Sunday, June 22, 2008

Debt Rattle, June 22 2008: It’s all looking very biblical

Dorothea Lange Migrant Jalopy February 1939
U.S. 99 in Kern County on the Tehachapi Ridge. Migrant workers travel seasonally back and forth between the Imperial Valley and San Joaquin Valley over this ridge.
(The billboard up ahead: "76 miles to GRAPEVINE air cooled cafe.")

Ilargi: One thing I’m sure of is that very few people are predicting a calm and quiet week ahead in finance. So today, we’ll do some easy and uplifting reading (?!). Yeah, right... I must admit, I hadn’t yet thought of the massive -top soil- erosion resulting from the floods in the US midwest, or the huge amounts of chemical fertilizers that leached out into the rivers. Of course, for the positive minds among you, there is the consolation of looking at disaster as a growth industry. Or, to use a quote from below: All we need now is a plague of locusts.

A thought I had this morning: Britain’s economy is sinking so deep and so fast, if I were PM Gordon Brown, I’d consider writing a law that bans the possession of pitchforks.

It’s all looking very biblical
The sky was blue, the sun was out. Was that a topless woman I just spotted on the shore of Lake Michigan? Outwardly there was little sign of the severity of the storms that have swept across the middle of America when I arrived in Chicago last week.

But turn on the television or open the paper and all you see are pigs on roofs trying to escape the flood, homes under water and crops destroyed. The rain may have stopped, but the consequences are only just starting to be felt. Not so long ago, corn prices were boring, a topic for farmers to chat about over their fences. The rise and fall of crop prices might have excited a few traders in Chicago, but the rest of us couldn’t have cared less.

And why on earth should we have cared? There was loads of the stuff out there. Bushels of it. Practically growing out of the ground. How things have changed. Now crop prices are a hot topic in Washington, on Wall Street and on Main Street. Food is top of the political agenda as the price of rice, corn and other cereals has hit record levels. Meat, by many accounts, is next.

Using corn for ethanol production led to a spike in prices long before the floods took their toll. According to some reports, the meat industry is already selling off breeding animals in order to offset losses from the high price of corn and soybeans it needs to feed its livestock. The move will temporarily increase the meat supply, but it also means that supplies of some meats will begin to shrink later this year and prices will rise.

Tyson Foods, the giant Arkansas-based meat producer, has predicted that retail chicken prices will have to jump by double-digit percentages in 2009 for poultry processors to recoup their feeding costs. The cost of food is increasing at its fastest pace in 18 years. The price of corn has more than tripled in the past two years to record high levels.

Analysts estimate that flooded Iowa and Illinois and the other corn states might produce 15% less grain than last year. Some believe the shortfall will be even larger. The commodity traders in Chicago certainly think so and are bidding up the price of corn in the expectation of shortages. Although the corn-growing season is young, the flooding is already prompting some grain industry analysts to trim their harvest forecasts.

The Department of Agriculture has estimated the US will use 12.5 billion bushels this year. About 5 billion would be used for feed, 4 billion consumed by ethanol production, 2 billion sold overseas and the rest put to other food, seed and industrial uses. America was on schedule to produce 11.7 billion bushels and the shortfall would be made up by corn grown in previous years, but the floods threaten to drain those supplies.

Nor can America expect much help from Australia, the second-biggest exporter of corn. On the other side of the world, Australia is experiencing the opposite problem to the Americans. The Australian authorities recently had to cut the wheat output forecast by nearly 9% after the return of dry weather during the crucial planting period dashed hopes for a return to record crops.

It’s all looking very biblical.

Given that the Bible belt crosses the corn belt in middle America, it’s a surprise someone isn’t making apocalyptic noises about seven years of famine and flood.

All we need now is a plague of locusts.

Farmers dealing with huge crop loss, erosion
For many Iowa farmers, recent floods have turned terra firma into terra incognita. Along with hopes for record profits, floodwaters washed away crops and in many cases the very land itself. The word "erosion" doesn't do justice to the losses. As Mohammed Ali once told football legend Jim Brown at the conclusion of a magic trick: "It's gone, Jim" — long gone down any one of nine Iowa rivers that reached record crests this month.

For Vern Dietzenbach and his son, Dan, who farm together along the border between Winneshiek and Fayette counties, the Turkey River washed out one-third of their intended 150-acre corn crop and replaced 16 acres of black bottomland soil with deep layers of inarable rock and sand. "It's sad when 50 years of conservation disappears in two hours", said Vern Dietzenbach, 61.

Gesturing toward the moonscape that had been a productive cornfield, he said, "I don't know what I'm going to do with this. Any ideas?" Gesturing toward a shiny new grain bin, he said, "I won't need that." The Dietzenbachs and their fellow Iowa farmers have already lost about 10 percent of their anticipated 2008 corn crop, either because floods destroyed it or wet fields prevented its planting, according to Bill Northey, secretary of the Iowa Department of Agriculture and Land Stewardship.

Much of the surviving corn is short, uneven and sickly yellow, languishing because its shallow roots can't tap the nitrogen needed to fuel the riotous growth taken for granted in late-June, 80-degree weather. Or because the nitrogen itself, applied at costs approaching $100 per acre, is gone, leached out by too much water.

"We may lose another 15 percent of the crop in reduced yields because of poor growing conditions," said Gene Mohling, Iowa State University Extension agronomist for Johnson, Washington and Iowa counties. Flooding and wet conditions have also claimed about 20 percent of Iowa's anticipated soybean crop, although soybeans, unlike corn, can still be planted in late June with a reasonable expectation of a profitable, if not bountiful, harvest, Northey said.

Those losses would be somewhat more bearable if corn and soybean prices, already at record high levels, had not lately been surging like the cost of crude oil. Corn prices have approached an unprecedented $8 a bushel and soybeans have topped $15 a bushel on concerns that crop damage from Midwest flooding is worse than previously thought.

Not to diminish the agonizing flood losses of town and city dwellers, but at least in monetary terms their losses — estimated at about $1 billion in Cedar Rapids — pale beside the flood-related crop losses of Iowa farmers. Ball State University economist Michael Hicks and his colleague, Mark Burton of the University of Tennessee, using current grain prices and a flood damage model based on their studies of the flood of 1993, estimate Iowa farmers' flood-related crop losses at $2.7 billion.

"It wouldn't surprise me if it's higher than that," said ISU Extension's Mohling. Iowa Farm Bureau Federation President Craig Lang raised the ante Friday with his estimate that floods destroyed $3 billion worth of Iowa corn and soybean production and that livestock producers will lose $500 million because of flood-induced higher grain prices.

The short crop and the high prices are "going to impact you personally," Mohling said. "You're going to feel it about a year from now in the form of sharply higher food prices." Meat and poultry prices may remain stable in the short term as livestock producers cull or liquidate their herds and flocks in response to higher grain prices, but the market will eventually catch up, he said.

With more than 75 percent of processed foods containing corn either as starch, sweetener or protein, "you are going to feel that at the grocery store, especially with skyrocketing transportation costs," Mohling said.

Ilargi: Yesterday we quoted Mr. Mortgage on the Housing Bill that turns out to have been written by Countrywide and BoA, who profit from it immensely. Karl Denninger covers the same issue here.

I don’t know that calling or writing to a Congressman will do you much good. I have the idea that the system is close to fireproof. Lobbyists are allowed to work pretty much anonymously, and as a result their political power is highly underestimated. I think they are responsible for this bill, as for many others. They have stealthily become the -unelected- de facto fourth arm of the US government.

And I don’t want to sound too smug, but yes, it all fits perfectly with what I have coined The Bulgaria Model. As far as I can see, of the 400-some people arrested by the FBI in connection with alleged mortgage fraud, only 2 are really from Wall Street. We can expect highly publicized court cases against lower "fraudsters", which will serve to divert attention away from senators and Mozilo’s. No surprise there.

Did Bank Of America / CFC Write The Housing Bill?
This is an outrage.  Senator Dodd was discovered to have gotten a "special" mortgage from Countrywide Financial (they are being "acquired" by BofA). Senators and Reps have since declined to do anything more than allow an "ethics investigation" to take place. Now we find out that it appear that Bank Of America wrote the damn bill that he and Shelby introduced!

Now why is this important?  Because it stinks to high hell, that's why.  And more importantly, if you read that linked document closely you will find that GNMA, otherwise known as "Ginnie Mae", should be the issuer of the bailed out loans. This is an absolute ticking nuclear weapon folks.

You are about to get robbed to the tune of $300 billion dollars.  Ginnie Mae is the ONLY issuer that has an EXPLICIT government backstop.  That is, if this plan fails you will be be on the hook for every penny of defaulted loan as a taxpayer. Now I do not know if the actual final bill that will come out and be sent to the President (who has said he'll veto it, by the way) will contain the GNMA underwriting or not. 

But for Bank of America to "propose" that the government step in and rewrite, then guarantee hundreds of billions of dollars of retained mortgages that Countrywide Financial (and others) have on its books, while they are supposedly "buying" Countrywide Financial, is an absolute outrage. 

This is corporate welfare at its worst - Countrywide is being investigated by virtually every 3-letter agency of the government that exists for the possibility of violating both civil and criminal law, and now Bank Of America, who agreed to buy them around the turn of the year, three months later essentially writes a bill that would remove some of the risk that they are buying something that has more liabilities than assets by shifting a good part of those liabilities to the taxpayer?!

