distressed mortgagee sales. One property in Bankstown, bought for $500,000 in August 2005 sold in February for $215,000 - a loss of $285,000. Several other properties in Sydney's west have recently been sold for losses of more than 30 per cent. Sutherland Shire, which was thought to have escaped relatively unscathed, is now having prices plummet.

One property in Oyster Bay, bought for $1.09 million in December 2001, sold in March for $680,000, while a Caringbah apartment bought for $339,000 in June 2004 was sold for a loss of $104,000 last October. The worst affected suburb was Parramatta, with 11 homes sold at a loss in the past six months. Neighbouring Merrylands had 10, while Punchbowl also suffered substantial losses. The data - complied exclusively for The Daily Telegraph - showed that even the more affluent suburbs are now beginning to suffer.

Several homes in Waverley, Coogee and Paddington were sold for losses of more than 25 per cent. The worst hit was the Waverley house bought in July 2003 for $725,000 and sold for $465,000 in March. And experts predict that the losses will get worse as the year goes on. Shane Oliver, chief economist at AMP Capital, said: "The pain of higher interest rates has only just started to kick in and we will see further falls over the next 6-12 months.

"The Sydney housing market is in a bind - we have a shortage of housing and huge demand but that isn't going to stop prices declining further. I think we'll see prices fall by another 10 per cent this year - and that's without another interest-rate rise." When the RBA decided to leave the cash rate at a 12-year high of 7.25 per cent last week, it hinted that rates might have to rise later this year if inflation kept rising, which would be disastrous for Sydney's homeowners. "If rates rise again it will accelerate the declines, and that's an ominous prospect because price falls can be infectious" Mr Oliver said.

Media to blame for slump, say New Zealand estate agents
It's the media - not the economic cycle or high interest rates driving down house prices, say real estate agents.
Alistair Helm, the chief executive of, - the website owned by the major agents, says media stories have "an immediate and significant impact on buyer and seller behaviour."

"We all know buying a home is the most expensive purchase most of will ever make and one fraught with uncertainty and complexity. So it's quite incredible decisions around it can be so dramatically influenced by media stories", said Helm.

His study monitored seven websites - described as "the major portals and real estate company websites" over a two year period from January 2006 until the end of last month. Helm says he has found a correlation between a fall off in traffic to these websites with negative media stories. "The most dramatic data showed the steep fall-off of traffic to these websites from the middle of February 2008 - significantly off the seasonal trend."

"This date in February correlates exactly with speculative media stories predicting 20 per cent- 30 per cent correction in property prices around the release of the real estate industry's January sales figures." Helm says this "clearly shows the market was spooked by headlines" such as "Property Market Set to Crash Says Expert" and "House Sale Low is Sign the Tumble has started." The past two weeks have been filled with negative news about the property market.

Sales at Auckland's biggest real estate agency group, Barfoot & Thompson, dropped 50 per cent last month from April last year to 453 - the slowest turnover since December 2000. New research from PMI Mortgage Insurance showed house sales in the first quarter of 2008 were down more than 40 per cent per cent on the same period last year. It showed a 53.3 per cent fall in sales from the same month last year and house price growth slumping to 2.1 per cent in comparison with 13.8 per cent a year earlier.

Record world rice production, but prices set to remain high
Rice production in Asia, Africa and Latin America is forecast to reach a new "record level" in 2008, the United Nations Food and Agriculture Organization (FAO) said Monday. But the Rome-based agency also warned that the cyclone disaster in Myanmar could still negatively impact on production and that world rice prices could remain high in the short term, as much of the 2008 crops will only be harvested by the end of the year.

"World paddy production 2008 could grow by about 2.3 per cent reaching a new record level of 666 million tons, according to our preliminary forecasts," FAO rice expert Concepcion Calpe said in a statement. "But the cyclone disaster in Myanmar could well worsen our forecast," she added. The destruction of Myanmar's food basket may sharply decrease national rice production and impair access to food, according to first FAO estimates.

Damage from the cyclone - which struck when paddy farmers in Myanmar were harvesting their dry season crop accounting for 20 per cent of annual production - could worsen the current global rice production outlook, the FAO said. "Entire rice-growing areas are flooded and many roads and bridges are impassable. Several rice warehouses and stocks were destroyed. Rice prices in Rangoon have already surged by nearly 50 per cent," it said.

