Monday, April 28, 2008

Debt Rattle, April 28 2008: Risk, Secrecy and Perverse Incentives

Stoneleigh: The British like their secrecy. The Official Secrets Act always covered the most ridiculously trivial things. I remember an episode of the series Yes, Minister which referred to 'open government', from the point of view of the civil service, as an oxymoron - "Either you can be open, or you can have government."

It's hardly surprising then that bank rescues would proceed in secret, when the alternative is probably more bank runs along the lines of Northern Rock. Such a dynamic would probably pick up momentum, with the market picking off apparently weak banks one by one and the public sector having to choose between full bailouts and banking chaos. Full bailouts are not an option once a banking crisis becomes systemic, just as deposit insurance in other jurisdictions wouldn't be worth the paper it's written on in a systemic banking collapse.

Unfortunately, that leaves depositors in the dark as to where the risks lie, without actually removing those risks. The bravado meant to buy time in the hope that confidence will return is a desperate gamble. If institutions and individuals can be convinced that the whole system will be bailed out if necessary, maybe they won't try to cash out and bring the system down in the process, or so the thinking goes.

It also creates a huge moral hazard problem, tempting the banks to play 'double or nothing' while the public sector carries the risk. Northern Rock made even riskier mortgages after they were handed a blank cheque than they had done before. This increases both the size and the likelihood of an eventual meltdown. Postponement is not prevention.

However, in the current climate, the Bank of England is probably 'damned if they do and damned if they don't'. Secrecy itself creates the appearance of heightened risk and reduces the very trust that must be restored if the credit crunch is to be resolved. As the issue is solvency rather than liquidity, resolution through hollow gestures is simply not realistic. At some point the Bank of England's bluff will be called and the systemic crisis will be triggered. Depositors and others will then be out of luck.

Bank bail-outs to be kept secret
The Bank of England has imposed a permanent news blackout on its £50bn-plus plan to ease the credit crunch.

Ferocious and unprecedented secrecy means taxpayers will never know the names of the banks that have been supported through the special liquidity scheme, which was unveiled by Bank Governor Mervyn King last week.

Requests under the Freedom of Information Act are to be denied. Details will be kept secret even after 30 years - the period after which all but the most sensitive state documents are released....

....Even a figure for the overall amount advanced will not be published until October. Meanwhile the Bank is expected to issue at least £50bn of Treasury bills to banks in exchange for their mortgages - entirely in secret.

This hypersensitive official stance is thought to be a response to the events of last year when a huge stigma was attached to any lender suspected of going to the Bank for cash help....

....The scheme, drawn up by King and approved by Chancellor Alistair Darling, aims to improve banks' liquidity by temporarily swapping bundles of mortgages and credit card debt for Treasury bills, which are short-dated Government debt that matures within nine months.

The scheme will run for three years so these bills will be replaced by new ones when required.

Stoneleigh: What's going on here amounts to trying to cure a hangover by having a few more drinks. The Keynes quote does not mean that central bankers an fix the credit system - it means that even if they could, it may not be enough, hence the oft-quoted 'pushing on a piece of string' analogy. The measures taken by central banks have spawned a rally, which is unlikely to last for much longer, but to say that the system is fixed is laughable.

Relief on Wall Street unlikely to bring universal joy
The key text here – much quoted of late – is from John Maynard Keynes: “Whilst the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition.” In other words, central banks can fix the credit system, but getting lending back to normal may be another matter.

Is the system really fixed? If so – and it feels like it – the turning point may have been not the Bear Stearns rescue, as often claimed, but the flood of liquidity from the central banks.

According to Tim Bond of Barclays Capital, in the months to the end of February assets held by US banks rose by $960bn. But deposits rose by only $293bn (£147.7bn), leaving a record gap of $667bn.

Normally, that would have been filled by the money market funds. They had liquidity to spare – in the same 12 months their cash inflow was $893bn.