If we the people allow this bill to pass, even if it is vetoed, it appears that there is a veto-proof majority in Congress and the veto will get overridden.  That is, we must stop this in Congress and we must stop it NOW. Lenders will receive a windfall in that their potential losses in the bad paper on their books will be transferred to you. This will be only the first.  Using this bill as a template Fannie and Freddie will be next. 

The mortgage insurers are drowning, with one of them being forced into runoff this last week.  The others will likely follow.  If and when they fail, Fannie and Freddie's credit book will be forced to trade on its underlying credit quality - that is, it will be exposed as toilet paper and full of fraudulently-sold loans (to them) that contain material misrepresentations as to the credit quality of the property and/or borrower. 

This bill will then be extended to cover those losses. How much loss will you, the taxpayer, eat? As I have said, my total estimated loss in this party is going to be between $2.5 and $3 trillion dollars, which is roughly equal to one third of the entire public debt of the United States. That's right folks, Bank Of America's "proposal", which will become law unless you stand up and stop it right now, will ultimately end up costing you, the taxpayer, $3 trillion dollars, and $300 billion of that cost is contained in the bill "as written."

To fund that treasury bonds and bills will have to be issued, and that will drive borrowing costs much higher. If there was ever a time that you HAD to get off your butt to save yourself, this is it.  Congress must hear not only from you today and Monday, but from every one of your friends, and they must tell their friends.

U.S. Markets: A Ton of Doubt Calls for Caution
Sentiment deteriorated further during the past week as oil prices rebounded, more bad news in the financial sector surfaced, economic woes mounted and inflationary pressures intensified, compounding the already-jittery investors’ anxiety.

Status Quo’s lyrics “Down down deeper and down” came to mind as global stock markets took a battering. For example, the Dow Jones Industrial Index, plunged by 3.8% over the week to below 12,000 – its lowest level since March. Commensurate with extreme bearishness, short interest on the New York Stock Exchange jumped to an all-time high during the week.

At the center of investors’ angst was the perception that the credit crisis has not yet played itself out. These fears were supported by Goldman Sachs (GS) analysts who said last week they did not expect the credit crisis to peak before 2009, and that U.S. banks might need to raise $65 billion of additional capital (on top of $159 billion raised so far) to cope with additional losses from the sub-prime fallout.

On a related note, Moody’s downgraded the credit ratings of Ambac Financial and MBIA, citing their limited ability to raise new capital and write new business. Banks were also in focus as analysts cut their price targets for, among others, Goldman Sachs, Citigroup and Wachovia.

In one of the most bearish reports for a while, The Royal Bank of Scotland advised clients to brace themselves for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. “A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank’s credit strategist (who gained credibility after his warnings last year about an impending credit crisis).

Richard Russell, 83-year old author of the Dow Theory Letters, expressed concern about the stock market’s negative breadth and said:
I did a double-take when I read Lowry’s statistics … Buying Power Index at a multi-year low and Selling Pressure Index at a multi-year high. And the two Indices at about their widest (most bearish) spread in history or since the 1930s.

What the devil could this mean? My guess can be summed up in one word – trouble.

However, there is still hope, according to David Fuller (Fullermoney), who pointed out that Investors Intelligence’s sentiment index (bottom section of the chart on the left) was extremely bearish.
There has never been a reading at current or lower levels that was not soon followed by a sharp rebound, including during the last bear market. This indicates to me that we are within a week or two of a bear squeeze, providing at least a tradable rally …

Lousy Fridays are often followed by rotten Mondays.

As first-time buyers vanish, the lights go out across Britain
Like a giant pyramid scheme, the housing market relies on first-time buyers to enable those already on the bottom rung of the ladder to sell their starter homes and climb higher. New blood is needed for the additional funds that will keep the market buoyant.

Yet this vital source of investment has all but dried up. The number of first-timers this year could be the lowest on record. In 1999, almost 600,000 people bought their first property, but then soaring prices started to make homes unaffordable and that number dropped steadily. Last year it stood at 358,000 – its lowest level since 1991.

However, with prices now falling, potential first-timers are still not taking the plunge even though properties are cheaper. On current trends, they will buy barely more than 200,000 homes this year. Indeed, the total could fall below the 198,000 sales recorded in 1974 and be the lowest since records began.

That non-owners are not buying is evident to every housebuilder with unsold stock and every estate agent looking for commission. The debate is whether demand from first-timers has dried up or whether the supply of mortgages has disappeared. Sue Anderson, spokeswoman at the Council of Mortgage Lenders (CML), puts up her hands and admits her members cannot provide the loans.

"We don't see this as a demand-led reduction but a funding problem," she confesses. "At the moment it's still seen as very much a supply-side problem." But not all lenders accept the blame. Fionnuala Earley, chief economist at Nationwide, Britain's biggest building society, says: "Affordability was beginning to bite before we had the trigger of the credit crunch.

In the short term, the demand factors will dominate. People are not in a position to buy and that's likely to be the case for some time." Would-be first-timers have switched quickly from being unable to afford an asset whose price kept rising, to being unwilling to buy one that is falling. The housing market, once a sure-fire bet, is now a guaranteed short-term way to lose money, and for highly geared first-timers a small price fall represents a major erosion of their equity.

Despite the tougher lending conditions imposed since the credit crunch, those first-timers prepared to enter the market are borrowing, on average, 87 per cent of the value of the property, which means finding a £17,000 deposit to put down on a typical UK first-time buy (whose selling price is down to £130,000).

The average age of these buyers, at just 28, and the size of the loans they take out, 3.3 times income, suggest that credit is not always hard to come by. But the 8 per cent fall in prices since last autumn has already wiped out most of the equity of the first-timers who bought then. The rest could disappear by Christmas.

UK: Number of new houses being built plummets nearly 60%
The number of new houses being built has plummeted by nearly 60% since this time last year as tighter mortgage lending conditions put off potential home buyers.

The National House Building Council, which has 20,000 registered house builders on its books, said there were 6,890 new starts in the private sector in May, compared with 15,713 this time last year. This represents a drop of 56%. The number of new public sector houses being built is also decreasing with 2,699 houses being built this year, compared with 4,306 in May 2007. Sixty percent of social housing is built by private developers.

This news came on the same day as Halifax, the UK's biggest mortgage lender, announced that it would be raising its fixed rates on loans by half a percentage-point from today - the twentieth time Halifax has changed its rates since the start of the year.

Homeowners who have more than 25% equity in their houses now face an increase on a two-year fixed-rate mortgage from 6.49 to 6.99%. On a £150,000 home loan, this adds £47 a month to repayments. The increase follows similar moves from several rival lenders in the past week, including First Direct which raised the cost of what had been the cheapest fixed rate on the market.

Roger Humber, strategic policy adviser to the House Builders Association, said the results were "not surprising". "We've seen an enormous downturn with the rate of sales falling 60% year on year. The issue is not the lack of demand but an absolute lack of mortgages. "Until the credit crunch is resolved by a reopening of the wholesale markets which banks rely on, we've got to see a continued low level of house building. Home building levels have got to come down in line with sales."

Joey Gardiner, housing and regeneration editor at trade publication Building, believes that this data shows how far away the government is from meeting its target of building 2m homes by 2016. "This is the danger from expecting the private sector to deliver public policy aims for you – they won't do it if it can't make them any money. Builders won't build if potential buyers are consistently refused mortgages for new homes.

Homes and economy drag each other down
The housing market will turn when the economy picks up, but that wider recovery could be delayed by falling property prices. While the state of the nation's finances influences housing, the state of the property market also affects Britain's prosperity.

The decade of rising house prices did much to make the economy buoyant. Most of the recent growth in consumption came from converting paper property gains into cash, allowing us to live beyond our means. What turned the property market last year was neither the credit crunch nor the oil shock. House prices simply ran out of steam.

While banks lent us more, we paid more, but even they drew the line at 125 per cent mortgages and lending six times income. And once prices stopped rising, the reason for much property buying disappeared: there was no prospect of an easy capital gain from trading up, buying second homes, investing in buy-to-let or financing the student homes of one's offspring.

Now we have stopped buying, prices are falling so fast that there is no incentive at all to buy. The slide has a fair way to run yet, but the disappearance of the property feelgood factor risks dragging down the rest of an economy already suffering from higher energy prices and rising inflation. Higher interest rates won't help. Thoughts now are of negative equity, not equity withdrawal.

A weak housing market hits not only building-related businesses but also DIY and furnishing companies – and ultimately all discretionary spending. Falling house prices could turn a slowdown into recession. The Government will have to do much more than relax stamp duty to revive demand, but at some point housing will look as oversold as it last year looked overheated. It is unlikely to be this side of an election, however.

Barclays seeks link with Japanese bank in talks to raise £5 billion
Barclays will this weekend aim to complete talks with four strategic investors as part of its plan to raise up to £5bn of fresh capital from new and existing shareholders. The high street bank is thought to be taking to Temasek, the Singaporean investment vehicle that owns 2.1% of Barclays, and the state-owned China Development Bank, which owns 3%, as well as the Qatar Investment Authority and Sumitomo Mitsui.

The involvement of the Japanese bank Sumitomo is more than a straight forward equity investment. It is thought to be considering an alliance with Barclays to set up new banking and asset management services in Asia where Barclays Global Investors, the bank's asset management arm, has been eager to expand more rapidly.

Shares in Barclays were suspended on the Tokyo Stock Exchange today while shares in Sumitomo fell by a modest 1.5% to 883,000 yen (£4169). One analyst cautioned that the possible £450m investment was too small to have much of an impact on the Japanese group's earnings. The terms of Barclays' share placing are being hammered out this weekend and it is by no means certain that all four will be prepared to participate in the placing.