Myanmar may need to turn to neighbouring countries, such as Thailand and Vietnam for rice imports, putting more pressure on world prices, the FAO said. "For the first time, paddy production in Asia may surpass the 600 million tonne benchmark this year, amounting to 605 million tons," Calpe said. "Major gains are expected all across the region. Bangladesh, China, the Philippines, Thailand and Vietnam could register the largest gains. Prospects are also buoyant for Indonesia and Sri Lanka, despite some recent flood-incurred losses," Calpe said.

Assuming normal rains in the coming months, rice production in Africa is forecast to grow by 3.6 per cent to 23.2 million tons in 2008, with large expansions anticipated in Ivory Coast, Egypt, Ghana, Guinea, Mali and Nigeria. Paddy production in Latin America and the Caribbean is expected to rebound by 7.4 per cent to 26.2 million tons in 2008. Production prospects, however, are negative for Australia, the United States and Europe.

Rice prices have skyrocketed by around 76 per cent between December 2007 and April 2008, according to the FAO Rice Price Index. International rice prices are expected to remain at relatively high levels, as stocks held by exporters are expected to be reduced heavily. In addition, other large importers will probably return to the international market to buy rice, including Iran, Saudi Arabia, Nigeria and Senegal.

Pressure grows on China's grain prices
Bumper harvests, subsidies and price controls have helped China, which is practically sufficient in grain production to meet domestic demand, largely escape the steep increases in grain prices that have hit other countries in the Asia-Pacific region. That may not last. Some Chinese economists say the country's grain production is likely to remain stagnant in coming years, while demand will grow.

Fast urbanization is reducing the amount of farmland, while the government's policies to restrict grain exports to keep prices low diminish farmers' enthusiasm to plant. In consequence, economists say, grain prices in China will inevitably go up markedly, perhaps within a year. That would echo the government's limited success in trying to isolate the country from the impact of rising oil prices, eventually having to allow price increases for domestic oil products to avoid spending ever-growing amounts in subsidies to refineries.

While China has avoided some of the big jumps in grain prices seen elsewhere, it has not been immune from inflationary pressures, notably in food products. Consumer prices rose 8.5% in April from a year earlier, the National Bureau of Statistics said recently, after gaining 8.3% in March. Food prices, led by meat at 48%, jumped 22% in April, up from a 21% year-on-year increase in March.

Global grain price increases are gaining pace. Thailand in March announced a 30% increase in its benchmark rice price to US$760 a tonne from $580. On April 17, the price of Thai rice soared to $1,000 per tonne. World Bank data show that international rice prices increased 75% in the past two months, as many countries concerned about domestic price pressures imposed restrictions on grain exports. The Chinese government nevertheless is confident it can keep grain prices stable.

Bumper harvests since 2003 have helped, with production reaching a record 50.15 million tonnes in 2007, according to the National Bureau of Statistics. That however may paint an overly optimistic picture. A recent Chinese Academy of Social Sciences study shows grain production this year will be about 50 million tonnes, while 2007 production was only 0.7% more than a year earlier.

Premier Wen Jiabao last month indicated a lack of undue concern over rising international prices, saying during a tour of Hebei, a major grain-producing province in central China, "We are unafraid since we have grain in our hands." Perhaps, but since the start of this year, Beijing has taken tough measures to restrict grain exports, including an export tax on 57 grain products, with tariff rates ranging from 5% to 25%.

The move, interpreted as a step to curb inflation, was taken only 10 days after the government scrapped export tax rebates on grains, including corn, wheat and soybean. The government has also increased its direct subsidies to grain-growing farmers. Central government payments will reach 63.3 billion yuan (US$9 billion) this year, according to the Ministry of Finance. Helped by such measures, the rice price in China is around 2,600 yuan per tonne, only one third of the current international level.

Japanese scientists warn Arctic ice melting fast
Arctic ice is melting fast and the area covered by ice sheets in ocean could shrink this summer to the smallest since 1978 when satellite observation first started, Japanese scientists warned in a report. Ice sheets in the Arctic Ocean shrank to the smallest area on record in late summer in 2007, researchers at the Japan Aerospace Exploration Agency said in a report.

"The sea ice in the Arctic Ocean has continued to shrink since the beginning of April in such momentum to approach last year's levels," they said in the report based on an analysis of satellite images. The area covered with perennial ice in the Arctic Ocean has receded "drastically" in recent years, falling to nearly half the area observed in 2005, they said.

"The reduction of areas covered with perennial ice means the overall ice in the Arctic Ocean is thinner and thinner year after year," the report added. The researchers made no mention of human-fueled climate change that could be blamed for thinner Arctic ice.

The conservation group WWF said last month that Arctic ice may be melting faster than most climate change science has concluded. WWF said that climate change has already affected all aspects of ecology in the Arctic, including the region's oceans, sea ice, ice sheets, snow and permafrost.


ric said...