But in a version of Northern Rock writ large, they no longer wanted to know. As recently as January 2006, all their monthly cash flow had gone into commercial and corporate paper. By February this year, that figure had shrunk to 11 per cent. Instead, the cash was going into safe havens such as Treasury bills.

This was all to do with the collapse of the shadow banking system – in particular, of off-balance sheet structures designed to hold mortgage-backed securities. As Mr Bond puts it, the banks had outsourced their assets and liabilities. The assets were now coming back on to their books, but the liabilities were not.

This is precisely the problem which the central bank rescues were designed to address. If the banks can swap those assets for Treasuries, then borrow against the Treasuries, they can plug the funding gap themselves.

Partly in consequence, equity funding becomes a lot easier, as shown by Royal Bank of Scotland’s £12bn ($24bn) rights issue last week. Deposits, too show signs of recovering. Much more of this, and the money markets will be open to the banks as usual.

Big Banks Levering UP UP UP!
Well, isn’t this cute. While spewing ‘de-leveraging’ every chance they get, apparently the big banks are levering up faster than ever before. reports that “according to Tim Bond of Barclays Capital, in the months to the end of February assets held by US banks rose by $960bn but deposits rose by only $293bn (£147.7bn), leaving a record gap of $667bn.”

The very same banks that have all said the financial system’s problems are due to the massive leverage and lack of capital are back on the crack pipe and in rare form. This story is infuriating but just goes to show the peril the banks have put themselves in.

Hedge funds take extra risk to lift targets
Hedge fund managers in danger of missing out on lucrative performance fees routinely raise their exposure to risk in a gamble to meet their performance targets, according to new research.

The study* raises questions as to whether hedge fund managers are acting in the best interests of their investors - who may want a consistent approach to risk - or are more interested in maximising their own bonuses.

"The investor wants them [hedge fund managers] to carry on doing what they mandated them to do from day one. Maybe performance fees don't provide the right incentives," said Nick Motson, one of the authors of the report. "The initial finding was this does not look good."

Academics Discover Two Plus Two Equals Four
I'm always amazed at how naive academics are about the real world of trading and investing.

Aside from such obvious delusions as the assertion that markets are efficient, they seem to have no real grasp of the human side of the business and its impact on investment decision-making.

Anybody who has ever traded for a living, or who has worked in close proximity to those do, will tell you that people who are losing money invariably have the urge to go for broke, and those who are underperforming targets will want to take on more risk, when some sort of deadline -- bonus time, the end of an evaluation period, a prospective margin call, you name it -- is approaching.

Not everyone yields to these feelings, of course, but skewed incentives -- like when the upside is unlimited but the downside is not -- boosts the odds that they will do what underlying investors and risk managers fear most.

Wall Street, Run Amok
First, Maestro Einhorn points out that the fellows who run big investment banks have a strong incentive to maximize their assets and leverage themselves into deep trouble because their pay is a function of how much debt they can pile on. If they can use relatively low-interest debt to generate slightly higher returns, the firm earns more revenue and executive pay increases. Often, an astonishing 50 percent of total revenue goes to employee compensation at Wall Street firms.

NOW, you may ask, what kind of assets were they acquiring with that debt? Well, sometimes, as with Bear Stearns, the leveraged assets are mostly government agency debt, which used to be regarded as fairly safe.

Sometimes, as Mr. Einhorn notes, those portfolios also hold stocks, bonds, loans awaiting securitization, and pieces of structured finance deals. They also hold heavy exposure to derivatives that have stunning risk profiles and can produce astounding losses in bad circumstances. They might also contain real estate assets and have exposure to private equity deals.

In other words, they can hold some scary “assets.” What do they hold as capital against such risks? You would think it would be cash or Treasury bonds, wouldn’t you? But no.

Under an interesting set of rules promulgated by the Securities and Exchange Commission in 2004, called “Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities,” the amount of capital that had to underlie assets was reduced substantially. (Mr. Einhorn rightly says that this set of rules should have been called the “Bear Stearns Future Insolvency Act of 2004.”)