The precise number of shares each investor takes will also not be known immediately as Barclays intends to offer its existing institutional shareholders a chance to participate in the placing in an attempt to placate those who are concerned that their influence over the bank would be diluted by new investors.

The new shares — which could amount to more than 15% of the bank's existing capital — are likely to be priced at a 10% discount to the bank's closing price a week ago on Friday of 318p. This was the last working day before the announcement at the start of this week that a plan to raise an unspecified amount of money was "under active consideration".

It is also well below the £7.20 a share at which Temasek and CDB bought in to Barclays during its ill-fated takeover attempt of Dutch bank ABN Amro last year. The bank's shares have fallen below this level since and today closed down 7.5p at 308.25p. At the start of the week Barclays confirmed it was looking at a "placing and pre-emptive offer to existing shareholders" and promised an announcement once an agreement was struck.

It is now thought likely that Barclays will try to confirm the details of the placing this week. The bank has been determined to avoid a rights issue — the route followed by Royal Bank of Scotland, HBOS and Bradford & Bingley — and has made it clear in the past that it was looking links with "strategic investors".

Sovereign funds prove a hard route to capital
Where will it all end? If, as expected, shareholders in HBOS support the company's £4bn rights issue and Barclays proceeds with its own similarly sized placement with a number of sovereign investment funds, it will bring the amount of capital raised by Britain's banks this year to the princely total of £20bn.

That's some sum. For that kind of money, one could pay healthy premiums to take over HBOS, Bradford & Bingley and Alliance & Leicester and still have spare change to establish a sizeable presence on Barclays' shareholder register. Yet despite having had to come cap in hand to investors, there is still astonishingly little humility on display among British banking bosses.

Last year's deal to bring in China Development Bank and Temasek of Singapore as investors was a smart move by John Varley, Barclays' chief executive, by any measure. It secured the firepower for his - ultimately aborted - play for ABN Amro by persuading the new investors to pay a price virtually double where the shares closed last week.

And just as importantly, it provided Varley with a serious consolation prize in the shape of access to the world's most important emerging commodities market. The idea, though, that Barclays' next round of fundraising is primarily an exercise to produce money for expanding its operations abroad - a notion now being propagated by the bank's advisers - deserves contempt.

Put simply, Barclays is raising capital because it has to: not because without it the bank would collapse - it would not - but because unless it does so, it will be saddled with the burden of a new reality in which financial institutions are being penalised unless they are perceived to have an adequate capital cushion.

It is right for investors and regulators to adopt this attitude. At just over 5 per cent, Barclays' core tier-one capital, a key measure of its financial robustness, is among the lowest of any major bank in Europe. The fact that Barclays is extending its net beyond its two existing sovereign shareholders suggests that these government-backed funds are becoming increasingly sceptical about the lack of transparency on the balance sheets of western financial institutions.

Varley's problem is that unless he can pull a rabbit out of the hat by pointing to growth opportunities provided by his new investors, his latest capital-raising will be shorn of the veneer of respectability which proved to be his salvation last year.

The signals are that with a leading Japanese bank among those being brought in, Varley is confident that he can indeed produce that rabbit: expanding parts of his business in Japan is a nice add-on. But Barclays' shareholders need to watch carefully that Varley's handiwork is more than mere financial trickery.

China's sovereign wealth funds set for global spending spree
China’s secretive sovereign wealth funds will help its state-owned companies to expand overseas in a shift of strategy after economic talks with America, according to analysts in Shanghai.

The negotiations, led on the American side by Treasury secretary Henry Paulson, ended with an agreement to open Chinese capital markets further to institutional investors by reducing the “lockup” period for investments. China’s aim is to secure reciprocal treatment to smooth the way for its own companies to build up their foreign holdings.

Sovereign funds will assist inexperienced Chinese companies in financing, foreign-exchange risk management and handling trade barriers. This policy is designed to support institutions such as the state-owned China Development Bank, which took a 3% stake in Barclays Bank last year and which The Sunday Times reported last week was in talks to increase its shareholding. The funds are likely to become indirect owners of big stakes in troubled financial institutions such as Lehman Brothers as they step up the pace of investment abroad.

They have now committed more than $5 billion (£2.5 billion) to private-equity firms that look for opportunities in the financial sector. Chinese analysts expect the trend to accelerate. There are signs that Beijing has given approval to a cautious risk-taking strategy in the search for higher returns, aware of the political and trade controversies that can accompany conspicuous investments by the Chinese state in open, developed economies.

China is seeking to diversify its holdings of more than $1.7 trillion in foreign-exchange reserves, which are mainly in US treasury bonds and other fixed-income assets. It is the second-biggest foreign holder of US treasury securities, with $490 billion, according to official figures from March. Only Japan, with $600 billion, has more. China’s latest move to diversify is a reported decision by the State Administration of Foreign Exchange (Safe) to invest more than $2.5 billion in a $17 billion fund set up by the American private-equity firm TPG Capital.

TPG recently agreed to buy a 23% stake in Bradford & Bingley for £179m after the downturn in the housing market hit the mortgage lender’s profits. It was Safe’s fifth known big investment outside China. It has taken stakes in three Australian banks, invested $2 billion in BP and acquired a $2.5 billion holding in Total, the French oil giant. A further clue to its investment strategy – officially a state secret – is its stake of almost 1% in BHP Billiton, the Australian miner, worth some $2 billion.

Bankers and executives on the pilgrimage to Beijing in search of fresh capital soon discover that little is known about the political factions or decision-making at the top. Chinese financial commentators have described a bureaucratic feud between the finance ministry and the People’s Bank of China, the central bank, for control of the world’s biggest foreign-currency holdings. The central bank exercises control over Safe, although its reporting lines run to the state council, China’s cabinet.

Prepare for change as world tilts to the east
“This too shall pass,” King Solomon’s advisers told him to engrave on a ring, and refer to it whenever he felt depressed. Or so the legend goes. Not a bad idea for bankers beset by still more dodgy paper to write off, for shareholders at loss-making Lehman Brothers and ailing Morgan Stanley (first-quarter earnings down 58% year-on-year), and for homeowners as they watch the equity in their homes evaporate. Some of our current crises will indeed pass.

However, it would be a mistake to believe that when these crises are over, the world will be as it once was. It won’t. For one thing, the entire system of regulation to which investment banks are subjected will be different. Ever since the Great Depression, governments have recognised that large commercial banks cannot be allowed to fail, and that depositors have to be protected when banks did fail.

But nobody imagined that investment banks are too interconnected to be allowed to fail - that the risks to the financial system of a failure by an investment bank are every bit as great as the risks posed by a failing commercial bank. Bear Stearns put paid to the notion that if a big investment bank fails, the next day will be just another day at the office for those who trade with it.

So the Federal Reserve Board worked with the US Treasury to bail out Bear Stearns, or at least prevent it from going bankrupt. Take the Fed’s shilling, and you are the Fed’s man: in modern terms, be too big or too interconnected to fail, and the government will regulate how you do business. That won’t pass. One highly knowledgeable observer tells me that the days of 30% to 40% returns on equity in the investment-banking business are over.

No longer will these institutions be allowed to leverage themselves as highly as they did in the past - too risky for the taste of the Fed regulators. Investors will have to satisfy themselves with a 20% return on their equity which, as they say in New York, ain’t chopped liver. Nor will the dependence of America’s banks on foreign investors pass. We are witnessing a massive transfer of wealth from American consumers to oil producers.

The sovereign wealth funds set up by producers have more cash than they can reasonably invest in skyscrapers in their own cities. Their investments in America’s financial institutions have proved a costly adventure so far, but these are long-term investors, the best kind from the point of view of the managers of our banks - so long as they remain passive - and so will remain key players in American financial markets.

The world of banking is not the only one that will never again be the same. The troubles of entire American industries will not pass, and they will be unrecognisable only a few years hence. The most obvious are the motor and airline industries.

Oil prices might come down a bit, but General Motors’ four shuttered 4x4 plants will not reopen and the 8,000 laid-off workers will have to hope that the company can find jobs for them producing small vehicles and hybrids. Chrysler says it plans to “break some of the old paradigms”, and Ford speaks of a “transformation”. Read, downsizing.

As for the airlines, they cannot even hope that their present difficulties will eventually pass, leaving them unchanged. Their business model is broken: some will disappear; others will find ways of extracting more money from travellers, and not merely by charging $15 to check in a bag; still others will continue paring schedules and finding new ways to make passengers cuddle even closer to their fellow sufferers.

But nothing they do will stop the shift from flying to tele-conferencing, from hopping on a once-cheap flight on grandma’s birthday to a congratulatory telephone call or family video conference. Yes, there will still be airlines a decade from now, but they won’t look anything like the ones limping through America’s skies in the days of $40 or even $80-a-barrel oil.

Businesses are not the only institutions that will be changed forever by the current flow of billions from the treasuries of western countries to oil producers and to the emerging Chinese and Indian nations. Governments also will have to adjust. Taxing consumers who are already experiencing downward pressures on their living standards as they fill up their cars, and heat and cool their homes, will become more difficult.

Bernanke's Market Week
The Federal Reserve's Open Market Committee meets again next week, and one of its jobs will be to clean up the mess the Fed made this week. Earlier this month, Chairman Ben Bernanke signaled a turn in Fed policy to include a focus on maintaining a "stable" dollar.