No Money Down Loans Continue
"But for those who lack the wherewithal to put even a little skin in the game, there's a workaround: a not-for-profit organization can give prospective buyers the teensy downpayment. The spigot is wide open. Of the 180,881 loans that the FHA insured in the first half of fiscal 2008, 36.7 percent, or 66,337, were seller-funded. With home builders and sellers desperate to make sales in a slowing real estate market, this percentage is likely to grow."

Sounds like cannibalism. Ahem--capitalism. Government insured.

Anonymous said...

Can someone please explain to me why Reuters / Bloomberg / WSJ and the like are headlining:

- Oil is down and dollar is up

(what, 122 U$/bbl instead of 124 or 126 U$/bbl?? Or the US dollar is 1.54 to Euro instead of 1.59???)

- Unexpected good data for the US economy

(from better retail sales, less unemployment... c'mon!!)

- Signs that recession is over


Stoneleigh said...

Oil being down and the dollar up are not good signs for the US - they are signs that the next phase of deflation is beginning. I have been saying for some time that the commodity complex was close to topping and the dollar should begin a significant rally, in tandem with the next stage of the credit crunch. The fact that these things are happening now is further evidence to me that the market rally is probably over and that last week's high should stand.

The next stage of the decline may start slowly, but should lead to significantly worse news than we've seen so far. I would expect more fireworks in the financial sector, with more bank failures on the cards. It's also possible that this phase could see the beginning of a crisis in the $62 trillion credit default swap market.

Stoneleigh said...

I thought I would post here a couple of posts I wrote to another discussion forum, in order to share the debate with our readership here. The topic is inflation versus deflation.

"The U.S. government is bankrupt. Though energy cannot be printed, but money can be 'created' at will. The Fed is doing just that, by bailing out the banks, issuing stimulus checks, and so on. But this can't go on forever. Eventually, rampant inflation evolves into hyperinflation. Like in Wiemar Germany."

Stoneleigh: This isn't a Weimar Germany scenario - it's a 1929-style crisis on steroids. The Fed is making a show of injecting liquidity in order to restore confidence, without which a debt implosion is inevitable, but at some point the market (ie the power of the collective) will call its bluff. The Fed has already committed half its balance sheet and we aren't even at the end of the beginning yet. They know that deflation is the real threat, so they play confidence tricks and talk about inflation as a distraction. That's all they can do. If they actually 'printed money', the cost of government borrowing would skyrocket, as would interest rates on all debt, bringing the debt-junkie economy to a screeching halt. We are looking at deflation - a cascade of debt defaults causing massive credit destruction - either way.

"History shows that a currency can become worthless practically overnight. Unfortunately, this is where I think many of us will get burned."

Stoneleigh: Access to liquidity will be critically important in the coming years. The majority is always - wrongly - fully invested at market tops and fully liquid at market bottoms. Insiders do the opposite and profit hugely. In coming years the insiders will be buying up all manner of high quality assets for pennies on the dollar because their erstwhile owners are desperate for cash, just like in the 1930s. The vast majority will get burned because they have far too little cash now, not far too much. Most of what has functioned as our global money supply is not money, but credit, and the coming collapse of credit will dwarf the liquidity injections of central bankers. Credit and money are only interchangeable during expansionary times, but when the expansion ends, credit implodes. What little actual money remains during the coming depression will be very valuable indeed.

Modern economics is a fiction based on unfounded assumptions (rational utility maximization, efficient markets, perfect competition, perfect information, stabilization through negative feedback etc), but finance is quite different and is very instructive if you look below the supposedly rational surface. Instability lies at its very foundation, as markets are grounded in positive feedback loops at various degrees of trend (ie when stock prices go up, so does demand as investors chase momentum, and the opposite is equally true).

Markets are very effective wealth concentration mechanisms, indeed more effective the broader market participation becomes, in true Ponzi fashion. They exist to separate the masses from their money by exploiting human herding instincts based on collective emotional responses - collective greed versus collective fear, both of which are very readily communicated among groups of people with no access to real information. Mass emotional responses can be very difficult to resist (ie intensely uncomfortable psychologically) because our brains are hard-wired to respond to them subconsciously for good evolutionary reasons. This why so many people eventually buy into a mania and lose everything once the greatest sucker has been fleeced and boom turns into bust. We are now on the verge of the largest deflationary bust in history, as an inevitable deleveraging follows the largest and longest mania (credit expansion). Canny insiders (the ones who hadn't got to the stage of swallowing their own propaganda, so to speak) will make money during the bust just as they did during the boom, but the masses will lose everything. Say good-bye to the middle class over the next couple of years.