Through the act, the S.E.C. — acting as one of Wall Street’s chief regulators, mind you — also allowed such things as “hybrid capital instruments” (much riskier than cash or Treasuries), subordinated debt (ditto) and even deferred return of taxes, to be counted as capital. The S.E.C. even allowed the banks to hold securities “for which there is no ready market” as capital.

“These adjustments reduced the amount of required capital to engage in increasingly risky activities,” Mr. Einhorn says....

....It looks to me as if the inmates are running the asylum. One truth, that deregulation is sometimes a good thing, has been followed down so long and winding a road that it has led to an immense lie: that deregulation carried to an extreme will not lead to calamity.

Deutsche Bank planning major capital increase: report
Deutsche Bank, the biggest German bank, is planning a capital increase to raise up to 17 billion euros (27 billion dollars), news weekly Der Spiegel reported in its Monday issue.

The bank will seek approval for the move at a shareholders' meeting at the end of May, the report said, citing a copy of the agenda for the meeting.

Some four billion euros are expected to be raised by the sale of 55 million new shares.

UBS to cut 8,000 jobs; announcement expected May 6 - report
UBS AG. plans to cut about 8,000 jobs and will likely announce the move when it presents its first-quarter financial results on May 6, Swiss weekly newspaper Sonntag reported, without saying where it got the information.

Some 3,000 cuts will initially affect the company's operations in the United States and in western Europe, with the remaining 5,000 jobs to be eliminated this autumn, primarily in administrative functions, the newspaper said.

Company Credit Deteriorating in Europe, Moody's Says
European corporate credit quality is sinking at an ``alarming'' rate as rising oil prices, the possibility of a U.S. recession and the euro's strength restrain the region's economic growth, Moody's Investors Service said.

Moody's assigned 32 negative outlooks to European companies in the first quarter, almost triple the 11 that were positive, the New York-based ratings firm said in a report today. The gap is the widest since 2001 and indicates deteriorating credit quality in 12 to 18 months, Moody's said.

``The negative outlook gap is quite alarming,'' Moody's economists Christine Li and Kimberly Forkes wrote in London. ``Uncertainty about the U.S. recession, nervous financial markets, higher input costs for business and an appreciating euro are restraining the euro-zone economy.''....

....Losses at banks are hampering lending and will have a ``greater and more prolonged'' impact on non-financial businesses, Moody's said. Banks reported $308 billion of writedowns and credit losses tied to the collapse of the subprime mortgage market, according to data compiled by Bloomberg.

The bloody knife used to gut Bear Stearns
JP Morgan had a credit exposure/capital ratio of 419% as of 12/07.

The average ratio is 83%, excluding JPM it is 49%. HSBC is the only bank with the level of exposure and they have had some of largest writedowns.

But there are more than a few crackpots making this assertion. Professor Solomon from NYU is one of those making the charge.

Specifically, I believe that JP Morgan acquired Bear because they stood to lose the most from a Bear Stearns bankruptcy. For example, as Barry Ritholtz of the Big Picture points out (see here), JP Morgan has the greatest derivative exposure of any of the I-Banks. Now, I do not know how much of that exposure was to Bear Stearns as the counterparty, but I bet it was a fair amount (in fact, see Jesse’s Cafe Americain for information on Bear’s credit derivative exposure).

If Bear were the counterparty (insurer) to JP Morgan on much of its mortgage-backed security portfolio, it then becomes transparent why JP Morgan had to step in. They would have had to step in to avoid a Bear bankruptcy so that they would not be forced to take toxic assets back onto their own balance sheet and avoid massive write-downs. Were JP’s exposure to Bear large enough, then JP Morgan itself could have been left significantly impaired.

This might also explain the Fed’s interest in Bear. For example, if it were only Bear at risk and their exposure was spread relatively evenly across counterparties such that many of the big, primary banks were not at risk as a result, the Fed would have had no interest in this event. Instead, it would have just let Bear fail. But the Fed could not let Bear bring down JP Morgan with it. So it stepped in to orchestrate an orderly wind-down of Bear while facilitating its acquisition by JP Morgan.