Sure enough, the dollar strengthened, the price of oil fell and stocks crept up. Then earlier this week, someone in the upper reaches of the Fed began leaking to the press in advance of next week's FOMC meeting that Mr. Bernanke saw no reason to raise interest rates this month, or indeed until the autumn.

Sure enough, oil shot up and gold rose back above $900 an ounce, with equities tanking in turn on stagflation fears. Throw in renewed worries over credit problems in the banking system, and the markets had a very ugly week. What we can't figure out is what in the world Fed officials are thinking, assuming that's even the right word.

The most precious commodity a Fed Chairman has is credibility. When he makes a widely advertised public commitment to maintain dollar stability, and then he or his minions leak that he has no plans to back that up with any action, he is squandering his own currency. Central banking isn't an academic seminar where ideas don't have consequences.

With inflation climbing around the globe, most of it inspired by dollar weakness, the Fed has a growing credibility problem. Mr. Bernanke needs to understand that investors are beginning to suspect that the most important financial official in the world doesn't seem to appreciate the Fed's primary role in undermining the greenback. If that conclusion becomes fixed, this week's market meltdown will look pretty by comparison.

A Closer Look at the CSX/TCI & Bear Stearns Cases
Two recent court cases have captured the attention of hedge funds. One pits a corporate raider cum philanthropist [TCI] against the increasingly desperate management of a old-line 100,000-car railroad (CSX). The other accuses two average-Joe hedge fund managers as the ones who originally infected patient zero in the global credit pandemic (Bear Stearns’ High Grade Structured Credit Strategies Enhanced Leverage Fund or “BSHGSCSELF” for short)

Many of the facts surrounding each case have been obfuscated by sensational reporting. CNN’s Lou Dobbs demanded, for example, that US legislators block the hostile take-over of CSX by London-based activist hedge fund TCI on national security grounds. Likewise, many mass media outlets seem to have bought into prosecutors’ arguments that the duo who ran Bear Stearns’ now infamous CDO fund were personally responsible for the entire global credit crunch.

If you, like us, were left with more questions than answers after reading media accounts or watching news items pertaining to these cases, you’re in luck. You can read the entire CSX and Bear Stearns (BSC) complaints online - unedited and without comments - and reach your own conclusions about these important cases.

CSX vs. TCI: In a nutshell, CSX accused TCI of sidestepping reporting rules by using swaps rather than actual stock to increase its interest in the company. TCI argued that swaps didn’t count. However, the June 12 court ruling sided with CSX saying that although TCI didn’t technically own the CSX shares, it knew that its swap position would be hedged by the shares and, similarly, knew that closing out the position would trigger a sale of those shares. In addition, the judge felt that TCI had considerable influence over how those shares would be voted in a proxy battle (including the possibility that they not be voted at all).

But don’t take our word for it, click on the document at the left from the US District Court - Southern District.

The Bear Stearns Two: Apparently breaking the Geneva Convention, the Department of Justice paraded Bear’s ill-fated managers in front of the media last week, prompting cheers from some and accusation of a witch hunt from others. The June 18 indictment (right) from the US District Court - Eastern District (via the NYT) accuses the two of not sharing their concerns with investors just as the fund was tanking.

This case raises important questions for portfolio managers and particularly for hedge fund marketers and investor relations personnel. Unlike mutual fund marketing, hedge fund marketing usually involves a discussion of portfolio details - usually with the managers themselves. So the big question is: does the manager have to share all of the details of the often heated debates that occur within the investment team each day?

As one commentator put it last week, “We have to be wary of a rush to judgment. The question is whether these managers crossed the line from permissible spin to wilful misrepresentation.”

Bottom line: If you really want to get all the facts on these cases and avoid inherent biases in the media (including ours), we recommend you check out these documents yourself. You don’t have to be (Law & Order’s) Jack McCoy to understand them.

Europe's Summit of Paralysis
Optimism was the name of the game at the European Summit in Brussels on Thursday and Friday. Still it was clear: After the Irish rejection of the Lisbon Treaty, the European Union doesn't know what to do next. And more hurdles are just over the horizon.

Everything was supposed to look just as it always had. The 27 European Union leaders smiled broadly and slapped each other on the back; optimism was on full display when they stepped to the microphones. The EU summit in Brussels even came to an end just when it was supposed to on Friday evening. No delays and, most importantly, not a hint of crisis.

There was even progress made, if one believes the list of successes read out by Slovenian Prime Minister Janez Jansa, who holds the EU's rotating presidency until the end of the month. There were new employment measures to announce, visa policy for the Balkans had been improved and Slovakia's adoption of the common European currency, the euro, was discussed. All of it, said Jansa, was "a clear sign that the EU works." His foreign minister, Dimitrij Rupel, echoed Jansa by saying that the summit had been "encouraging."

And as for "our Irish friends," as European Commission President Jose Manuel Barroso put it, "they have asked for more time and they will get more time." Yet despite all of the forced bonhomie, it was difficult to conceal the truth about the Brussels gathering: It was a summit of paralysis. It was so short because there was nothing to discuss or negotiate. In answer to the central question -- what to do now that the Irish have rejected the Lisbon Treaty in a referendum a week and a half ago -- there was silence. The EU decided to wait until the next summit in October to talk about it.

The closing document speaks for itself: The European Council is unanimous that, following the Irish referendum, "more time (is) needed to analyse the state of affairs." The Irish government, it said, "will actively consult, both internally and with the other member states, in order to suggest a common way forward." In October, EU leaders will come together again to "consider the way forward." But in the meantime, the seven EU countries that have not yet ratified the Lisbon Treaty should do so, the document states.

And the Wheels Stopped Turning
…and everything comes to a grinding halt.

The farmers are upset about falling global prices and the new regulations constantly coming from Brussels. Those at the bottom of the social ladder are upset about the growing gap between rich and poor, especially evident in a country where both groups live in close proximity. The citizens despise their own politicians, who promise the world but who lack perspective and do not (cannot) deliver.

And then along comes a referendum over a treaty that is too complicated to be understood. EU membership has been more or less advantageous. Why should anything be changed? Doesn't the strengthening of European institutions necessarily lead to a weakening of democratic voices, which are only heard within the national public sphere?

The citizens sense that they are being patronized. Once again, they are to ratify something in the making of which they were not involved. The government has said that this time the referendum will not be repeated until the people give in. And aren't the Irish, this small, obstinate people, the only ones in all of Europe who are actually being asked for their opinions? They don't want to be treated like cattle being driven to the voting booth.

With the exception of three members of parliament who voted "no" on the issue, the Irish people and the entire Irish political class are entirely at odds. In a sense, it is also a referendum over politics in general, making it all the more tempting to send "politics" a message. This temptation is one felt everywhere today.

One can only speculate on the motives behind the Irish "no" vote. But the first official reactions have been clear. Suddenly roused out of complacency, European governments don't want to appear helpless. They are looking for a "technical" solution -- which would result in a repeat of the Irish referendum.

This, though, is little more than unadulterated cynicism on the part of the decision makers, especially given their protestations of respect for the electorate. It is also wind in the sails of those actively wondering whether semi-authoritarian forms of pseudo-democracy practiced elsewhere are perhaps more effective after all.

The purpose of the Lisbon Treaty was to finally achieve the organizational reform intended, but not completed, by the 2001 European Summit in Nice. That summit took place before the European Union's membership was expanded from 15 member states to 27. The eastward expansion, with the broadened prosperity gap and increased diversity of interests, has led to an even greater need for integration in the mean time.

These new conflicts and tensions cannot be addressed by European governing bodies in the manner to which they have become accustomed. After the failure of the proposed European constitution in 2005, the Lisbon Treaty represented a bureaucratically negotiated compromise to be pushed through behind the backs of the citizenry. With this most recent tour de force, European governments have callously demonstrated that they alone are shaping Europe's future. There remained only that one tiresome exception mandated by the Irish constitution.

The treaty itself was little more than a stalling response to the shock of 2005's failure. The ratification process came to a halt in France and the Netherlands before it could even reach the real hurdle in Great Britain. The predicament is even worse today. Business as usual? Or is it perhaps time to realize that, for European unity to deepen, Brussels must shift to a more participatory style of democracy?

Ilargi: As the insane leveraged buy-out (the biggest in global history) of BCE continues, there is one party missing that, I think, should have asked a judge for an opinion. How is it in the interest of those who rely on Ontario Teachers for their present and future pensions, to take on over $40 billion in new and existing debt?

At a point in time when leveraged buy-outs are distinctly out of fashion, for very obvious reasons, how is this deal going to make these pensions more secure? What happens, for instance, if one or two years from now, one of the banks involved cannot afford to live up to its part of the scheme?

RBS is not exactly doing dandy right now, and Citigroup is a deeply troubled institution, as Meredith Whitney confirms time and again. All these banks are suspected of having toxic monsters in their closets. If I were one of the future "Teachers pensioners", I would ask a judge to investigate this prior to any deal being closed.

Sure, BCE stock is set to rise strongly on Monday, and generate some profits, but what about Tuesday, or next week?

BCE triumphs over dissidents ... bankers up next
With its landmark decision, the Supreme Court of Canada erased the public legal battle lines in the tug-of-war over the $52-billion privatization of BCE Inc., giving way to what many insiders expect to be brass-knuckle brawling behind closed doors.