Stoneleigh said...

And here is the second comment:

"Nobody here is denying deflation -- massive credit destruction has been going on for months (and it will get much worse). Nevertheless, we are currently seeing unprecedented monetary inflation in the U.S. For example, M3 growth was 17.4% in March. This is the highest it has ever been. Even M2 growth was at 7%! These are startling numbers."

Stoneleigh: They are indeed large numbers, but they are already outweighed by the on-going destruction of credit, meaning that the money supply is already effectively shrinking. The amount of credit produced from thin air in recent years is truly staggering. It dwarfs the resources of central bankers. Even if the Fed and other central banks committed their entire balance sheets to combating credit destruction, it would not be nearly enough, and they won't do that anyway because to do so would be to throw away their own power. Why would the Fed - a private institution - offer up its power in futile attempt to save what cannot be saved? As Mayer Amchel Rothschild said, "Give me control over a nation's currency, and I care not who makes its laws." That power, once given, is not something to be lightly discarded.

They would like you to think they would do whatever it takes to stave of a debt implosion, because then you might be confident enough not to cash out, and that tenuous confidence is all that stands between the existing global financial system and the abyss. I agree that they will delay the inevitable for as long as possible, but I would argue that 'as long as possible' is not very long at all. The recent market rally, and the brief resurgence of confidence that sparked it, are likely over (or if not then nearly so). If such aggressive moves by the Fed can only produce a rally lasting a couple of months, then what more would they have to do in the face of a tidal wave of defaults? By way of analogy, one might say that the water has gone out and the bemused tourists are wandering out on to the newly exposed sands to pick up interesting shells. Soon they are going to be swept away.

Subprime is now a household word, but we have yet to see the inevitable defaults in Alt-A or prime lending as pay options ARMs reset, and those are far, far larger. After all, lending based on FICO scores is brain-dead lending - it doesn't take into account debt to income (DTI) or loan to value (LTV), both of which are better predictors of default. With huge numbers of mortgages already underwater and millions more to follow with interest rate resets and loss of jobs as the economic effects start to bite, we are looking at default leading to credit destruction on an epic scale - homes, commercial real estate, credit cards, car loans, etc, and not just in the US either. Have you seen what's happening to real estate in the UK, Spain, Ireland or eastern Europe? Bank writedowns in Europe and Asia have barely begun, but they are fast approaching.

Add to all that increasing LIBOR rates, which are a clear indication of banks fearing skeletons in each others closets (that may nevertheless understate the problem due to banks under-reporting their real borrowing rates). This will drive increasing interest rates on all other lending, whatever central bankers may do with short term rates. Credit spreads are poised to go through the roof, tightening credit standards are shutting the door on new lending, emerging markets are being hit hard, carry trades are set to unwind, over-extended banks in small jurisdictions are beyond their host country's ability to bail out, and the credit default swap market (worth tens of trillions of dollars) is verging on its equivalent of a high speed traffic accident. By way of analogy again, credit default swaps amount to me being able to take out fire insurance on your house, which then gives me a direct incentive to burn it down. There is a great deal of money to be made in wanton economic destruction, for those lucky enough not to fall foul of huge counterparty risk. To think that no one will take advantage of their winning bets if possible is naive.

As for the dollar, it has probably bottomed for the time being, and should now be at the beginning of a significant rally, fueled by short-covering. Anti-dollar sentiment is so extreme that most bets on further falls will already have been made. As consensus takes time to build, the more extreme the consensus, the later it is in the trend. Although the dollar will eventually become worthless, as do all fiat currencies, I would argue that that time is not now. For now we have a deflationary bust to live through, for which a large supply of dollars in cash (and not trusted to the banking system, as FDIC will be useless in a systemic banking crisis) would be very helpful indeed.

Anonymous said...

Stoneleigh, I dont think you are reaching the right conclusions: I agree that there will be a deflation, that the central banks reserves are not enough, that money is being destroyed.
But why should have the dollar have bottomed? Dont you think most of this thin air money (derivatives, etc.) has been nominated in US dollars. It sure was not created out of rubles, brazilian reais or even euros... no, its all dollar. Therefore it is clear to me that there is no safety to fly to, forget about it before its too late.
In Latin America, when a currency gets hard hit, they rename it or give it a first name: australs for argentinian peso, reais for brazilian cruzeiro, strong bolivares, etc etc. Shall we propose a name for dollars, like New Dollar or Worthy Dollar or Foolproof Dollar??