(see original for chart)

Danger Ahead: Fixing Wall Street Hazardous to Earnings Growth
Wall Street's money-making machine is broken, and efforts to repair it after the biggest losses in history are likely to undermine profits for years to come.

Citigroup Inc., UBS AG and Merrill Lynch & Co. are among the banks and securities firms that have posted $310 billion of writedowns and credit losses from the collapse of the subprime mortgage market. They've cut 48,000 jobs and ousted four chief executive officers. The top five U.S. securities firms saw $110 billion of market value evaporate in the past 12 months.

No one is sure the model works anymore. While Wall Street executives and regulators study what went wrong, there is no consensus solution for restoring confidence. Under review are some of the motors that powered record earnings this decade -- leverage, off-balance-sheet investments, the business of repackaging assets into bonds through securitization, and over- the-counter trading of credit derivatives. Without them, it will be difficult to generate growth.

``Brokerages will have a tough time for a while,'' said Todd McCallister, a managing director at St. Petersburg, Florida-based Eagle Asset Management Inc., which oversees $14 billion. ``The main engine of its recent growth, securitization, will be curtailed. Regulation will be cranked up. Everything is stacked against them.''

Last month's collapse and emergency sale of Bear Stearns Cos., the fifth-largest of the New York-based securities firms, demonstrated the perils of Wall Street business practices developed after the 1999 repeal of the Glass-Steagall Act. The change allowed investment banks and depository institutions to compete with each other.

Are Low Interest Rates Fueling Price Inflation?
The idea that the credit crunch is over is pure fallacy. The Fed Funds Rate is 2.25%, LIBOR is 2.91% and Citigroup is raising money at 8.4%, Merrill Lynch is raising money at 8.625%, and Bank of America is raising money at 8.125%....

....If one looks at what banks and brokerages have to pay for debt, what spreads junk bonds are yielding, and what jumbo mortgages are costing, the widely held idea that "Interest rates are low" is easily debunked....

....The easily seen and often quoted interest rate is the Fed Fund Rate. However, the Fed Funds Rate is not a valid perspective from which to state "low interest rates are fueling price inflation".

On the other hand, if one wants to state that past interest rate actions by the Fed and past monetary printing by the Fed are still causing current economic distortions, I can embrace that. The Fed, by its very nature, causes economic distortions including price inflation.

But the key rates now are the rates it takes to get a deal done. And those rates have been climbing since last Summer. Clearly it's harder and harder to get a deal done. Credit has dramatically tightened. There are no more liar loans, covenant lite agreements, huge commercial real estate deals, etc.

Nonetheless, the market has been cheering lately simply because deals are getting done, even thought the cost (excluding the last week or so) has been rising. But don't be fooled, there is no bottom in sight. As professor Bennet Sedacca suggests, the bottom will come when the deals can't get done. That could be quite a long ways off. Economic Winter is setting in.

Inside the Liar's Loan
The term is mortgage-industry slang for what's more formally called a "stated income" mortgage—a mortgage that a lender gives without checking tax returns, employment history, or pretty much anything else. Many of the loans that are in trouble now, or will be in trouble soon, fall into this category. But the term gives only the barest hint of the pervasive failure involved.

The original idea of the stated income mortgage was that it would benefit salespeople who work on commission, people who own their own businesses, and others for whom predicting next year's income isn't just a matter of looking at last year's.

At the height of the mortgage boom, however, especially in pricey markets, the liar's loan became a routine way of doing business; for some lenders—both smaller ones like IndyMac and WMC as well as big ones like Countrywide and Washington Mutual—it was the main way. In 2006 in some parts of the country, these loans made up as much as half of new mortgages, for both subprime borrowers and for homebuyers with high credit scores.

Under ordinary circumstances, we think of lying as something that a few people do. But the nickname "liar's loan" is stunningly apt. The vast majority of the people who took these loans out exaggerated at least a little. Most lied a lot. And it's likely that most of the liar's loans—including those given to people with excellent credit histories—will go bad.