No sooner had Canada's top court paved the way for the Ontario Teachers' Pension Plan and its buyout partners to proceed with their proposed takeout of the giant telecommunications company, its four bankers issued a goodwill statement. "The banks expect that the transaction will close in accordance with the definitive agreement between BCE and the sponsors," declared the joint statement from the consortium of banks led by Citigroup Inc.

"We continue to negotiate the financing documents in good faith with the sponsors and stand behind our original commitment to the transaction." Those soothing words will be tested as Teachers and its U. S. partners -- Providence Equity Partners Inc., Madison Dearborn Partners LLC, and Merrill Lynch Global Private Equity -- renew their sparring over final terms of a $30-billion lending pact.

While the buyers and financiers re-engage in serious negotiations, sidetracked by the Supreme Court challenge, BCE's disgruntled shareholders still loomed as a legal threat against the takeover. Some bondholders have planned to file a legal challenge over whether Teachers can control BCE under Ontario pension laws. More immediately, Teachers and its buyout partners will tackle the consortium of banks that are agitating for more favourable interest rates and tighter lending restrictions.

Citigroup, Deutsche Bank AG, Royal Bank of Scotland PLC and Toronto-Dominion Bank are holding firm in their attempts to gain concessions. Teachers and its partners expect everyone will honour the commitment letters they signed last year at the time they won the auction for BCE. "There's been no settlement in terms of whether there should be any accommodation of the requests of the bankers and lenders or whether they should be held to the strictest interpretations of their commitment letters," said a banking source who asked not to be named.

Sources say Jonathan M. Nelson, the 51-year-old chief executive of Providence Partners, is taking a particularly hard line with the banks, refusing to allow them to budge from their original arrangements. Mr. Nelson, a reclusive investment banker based in Rhode Island, had targeted BCE for more than two years before he hooked up with Jim Leech, CEO at Teachers, to launch the winning bid.

"The only way you can get to a renegotiated deal is if the Supreme Court ruled against BCE or you'd have to be a street fighter to think you could get a renegotiated deal that would be better," said a source familiar with the talks between the buyout group and the bankers. Others say both sides may make concessions to meet the June 30 deadline. "Everyone will have to put some water in their wine," said an insider who asked not to be named.

Ron Mayers, vice-president of Desjardins Securities, says the transaction will eventually close at the offering price of $42.75 a share. "The banks put out a press release which we thought was rather Machiavellian. They didn't want to do this deal and even if they did, why are they obligated to put out that press release?" he said.

Mr. Mayers predicted the Supreme Court's unanimous ruling will cause the mostly foreign banks to reconsider risking the deal by forcing a renegotiation of the lending terms. "They are now in Canada where seven of the best judicial lions in the country have moved Heaven and Earth to decide a case in a matter of days. My view is the last thing [the banks] want to do is piss off Canada," he said.

At the same time, George Cope, president of Bell Canada, and his management team continue to forge ahead with a restructuring plan that will "transform" the telecom giant once the company is privatized. Mr. Cope will replace outgoing CEO Michael Sabia at the helm of the newly privatized entity. According to an industry source, Mr. Cope will be expected to deliver "a dramatic turnaround story" for the storied blue-chip company.

Wanted - Young, Urban, Professional Beekeepers
Germany is running out of bees. But urban beekeeping may just be the solution. The country's aging beekeepers are looking to attract young city dwellers to the hobby.

Emil Wiedenhöft's bees know their way around the urban jungle. They buzz in, flying around the 71-year-old beekeeper's head as they carry nectar and pollen to the hive. Then they swarm out again, heading back into the surrounding sea of buildings -- a squadron of tiny, striped nectar collectors.

"They have to fly out of here at a steep angle to make it over the buildings," says Wiedenhöft, as he casually wipes one of the bees from his shirt and points up into the air. The gray wall of his apartment building towers over the beekeepers' patio. Two beehives stand in front of his apartment window.

Wiedenhöft is a beekeeper in Berlin. "Beekeeping in the big city isn't a problem at all," says Wiedenhöft, who is retired. He has even managed to convince a few neighbors to take up the hobby. "I've trained six beekeepers in the eight years I've been living here," he says, proudly. "A young beekeeper needs a role model."

Still, despite Wiedenhöft's efforts, there are too few beekeepers in Germany and, as a result, not enough bees. Experts already fear that the shortfall could have serious consequences for fruit farmers, because the industrious pollen collectors are no longer adequately pollinating their plants. But beekeepers like Wiedenhöft are bucking the trend. The profession, which includes a disproportionately high percentage of older people, is trying to recruit new blood with courses and special offers -- especially in cities.

Hundreds of thousands of bees are constantly dashing through the backyards and courtyards of cities like Hamburg, Frankfurt and Munich. The densely populated Ruhr region is now home to more bees than the surrounding countryside. Bees are at home on Berlin's balconies, rooftop terraces and hotel roofs.

Bees are also popping up in larger numbers in cities around the world. In London, beehives can be seen on the roof of the Bank of England -- honey from the London metropolitan area has even won the first prize at Britain's National Honey Show. And in Manhattan, "Sheriff Beekeeper" David Graves sells his Rooftop Magic Honey at a premium price.

"Cities are ideally suited for bees," says Jürgen Hans, chairman of Berlin's beekeepers' association. There are roughly 500 beekeepers in the German capital alone. Hamburg is home to at least 50 million bees from more than 2,100 bee colonies. While many city dwellers are likely to gasp at such numbers, the armies of bees are hopeful signs for beekeepers.

"The animals develop marvelously in the city, because it's warmer there than in the countryside," says Hans, adding that cities offer "a large and constant selection of flowers for bees searching for nectar." Hans, a beekeeper himself, waxes lyrical about the chestnut, black locust and maple trees lining the streets, and the sweet pea, briar roses and knotgrass on playgrounds.

Hamburg's trendy Ottensen neighborhood is the ideal place for lively city bees. On this early summer day, for example, beekeeper Georg Petrausch is checking his hives on the roof of the "Motte," a neighborhood cultural center. "Nice flying weather today," says the 45-year-old, as he gazes across streets and alleyways flooded with sunlight, the sound of traffic drifting up from the street below. It is a trendy quarter, with Moroccan restaurants across the street and numerous bars where hip urbanites hang out.

Petrausch lights a bundle of hemp straw in a pipe-like device. The beekeeper uses the smoke to calm the insects. Then he carefully removes a bee-covered honeycomb from the hive and opens a few of the hexagonal cells. Petrausch has lovingly dubbed the glistening honey flowing from the cells Ottenser Wildblüte (Ottensen Wildflower).

He harvests between 150 and 200 kilos of the sweet stuff a year, often with the help of neighborhood children. A teacher, Petrausch has also founded a beekeeping program for kids. Once a week, young bee enthusiasts meet in the garden of a school nearby where the students handle the honeycombs without protective clothing while bees buzz around their heads. "I'm not afraid at all anymore," says 12-year-old Iris, "and the honey we make here also tastes better than honey from the store.

Ilargi: It is of course as inevitable as it is fitting that mankind will reach the zenith of its progress in making disaster the ultimate growth industry.

World unprepared for coming catastrophes, warn experts
Hand sanitizer was abundant at this year's World Conference on Disaster Management, as were tsunami sirens, enormous ambulance RVs and the earnest faces of some 2,000 crisis experts who gathered last week in Toronto to draw the world's attention to a seemingly growing list of international emergencies.

Inside the cavernous Metro Toronto Convention Centre, the delegates recalled their travails from Katrina and California's wildfires over lunch. In the centre of the room, a police officer showed off a $1-million "mobile emergency operations centre" -- an RV complete with e-mail, satellite, onboard radio station and the world's most sophisticated toilet: It incinerates poop. At the nearby kiosks, a woman peddled belts lined with packets of hand sanitizer for those "serious about hand hygiene," presumably in the event of a pandemic.

A few steps away, a man illustrated his tornado sirens, the ones that blare their telltale wail for four kilometres. They would work just as well for chemical spills, the man said casually. On the other side of town, calamity was also on everyone's mind at the kick-off of communication guru Moses Znaimer's annual three-day Idea City festival. Here, experts rallied the crowd behind their respective disasters, be it food and water shortages, pandemics or meteors slamming into the Earth.

The message was largely the same: The rest of the world is not prepared for the coming catastrophe -- whatever it may be. For this crowd, flu pandemics, cyber warfare, rising sea levels and tumbling asteroids are all potent threats -- but the public simply isn't paying enough attention, they insist.

As public consciousness swings from one crisis to the next, from SARS and BSE to the current salmonella contamination of American tomatoes, emergency planners spend their days preparing communities for the changing roster of imminent threat.

At the Disaster Management conference, the word of the day was "resilience," or how to brace people -- who simply want to enjoy their lives without worrying about the sky falling--for the worst. The worst, in Kevin G. Coleman's mind, would be a full-scale cyber war.

"What would happen if one day the Internet stopped?" asked Mr. Coleman, a former chief strategist of Netscape. For starters, he said, a country like the United States would lose $450-million a day in e-commerce. Beyond retail, cyber war could bring a country to a complete standstill, as it did for the first time in history last April, in Estonia, where that nation's reliance on the Internet created a new vulnerability when its servers were overwhelmed by attacks of robot networks believed to have originated in Russia. According to Mr. Coleman, "Estonia is inevitable."

He said governments, organized crime and extremist groups in at least 140 countries now claim they could launch a full-scale cyber war by the end of the year. "The government needs to step up to this," he said. "This is a threat that we are ill-prepared for." At lunch, several emergency planners could be heard grumbling about the lackadaisical attitude they see many chief executives taking toward disaster, mostly because they do not want to spend money on preparing for a hypothetical situation.

"When I plan for them, I ask, 'What if Martians came?'" says Michael Redmond, a Brooklyn, N. Y.-based consultant who used to work for the military. Ms. Redmond boasts that after 9/11, 10 of her corporate clients had their employees back to work a mere 24 hours after the terrorist attack. She said businesses have to lead the disaster-preparedness charge and support their communities after a catastrophe.

She pointed to IBM, which has set up "ill" and "healthy" daycares for their employees in the event of a pandemic, as well as a New Orleans Wal-Mart that had stocked up on biohazard suits and air filters at "very reasonable prices" before the flood. Business preparedness aside, the state of the world seemed much more dire at the Idea City lectures, where academics presented a myriad of potential calamities to their bespectacled audience.

"I see stormy biological weather ahead," warned Richard Preston, a pandemics expert who has visited places as remote as the Kitum Cave in Kenya. The author donned a biohazard suit when he clambered into the elephant and bat feces-strewn cave, which is believed to house the original Ebola carrier. "We are as vulnerable as trees to infectious disease," Mr. Preston declared.

For the last, Mr. Znaimer saved the most instantaneously deadly calamity of them all, namely the earthbound asteroid. He introduced Donald Yeomans, a NASA manager charged with tracking 90% of the estimated 1,100 "near-Earth objects" that are one kilometre or greater in diameter. That includes a 270-metre-wide asteroid that has a 3% probability of hitting Earth on Friday April 13, 2029.

Ilargi: Paul Kasriel takes a closer look at what is really happening with money supply and credit.

If the Fed Is So Easy, Why Is the Growth in Money and Credit Aggregates So Weak?

We constantly hear from the talking heads that the Fed's recent policy actions are creating mammoth amounts of financial liquidity. But have these talking heads bothered to look at the data? If they did, they would have to change their tune.

Let's start with the raw material of financial liquidity created by the Fed - the size of its balance sheet. Chart 1 shows that the year-over-year growth in the total assets of the Federal Reserve System was up 3.85% in the week ended June 18.

Although total asset growth has rebounded from slightly negative territory of late April, the latest 3.85% growth still is low in comparison with recent years' behavior. So, the Fed is not creating massive amounts of credit on its own. In yesterday's comment, I noted that the Fed had reduced its holdings of U.S. Treasury securities by billions of dollars in the past six months.

In effect, the Fed has been "sterilizing" much of the credit it has been creating via the discount window and its new borrowing facilities.

Chart 1

Now, let's take a look at what commercial banks have been doing with their loans and investments. Chart 2 shows that in the 13 weeks ended June 4, loans and investments at all commercial banks were contracting at an annual rate of 2.25%. It is true that bank credit growth ballooned in 2007 as banks were forced to take on credit that had originally been financed in the commercial paper market. But we seem to be over that "hump."

Chart 2

If bank assets are contracting, then banks' funding needs would be diminished. And if banks' funding needs were reduced, we would expect that banks' deposit growth would be slowing. Do the facts fit our hypothesis? You betcha. Chart 3 shows that after growing at annual rates in excess of 16% in the second half of 2007 and in early 2008, growth in deposits at commercial banks has slowed to only 3.02% in the 13 weeks ended June 4.

Chart 3

Similar to bank credit and deposit growth, M2 money supply growth accelerated recently. But, also similar to bank credit and deposit growth, M2 growth has sharply decelerated, both with and without retail money funds. Chart 4 shows that in the 13 weeks ended June 9, growth in M2 was only 2.99% and growth in M2 excluding retail money funds was only 3.12%.

Chart 4

In general, there has been a sharp deceleration in the growth of private nonfinancial debt. Chart 5 shows the growth behavior in the sum of household and nonfinancial business debt. After growing at annual rates in excess of 10% in each of the four quarters ended Q2:2006, private-sector nonfinancial debt growth has slowed to only 6% in Q1:2008.

Chart 5

Ilargi: Doug Gnazzo looks at the recent Bilderberg meeting. I don't want to start any blasphemous rumors, and certainly not on Sunday, but why not take a look? These folks, after all, don't get together to compare their golf scores.

The High Priests Of Globalization
"The beast that was, and is not, is himself also an eighth,
and is of the seven; and he goes to destruction."


The ruling elite - who are they? Are they puppets or puppeteers? Do they pull the strings, or are they the tools of others? Recently, the Bilderbergs meant in Chantilly, Virginia. For those who would like to know some of the history behind the group, see the article: The New World Order - Bilderbergs.

Those that meant in Chantilly were the high priests of globalization, the movement to establish one world government via the loss of national sovereignty. The European Union is a prototype of such supranational government, and the Euro is a test trial of a one world currency.

"When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute..., neither the ECB nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle, and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks."

"Further, the member countries of the EU must make sure that their national laws, including the statutes of their central banks, are fully compatible with this and other provisions of the Maastricht Treaty."

Attending the June 8th meeting in Virginia were numerous high powered "officials", some brazenly calling themselves public servants, as if they serve the people's interest and not their own. If it wasn't so sad, it would almost be comical - almost. The list of those attending can be seen here.

Although the meetings are dominated by the western elite, this does not mean that the eastern elite do not partake in setting the course of global policy - they do. Some of the wealthiest and most influential houses are of eastern descent and heritage; as are some of the largest transnational corporations under their control and influence.

The powerbrokers that got together at the Bilderberg conference are not the true ruling elite; they are bishops and rooks that do the bidding of their would-be masters of the universe. Only two attendees were members of the upper echelon of houses that dominate global wealth and power.

Paper Money

Paper money, as used today, is a scourge to mankind; however, it had its origins in China long before it came west. Also, paper money per se is not the only problem, it is the fact that it is debt; and that fractional reserves and legal tender laws make a most unholy alliance to carry out the bidding of their masters.

All currencies in the world are paper fiat - nothing but hollow promises: some are worse than others, but they are all losing purchasing power and headed toward self-destruction, if the present course is maintained. To think that the world of the elite is unraveling before their eyes is a mistake of the highest order.

It is true that a few eastern nations have a high savings rate, and that the United States savings rate is almost non-existent, however, it must be remembered that most eastern savings is in paper money or paper money substitutes, which means it can lose purchasing power overnight. Only gold and silver kept out of the system is a store of wealth or purchasing power.


Around the world the devastating results of paper fiat debt-money can be seen everywhere: the subprime debacle, mortgage problems, defaults and bankruptcies, and the derivative's nightmare that has yet to visit our shores - it is only a matter of time; and time is running out.

Is the world of the Bilderbergs threatened by the confluence of the above problems, or might they be intended to occur to serve a purpose - a pre-planned raison d'être? Perhaps the puppeteers want to see the U.S. dollar fall from grace, and implode or explode, dragging down the rest of paper fiat land with it.

There is no better time for collectivists to go collecting then during a depression, when entire industries can be scooped up for pennies on the dollar. True - the U.S. dollar could become worthless, however, the elite collectivists would still be in possession of most real estate and the largest hoards of money from different countries; and very large caches of gold and silver as well.

The power elite are not stupid, they are very smart. During the last great depression they made out like bandits. This time it is different, although you can always trust them to be them - and they are collectivists. For a more detailed account see: China's Nuclear Threat - the U.S. Dollar.

Remember, there are those that say whoever owns the gold makes the rules. There have been protocols and plans for decades, even centuries, to procure the world's supply of gold and silver. Is all that gold still in the vaults? Who has recently seen it and audited it? Who recently stopped setting the price of gold in London around the same time the gold ETF's came into being?

Ilargi: Peter Schiff raises some issues that I think deserve far more attention. What I have a problem with in his writing is the unquestioning assumption that the Fed is bungling its job. I say chances are they know precisely what they do.

They seem to be screwing up, sure, but only if you presume that they are trying to save the US economy and its citizens. If the objectives are not according to that presumption, the picture that emerges is completely different. Yes, it was a mistake for the Fed to provide all that cheap credit, but only if you assume they have the best interest of the US people in mind.

If on the other hand, just as a hypothesis and for entertainment purposes only, you would assume that the goal all along has been to squeeze the people for all they were and are worth, the Fed’s moves in the past 25 years have been nothing short of brilliant.

The Fed Unreserved
Throughout history, governments have always used crises to justify blatant power grabs. Often the crisis subsides, but the expanded government powers remain. In America this week, the tendency came into sharp focus. Congress signaled that it is preparing to perpetuate the Bush Administration's domestic wiretapping program, and has even abandoned the pretense that warrantless surveillance be confined to terrorism.

Similarly, even though our financial crisis has yet to reach full flower, Treasury Secretary Paulson announced plans to give the Federal Reserve new and explicit powers to oversee and regulate the financial services industry. However, a sober look at his plan reveals that it is tantamount to giving the fox complete autonomy to guard the henhouse.

What few economic leaders have acknowledged is that the Federal Reserve itself is responsible for the real estate and credit bubbles, which are the source of our current troubles. By keeping interest rates too low for too long, the Fed ignited a speculative fever and engendered a disregard for risk management that pushed asset prices above rational levels. Should we blame the private sector for taking advantage of all the cheap credit, or the Federal Reserve for supplying it? If a kindergarten teacher passes out handfuls of Pixie Sticks, and then leaves her classroom unattended for several hours, should we blame the five year olds for the hysteria that ensues?