Three Reasons Why a Mortgage Bailout Is a Terrible Idea
1. Home Prices Should Fall

Every time a bailout is mentioned, there is talk about slowing the decline in prices. Everyone wants to keep the bubble inflated, keep the good times rolling. But it's time to face facts: home prices are too high and need to come down.

Home prices in the U.S. increased 85 percent when adjusted for inflation from 1997 through 2006, according to Yale economist and noted bubble expert Robert Shiller. Income increases came nowhere near this figure. Since mid-2006, home prices have fallen only 15 percent, leaving potential buyers priced out of the market.

Incomes are not going up. They are going down. In order for people to be able to reasonably afford a home, prices need to come down too. It's simple math. A bail out won't change that. In fact, it could make it worse by delaying the inevitable correction.

2. Some Borrowers Should Be Renters

Bailout supporters argue that a bailout is needed to 'keep people in their homes.' Let's think about this for a minute. What is the point of keeping someone chained to a depreciating asset that they can't afford?

Data has shown that people aren't defaulting in increasing numbers because their payments are readjusting. Most of the defaults are occurring before a reset. The fact is that there are hundreds of thousands--if not millions--of people who bought more house than they could reasonably afford because home prices were too high.

Giving these people a prime rate instead of a subprime rate or a fixed rate instead of an adjustable rate isn't going to change that fact. These homeowners would be better off getting rid of their dead weight ASAP and renting a comparable home for less money for the next few years.

3. There Should Be Consequences

A mortgage bailout that utilizes taxpayer money or any other money that would be better spent elsewhere is downright unethical. While there are people who are struggling with default because of job loss, a death in the family or some other tragedy, most are in trouble because they made a poor financial decision.

Bailing them out at the expense of others is just plain wrong. Poor financial decisions get made every single day. People charge too much on credit cards, they gamble their grocery money away at the slots, they buy a brand new SUV when they should have bought a used Chevette and they spend their daycare fund on crack. Do we bail these people out? Of course not.

The same philosophy should be applied to housing. While it's true that not everyone was a speculator--some people just wanted a home for their family--they all had a chance to weigh their decision and READ the contract they were signing. If a poor decision was made, it should be no surprise that there are consequences that must be faced.

By the way, this 'consequence theory' also applies to the lenders, builders and others in the housing industry that made bad business decisions. They are the last people who should be helped by a bailout.

The Housing Market is Nowhere Near Bottom
Housing is what started the current mess me are in. Thanks to record low interest rates from the Federal Reserve, the US consumer went on a debt-induced home buying binge. That binge is now coming home to roost. And it's not going to let up for the foreseeable future.

Let's start with supply. First, there are a ton of existing homes on the market -- right around 4 million.

This translates into a little under a 10 months supply. Also note that this number -- months of supply -- has been increasing.

So -- we have a ton of supply on the market. Unfortunately that has not translated into a big enough cut in prices to stimulate demand.

Prices increased about 90% in 6 years, yet have barely dropped in comparison to the massive run-up they had during the early 2000s. Simply put, we have a long way to go before we start seeing prices hit an inventory clearing level.

(see original for charts)

Bernanke May Have to Follow Volcker to Avoid Being Tagged Burns
Federal Reserve Chairman Ben S. Bernanke may have to start talking and acting more like Paul Volcker if he wants to avoid being remembered as another Arthur Burns.

With oil and food prices surging, Volcker told the Economic Club of New York on April 9 that ``there are some resemblances between the present situation and the period in the early 1970s,'' when then-Fed Chairman Burns let an inflation psychology take hold. ``There was some fear of recession, the oil price went skyrocketing up, the dollar was very weak.''

It took Volcker's effort as Fed chief to push the overnight lending rate to 20 percent in 1980 and drive the economy into its deepest decline since the Depression to break the inflation he inherited. To avoid squandering the gains Volcker made, Bernanke may need to stop his all-out effort to prop up the weakening economy and start paying more attention to countering price pressures.

Jefferson County bond interest payments climb another $700,000 per week
Interest rates on some Jefferson County sewer bonds have more than doubled this month, adding $700,000 each week to the $2.5 million in extra weekly interest expenses the county was already paying on its failed auction-rate bonds.

The development means the county's financial situation has continued to deteriorate as its leaders attempt to negotiate terms with creditors that would avert a default.

The county now faces additional monthly interest payments totaling $12.8 million - money county officials say they don't have the ability to pay over an extended period. It has more than doubled the $10 million in monthly interest Jefferson County was paying on its auction-rate bonds before the crisis hit.

"The county has taken the position that the current circumstances are not entirely of its own doing," said James H. White III of Birmingham investment firm Porter, White & Co., the county's top financial adviser. "We had lots of help.

"The immediate cause of the failure was the downgrade of the insurance companies. Our auctions didn't start failing until the insurance companies were downgraded."

Earlier this year, Fitch Ratings downgraded the credit rating of bond insurer Financial Guaranty Insurance Corp., starting a cascade of cuts over fears the companies might not be able to cover guarantees on losses tied to subprime mortgages.

The downgrades triggered a chain reaction that ended up wiping out demand for the auction securities issued by the county to pay for a massive sewer repair and expansion program.

Middle class taps nest eggs to keep homes
Trapped by rising mortgage payments and falling house values, a growing number of squeezed middle-class homeowners are tapping into their treasured retirement nest eggs to ward off foreclosure.

"This is definitely an issue we've been hearing about from our members," said Kevin Stein, associate director of the California Reinvestment Coalition, which represents 250 nonprofit groups and public agencies in the state.

"It does seem the crisis is impacting a broader segment of America, and it clearly calls for broader solutions than what we have so far," Stein said.

Apart from being a fresh sign that the housing crisis has spread up the U.S. income ladder, tapping tax-deferred savings accounts like 401(k) plans could have profound effects on taxpayer welfare, social security and employment patterns, economists and financial advisers said.

"I think this means we'll see some baby boomers having to work well into their 70s to make ends meet," University of Maryland economist Peter Morici said.

Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin
Commodity-index funds control a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures, equal to half the amount held in U.S. silos on March 1. The holdings jumped 29 percent in the past year as investors bought grain contracts seeking better returns than stocks or bonds. The buying sent crop prices and volatility to records and boosted the cost for growers and processors to manage risk....

....The divergence between CBOT futures and the underlying commodity is so great that some grain merchants have stopped bidding for new crops, said Niemeyer, a member of the National Corn Growers Association board. Others won't guarantee a price for more than 60 days.

``We have a fundamental problem with the markets,'' said Kevin McNew, president of researcher Cash Grain Bids Inc. in Bozeman, Montana, and a former Montana State University economist. ``It is very difficult to operate a grain business when the cash prices are below the futures'' by such a wide margin, he said.

The price gap should converge when futures contracts expire and deliveries are settled. Instead, the average premium for CBOT wheat has quadrupled in two years to 40 cents a bushel, compared with 10 cents the prior five years, McNew said.

Stoneleigh: Will Steel producers be any happier with the effects of speculation than farmers?

Steel screams on LME despite recession talk
The London Metal Exchange is today launching a futures contract for billet steel, the semi-finished fungible variety. The first batch of July-dated lots of 65 tonnes each - the size of a Russian-Ukrainian rail car, the industry norm - will be sold by open outcry this morning at 11.40....

....The steel contract is a big play, second to oil in the raw materials firmament. World steel output hit a record $660bn last year. If the venture succeeds - Dubai and New York's Nymex are angling for a share - it may double the LME's turnover in five years.

Steel futures are a boon to the world's army of small producers. They can at last sell their product into the forward market, hedging risk.

It eliminates the punitive "haircut" imposed by banks to cover wild price moves. The cost of credit will fall. "This is the first time they have been able to manage their risk and guarantee cash flow," said Liz Milan, the LME's commercial director. This is creative City capitalism at its best.