The reality is that we should be restricting, rather than expanding, the powers given to the Federal Reserve. Since Greenspan, Bernanke and company have already inflicted so much damage with the weapons already in their arsenal, why provide them with heavier artillery? Only in Washington do those who screw up get rewarded for doing so.

Since the Fed has demonstrated complete incompetence at setting interest rates, why not return that function to the market? Instead of allowing the Fed to inflict unbridled havoc on our economy, why not re-impose some discipline? Instead of looking for new ways to regulate Wall Street, why not find an old way to regulate the Fed? Actually there is a simple answer to all of these questions; it's called the gold standard.

In his speech outlining these proposals, Paulson stated that during the past fifty years the performance of the U.S. economy has been second to none. I do not know what planet Paulson has been living on these past fifty years, but it is certainly not Earth.

If Paulson were referring to the prior fifty year period, from 1908-1958, his statement would have been correct. But from 1958 to 2008, the U.S. economy has blown a lead even greater than the one the Lakers enjoyed over the Celtics in game four of the just concluded NBA Finals. In fact, it may well qualify as the biggest economic choke in history.

In 1958 the U.S. enjoyed a standard of living so unmatched that the rest of the world still lived in the Stone Age by comparison. Our per capita income was so far ahead of our nearest rival that it seemed impossible that any other nation would ever catch up. Today not only is per capita income in the U.S. barely in the top ten, but we are being rapidly overtaken by countries that up until a few years ago were barely discernable in our rear-view mirrors.

When it comes to economic performance during the past 150 years, the U.S. is the Big Brown of economies. 1858-1908 was the Kentucky Derby, 1908-1958 was the Preakness, and 1958-2008 was the Belmont Stakes.

Not only did the U.S. surrender a substantial lead, but in many respects our current standard of living is lower than the one our grandparents enjoyed. Sure we have a few more gadgets, larger televisions and more prevalent air conditioning, but the quality of life has actually declined.

In the 1950's, the average man earned enough money to fully support a wife and four kids, all while saving for retirement and paying off his mortgage. Today the average man can barely support himself. It takes two bread winners in most families to make ends meet, and that is assuming only two children. Even with both parents working, the typical mortgage on the family home will never be paid off and retirement is now a pipe dream. Flush with high pay, low debt, and a strong currency, the Ugly American in the 1950's could vacation in Europe like a king. Now we can now barely afford the gas for a day trip to a Six Flags theme park.

If Paulson can be so completely clueless regarding the Fed's role in the current debacle and in America's economic stumbles over the past two generations, why would anyone place any faith in his proposed remedies?

In fact, an unaccountable and unelected Federal Reserve, which nonetheless has lately proven to be as politically craven as any two-bit politician, does not hold the keys to our economic revival. However, with its increased willingness to rescue the big financial firms from their own excesses, perhaps Paulson sees an expanded Fed as the best way to ensure the continued prosperity of his former pals on Wall Street.


Anonymous said...

Kasriel should have said --In effect, the Fed is "sterilizing" the real economy to balance the credit it has been creating for the financials.

el pollo said...

I have three questions today to pose at this forum:

1) Was the coming fiscal meltdown planned long in advance by the world’s wealthiest elite? Is it an episode of disaster capitalism, so well illustrated by your fellow Canadian Naomi Klein, with the intension of buying up the once (somewhat) distributed assets of the American middle class for pennies on the dollar? And if yes, why have all the major investment banks seem to have shot themselves in the foot (if not the groin)? Wasn’t there an easier way to destroy the middle class?

2) What does deflation mean in terms of the cost of goods? Attempting to compensate for and hold even technical advancement, what would a mid-level $400 television cost in 5 years is USD?

3) It has been my experience that libertarians are (for the most part) unfeeling assholes and geeks who name their dogs Galt. Milton Friedman and Alan Greenspan are prime examples. They spout off about freedom and the free market and never see the contradiction between this and a sweatshop full of 18 year old girls, performing repetitive tasks for 14 hours a day for a less than subsistence wages, and claim that this state of affairs represents the beauty of the free market. Or supporting monsters like Pinochet.

To say the least, Ilargi and Stoneleigh do not fall into this category. Do you consider yourselves libertarians?

Anonymous said...

el pollo,

To badly paraphrase Mr. Jon Rappoport: There are about 9 syndicates interested in keeping and always increasing their power over humanity. They are Religion, Medicine, Government, Military, Energy, Intelligence, Finance, Entertainment and Thugs. It is about control.

For instance, the powerful men that arguably caused the last 1800s financial panic/depression then created the Federal Reserve in reaction ostensibly to what they had caused in the first place. Then they caused the next depression (1930s). It is about money. But all along they are gaining more and more power for their group. Syndicate interests sometimes coincide but occasionally clash.

Seems to explain history fairly well to me….

OuttaControl said...

EP said Wasn’t there an easier way to destroy the middle class?

That's the part I don't get either. Zeitgeist is a polemic that is suitable viewing for this topic. I don't advise watching it before bed time. I found the first third fascinating, the second third a decent rehash of 9/11 and the last part and conclusion the truly scary parts. Don't forget to check out wikipedia for criticisms.

Oilman Tom said...

Conspiracy theories are fun/easy to consider but probably less likely than close study will reveal. I can't rule them out - noone can - but having worked my whole life in the oil&gas business, it's common to get asked about technologies that have been 'suppressed' by oil companies. The reality I see is that O&G companies have done an excellent job of keeping energy cheap for the past 100 years and we - as a whole - have become very spoiled by that fact.

I read "The Great Depression of 1989" in 1990, and ever since I've been interested in a coming storm but reading the book one year after the predicted collapse was at least enlightening that no one can predict when the storm will hit. Perhaps we should give credit to our leaders for delaying the storm 19 years!

But prepare we should - just do it with consideration of rational justifications for why it is happening and 'who' is to blame.

Stoneleigh said...

El Pollo,

I'll let Ilargi speak for himself, but I am not a libertarian. That's not to say that I don't value freedom, but that complete freedom of capital accumulation would naturally lead to oligarchy, at great cost to the vast majority. Unless there are factors which can inhibit the wealth conveyors concentrating wealth at the centre, there cannot be a middle class - just an small elite and a huge proletariat. Actually, I think this is indeed the direction in which we are headed, but I don't have to like it.

The difficulty is that potential alternatives also have significant drawbacks. A strong and relatively inclusive political centre with redistributive powers can blunt the more rapacious forms of capitalism while maintaining the rule of law, but can also lead to bloated self-serving bureaucracy and endemic corruption. As a long time researcher into the affairs of the former Soviet Union, I am no fan of that system either, to put it mildly.

My own natural instincts are progressive, but I recognize that most aspects of the progressive agenda are ill-informed and hopelessly naive. They assume the best of human nature in its collective form, which not a great bet at the best of times, and certainly a lousy bet during hard times. Cooperation can work very well on a small scale, but it doesn't scale up, particularly when there isn't enough to go around, and that's certainly what we're facing now.

In short, I don't think there is a single position on the political spectrum which is ideal. I think different circumstances call for different degrees of freedom or social control, although that's not to say we end up with a position appropriate to the circumstances. Where we end up is to some extent a function of the balance of power between the individual and the collective. William Rhys-Mogg and James Dale Davidson had a good historical overview of this point in The Great Reckoning - an older book about our current predicament that was written at least ten years too early.

Ilargi said...

el pollo,

You come armed with a bunch of presumptions, and that makes it hard to formulate some answers.

I question things at times just for the sake of questioning them; I know of no better way to learn. I always do this for entertainment purposes only.

When people claim the Fed is bungling their job, they invariably do that presuming that the Fed has the best interest of all Americans at heart. Well, one thing I know, it ain't the Salvation Army. So I ask: what if their objectives are not what is presumed?
When you give a select group of families the power to issue your money, is there anything but one and the same possible outcome?

I have the same reaction when people say the US is screwing up their invasion of Iraq. These folks presume that Iraqi's are either being slaughtered for global freedom, or even their own, or even not slaughtered at all, or, alternatively, that it's about oil, which in their view would have to mean that Iraq oil needs to be brought home to the US to keep the economy puttering along.

But who has any proof that that is the reason behind it? I could hypothetically presume that the intention all along has been to secure fuel for the US army, not its population, for years to come. I could add, if I felt like it, that to keep the troops in the sand for the same years to come that would be needed to protect the Army's private stash, they'd have to paint a picture of difficult operations, bloody and deadly and all, that require 150.000 soldiers at all time, and for all that time.

An easy victory would have made that impossible; the folks back home would have clamored for the troops to be home by Christmas 2003, and hence no-one to protect the oil. Last time I looked, the US had 100 times more firepower than necessary to obliterate Iraq in two days. They haven't used it. Why?

Along that very line: who does the Army exist to protect for? And what? It's all war on drugs and war and terror and such, but I have to give this one to Michael Moore: you can't declare war on a noun. It's just complete nonsense.

Same line, I have often asked why US and Canadian troops (along with Brits, Dutch etc.) are in Afghanistan. Still waiting for an answer. For entertainment purposes, I could suggest the world poppy trade is the reason.

So who's in your list of the world's wealthiest elite? Are you thinking Bush and Cheney?

Why do you talk of "an easier way to destroy the middle class"? Of buying up their assets on the cheap? Think that is the purpose?

Why would anyone care about investment banks? Wouldn't they be for sale el cheapo as well? Think they are among the elite?