The steel lords sniff a threat. Hedge funds will run amok, they mutter. Look what they did to nickel contracts last year - pushing prices up and down like a yo-yo.

"We do not believe financial institutions speculating on steel pricing will bring any benefit to our industry," said Arcelor-Mittal, top dog with 10pc of world steel.

Dollar Slide Drives Budget as Japan Shuns Treasuries
Add another ailment to the U.S. misery index of soaring gasoline and wheat costs and falling home values: a federal deficit that is burgeoning as foreign investors led by the Japanese recoil from the slumping dollar.

The Japanese, who own $586.6 billion, or 12 percent of U.S. government debt, had their worst quarter in Treasuries this decade, losing 7 percent in the first three months of the year as the dollar fell to the lowest since 1995 versus the yen, Merrill Lynch & Co. indexes show. Dai-ichi Mutual Life Insurance Co., Meiji Yasuda Life Insurance Co. and Sumitomo Life Insurance Co., three of the nation's four-biggest insurers, would rather accept the world's lowest bond yields in Japan than buy U.S. debt.

``It's too early to say the dollar will stop falling,'' said Masataka Horii, head of the investment team in Tokyo for the $53.1 billion Kokusai Global Sovereign Open, Asia's biggest bond fund. ``The U.S. economy will be slow for a while.''

Japan owns more Treasuries than any other nation. After raising their holdings by $9.2 billion to $620.6 billion between March and July 2007, Japanese investors trimmed that stake by $34 billion through February, the Treasury said April 15.

For half of India Inc economic scenario worsens: FICCI
As much as half of Indian corporates, surveyed by industry body FICCI, have said the overall economic conditions have deteriorated in the last six months with high interest, appreciating rupee and rising cost of raw materials playing the spoilsport.

The survey found that many firms are faced with no choice but to increase their prices. Stabilisation of the rupee to around Rs 40 to a US dollar has helped some companies in their export business but a majority 56 per cent feel that currency appreciation has dented their competitiveness.

Cars and kitchens tempt Indian housebuyers
Free cars and mortgage-free living are being dangled in front of house-hunters in Bangalore as developers battle to halt a property slump in India's Silicon Valley.

House prices have fallen by as much as 20 per cent this year in the sub-continent's IT capital on the back of a building boom and fears that the US sub-prime crisis will stall the huge recruitment plans of the city's flagship outsourcing companies.

After the meltdown on Wall Street, the Indian software industry's most important client, similar declines are being reported in technology hubs across the country. Vincent Lottefier, head of the Indian operations of Jones Lang LaSalle, the property consultant, said: “We are definitely seeing pricing pressures and corrections in areas where outsourcers are putting on the brakes.”

Freebies commonly thrown in by increasingly desperate developers include complimentary fitted kitchens, extra parking spaces and relief from stamp duty. Some, however, have been more generous. Orange Properties, a Bangalore company, has promised a free Maruti SX4, a four-door family car, with every 1,500 sq ft flat. The saloon costs up to 800,000 rupees (£10,120), representing a discount of 20 per cent on the 4 million rupee apartment.

Scholar Threatened for Warning of Housing Bubble in Taipei
An academic who warned of a property bubble in Taipei in a letter to a newspaper editor April 12 has received a threatening letter telling him to "shut up" or a contract killer will be sent to murder him.

The Wenshan police station in Taipei confirmed Thursday that its officers were investigating the intimidation case.

Chang Chin-oh, a professor of land economics at National Chengchi University, warned property hunters in his letter to the editor that the property market in Taipei is showing signs of a bubble and that although the market is no longer flourishing, housing prices are still being maintained at abnormally high levels.

After the letter was published, Chang received a computer-printed letter from the "Greater China Real Estate Alliance," warning him to keep his mouth shut or his life will be in danger.

Chang told reporters that the caution he set forth in his letter to the editor was well-intentioned, as he felt he has a duty to share the findings of his research with the public.


Greyzone said...

Continuing the conversation about oil from yesterday, I wrote a bit of a reply on my blog titled Is a Deflationary Collapse Guaranteed?