(Debt) Deflation means that things will get much cheaper, but you won't be able to afford them anyway; your income and wealth will lose value faster than the things you can buy with them.

Libertarian is one of a long litany of terms I have no opinion about, other than that this particular one seems to mean that its proponents would like to be free to do whatever they feel like, to whomever they would like. Which sounds like it will work fine until someone does it to them.

It also sounds like a perfect extension of our perpetual growth economic system, which itself is perfectly adapted to how the human brain works.To understand that last one, you have to include the part of our brain that originates with the slime and algae we all come from, the part that still drives all our actions, and which we tell ourselves does not do that.

But no, it's not something I identify with, at least when I use the small neo-cortex part of my neurons and synapses that I, like all my peers, convince myself drives me instead.

el pollo said...

"(Debt) Deflation means that things will get much cheaper, but you won't be able to afford them anyway; your income and wealth will lose value faster than the things you can buy with them."

Well, as Yogi Berra once said, "It's tough to make predictions, especially about the future."

I understand that in a depression/deflation, money will be much harder to come by. But if, say, one were on a fixed income, then one's standard of living would increase? ( Actually, along with "personal net worth," I hate the phrase "standard of living." )

I understand that during the Great Depression, people who managed to hang onto some money lived rather high on the hog.

The reason I am asking this is that some of my friends are being strongly influenced by the stockbroker Peter Schiff who is both an outspoken bear and self promoter. He believes that the Fed will undermine the USD to the point that everything which relies on importation will become very expensive, not only in terms of what the average income earner can afford, but in terms of actual price in dollars. It seems to me that you disagree strongly with this although, try as I might, it seems that I rarely can accurately figure out what you propound. Like John McCain, I am not the brightest bulb in the pack.

OuttaControl said...

el pollo said But if, say, one were on a fixed income, then one's standard of living would increase?

If your fixed income consisted of you selling your ducks' eggs every day to people for a certain amount of money or if you withdrew a bit of cash from your own mattress stash from time to time, then you would probably do ok for a while. If your fixed income was from, say, an airline pension fund, then your income will probably be fixed in the same way that pets are fixed. My company's pension plan, for example, was recently deemed technically insolvent in that, if the company suddenly stopped operating, the claims in the pension plan would be greater than the funds in it could provide based on current and projected interest rates (and that was before any talk of recession). But the funds in the plan are invested in all the things that all the rest of us (on average) are invested in; stocks, bonds, real estate, all of varying quality. All of those asset classes will be hurt substantially when this deflation picks up a little and the stock market tanks. Just as (I beleive it was)United Airlines cut pension benefits to its current pensioners and scaled back expectations of contributing members afer 9/11, so too will other companies have to reneg on their pension commitments. I hold out no hope that my own pension fund will be any different.
If your fixed income is a government pension, you may have slightly better luck but I wouldn't count on any particular level of income.

If your income is from your own financial institution-based investments, you have to hope that your investments are sound and that the institution itself remains solvent and allows you to withdraw your capital when you want. Note: CDIC/FDIC cannot cover a systemic financial collapse.

I am planning for a scenario in which I am providing the necessities of life for my family with little dependance on governments, employers or the kindness of strangers. As gravy, I would like to provide those necessary goods or services to others, keeping in mind that it will be a very money and energy-deprived world and others may not be able to actually pay for those goods, except maybe in barter. The numbers on the price tag may be low but still too expensive for someone with no ability to pay.

tenthousandmilemargin said...

The problem with conspiracy theorists is they like to explain events with reference to one grand conspiracy.

Why only one? Why not hundreds of competing conspiracies, each with their own subfactions, some grand, some modest, some mediocre.

Humans have this lazy tendancy to look for one explanation, one cause.

The real world is overdetermined. Things don't happen for a reason - they happen for 50 diffent reasons jostling together. Contributing factors.

I do believe there are conspiracies. I can believe that someone thought up a grand conspiracy - but I can't believe they don't have any competition.

If one conspiracy can grow up, why not a whole forest of them, competing for sunlight?

Everybody wants to rule the world.

tenthousandmilemargin said...

Consider this:

If all the dollars in the world were destroyed except one, could you buy the whole world with that dollar?

Or would that one remaining dollar be worthless?

Is the value of the dollar determined solely by the number of dollars, or are there are other factors?


What happens to the value of a dollar if the number of dollars drops by 90%, while the combined value of the sum total of dollars drops 99%?

Can you imagine a situation where this actually happens?

Why not?

Perhaps you should reconsider your definition of "worst case scenario". Just as a thought experiment.

el pollo said...


My hypothetical question about the buying power of a dollar during deflation used a very large hypothetical mattress as the source of the dollars.

As I said, my friends are influenced by Peter Schiff. He says that American assets that are fixed to the ground, such as houses will continue to drop in price, but anything that can be imported or exported will increase dramatically in price as the USD sinks into the sunset in relation to other curencies. He even envisions a huge export market for used autos and electronics leaving the USA as we have to sell back to the rest of the world all the stuff we bought on bad credit.

So if you had a large, hypothetical mattress stuffed with $20's, will the cost of an average TV be higher or lower in a straight dollar price in 5 years.

scandia said...

I think to make accurate judgements about future value is premature.Importing/exporting assumes a fuel supply. This is a big unknown. There are some black swans flying overhead.I can feel the wind beneath their wings. Also a strike against Iran will shuffle the deck so to speak.
I have to keep it simple. I am focused on " assets" that enable me to survive, tangibles. Doing business is beyond me at the moment.

Stoneleigh said...

El Pollo,

For those who have managed to hang on to liquidity, lower nominal prices due to deflation should make many things cheap. However, they will be a tiny minority. For most people those lower prices will be even more out of reach than today's high ones, as purchasing power should generally fall faster than price.

As for the price of a TV, it's difficult to say as there are many competing factors. Almost no one would be buying, as many people would probably struggle to pay for the electricity to run it, let alone the purchase price of a new one. A lack of available money depresses prices for virtually everything.

On the other hand, TVs are mostly imported, and imports are likely to dry up, so there could be very few new sets available. If importing becomes difficult - due perhaps to lack of affordable energy, protectionism, trade wars or piracy on the high seas - then it would only be worth importing high end merchandise in small quantities. Buying a new TV could therefore become a very elitist activity, and elitist activities are never cheap.

Second-hand TVs could be prized possessions though, so long as the electricity is available. In many parts of the world, those who live in the favelas, barrios, villas miserias and shanty towns of the world manage to run an old TV with an improvised power connection even if they have almost nothing else.

Essentially, most things will become less affordable as credit evaporates, whatever their nominal price, but some things will cease to be available at all (except perhaps to the extremely wealthy). If there are items you need in order to improve your self-sufficiency that are not available locally (eg proper water filters), then you would be well advised to buy them now when all you need is the internet and a credit card.

Stoneleigh said...

EP, OC and TTMM,

The value of cash should increase in comparison with almost everything else as cash is king in a deflation. Cash is near the narrow point at the base of the inverted pyramid representing the effective money supply (where the higher up the pyramid one goes, the more removed from real wealth the financial instruments become). Only gold is below cash as gold IS real wealth (although it is not without its own risks of ownership).

During deflation, the broad upper layers are progressively knocked off the pyramid as various credit permutations cease to be regarded as money equivalents. We may well get far enough down the money supply pyramid for the only things left to be considered as money to be high-grade short-term debt instruments (ie short-term government bonds), cash and gold.

That's not to say that there's no risk involved in holding these forms of wealth. There will be risk everywhere, and holding on to your wealth through a great wealth-destruction event might require being both right and lucky.

Eventually, fiat currency will fail, but the point is that it will be a haven of relative safety for the next several years, and if you don't look after the short to medium term, then you may not have a long term to worry about. For now you need liquidity (ie cash), as liquidity represents a stockpile of uncommitted choices. You need to be able to face uncertainty with flexibility, and for that you need to keep some choices in reserve.

As prices fall, you can convert that wealth into real goods such as land and control over the essentials of your own existence. Once the deflationary force is spent, and the international debt financing model is irretrievably broken, then governments will have no choice but to print currency, but I believe that point to be many years away.

Deflation supports economic depression and economic depression supports deflation in a positive feedback spiral. That dynamic inevitably takes time to play out, hence inflation should be out of the picture for at least as long as it was the last time. I would be very surprised if it lasted less than ten years. By the time deflation is coming to an end, you will need to be invested in real goods. Most people are fully invested at tops and fully liquid at bottoms, but you need to do the exact opposite in order to hold on to what you have for the sake of your family's future.

One risk to be aware of with regards to cash is that governments may attempt to flush out reserves of cash by reissuing the currency of entering into a currency union that would achieve the same thing. You would then have to convert your reserves to the new currency, which would mean admitting you had them. Governments don't necessarily make conversion easy or fair, as the point is to establish control over wealth. They wouldn't necessarily recognize you reasons for holding cash as legitimate either.

Russia reissued its currency during its collapse and managed to dispossess the middle class almost entirely, but I think the risk will be lower here. In Russian the populace had a collective distrust of banks and so had large amounts of money stashed in their mattresses. In other words, there was something worth flushing out, whereas in our credit-based society there would be very little to flush out in any case.

Nevertheless, it's a risk to be aware of that could make it unwise to stay in cash for too long waiting for an ultimate bottom in prices. Waiting for the worst of the froth to be blown off prices before buying into real goods might be the best compromise (although make sure you don't draw too much attention to yourself by conspicuously spending large amounts of cash when no one else has any).

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