As I said, I don't believe what we are seeing right now is "normal" at all in any historical sense.

Stoneleigh said...

Thanks for the thoughtful reply on your site GreyZone.

At the moment I would describe our trajectory as stair-stepping lower in a series of stomach-churning lurches interrupted by occasional rallies where everyone goes back to sleep again. Positive feedback spirals take time to build up to 'critical mass' before a tipping point is reached, but once that point is reached, things can unravel very quickly. I firmly believe that this will happen at some point, although not tomorrow or the next day.

In my view a 1929-style deflationary crash is inevitable. As it takes time to prepare for an event of that magnitude (or larger, as I think this one will be), there is no time to lose. Advance warnings are the only kind that is useful.

I fully accept your point about over-population leading to shortages, high prices and general mayhem. I don't doubt for a minute that oil and food in particular will harder to come by and much less affordable than they are now.

When I call an approaching top in the commodity complex I am looking initially at the effects of driving speculation into reverse, which has the potential to overwhelm the fundamentals temporarily. This can happen very quickly in a world of free capital flows.

Among the effects that will take longer to to felt would be a huge decrease in general demand due to the collapse of the money supply (where demand is what one is ready, willing and able to pay for), a countervailing increase in military demand mediated through resource wars, and the collapse of supply due to economic upheaval and war.

I think the initial effect on demand will begin when we reach the tipping point and credit deflation begins to accelerate, proceeding to develop from there over the next several years of wide-spread impoverishment.

The timing military adventures is obviously difficult to predict, although I can imagine a crescendo effect beginning sometime after a crash, as the-powers-that-be may well be occupied with domestic crisis management initially. I think it would be a long time before demand from this quarter would compare to the loss of demand due to the on-going loss of a middle-class.

I also think the collapse of supply will take time to unfold, as economic upheaval, warfare, infrastructure decay, and movements intent on sabotage do not develop overnight.

In my view, the likely net effect of conflicting pressures will be an initial price decline in nominal terms, followed by substantial increases in the longer term.

Anonymous said...


I read the article by Clive Maund. Chilling. His conclusion number 4 was odd. As if European strategic planners were in charge of trash collection. He also seems to imply that they have the same warlike intentions as the U.S., which I doubt, to say nothing of the fact that that is totally out of sync with the population. In France, Sakozy simply decided to send more troops to Afghanistan, without any real debate because he knew what debate would lead to.

But more to the point, I wonder why Ilargi suggested we read the article. For the presentation of U.S. political aims? I would imagine it is not for Maund's economic assessment because it seems to run counter to everything posted here for months.


Ilargi said...


I suggested it because Maund presents a manner of reasoning that is little heard, namely that the US government and bankers and so on, don't give a coot cahoot about being in debt or having a sinking currency or any of that. In the end, it's military might that counts. That idea goes missing from just about all finance commentary, and I think it needs to be present.

I have for a long time suggested that people consider the option that in order to pre-empt the effects of resource depletion, especially oil as the main military resource, the decision was taken a generation or more ago to liquidate the US economy. It works two ways: the amount of oil in useless commuting is greatly reduced, and there will be millions of newly destitute to use as cannon fodder and desert rats. Once oil really gets scarce, its use as a military tool trumps all else. Countries without it will be defenseless.

The Lizard said...

Ilargi said:
"Once oil really gets scarce, its use as a military tool trumps all else. Countries without it will be defenseless."

Modern times in two sentences. Exactly. Brilliant. And why Automatic Earth is the place to be.

I wonder how the America-worshiping conservatives in Alberta will feel when the Marines come to call?

Any older Spaniards on the list, who lived under Franco and can pass along pointers for living under fascism?

snuffy said...

I think the comments earlier have a deeper understanding of what we face than is seen at first glance. Think of the complexity of our world,vs.the relative simplicity of Franco's Spain...You might set the mood with a evening spent watching "Pans Labyrinth" with a side of "Red dawn" or "Bladerunner".
With that cheerful frame of mind fresh in your mind,find some old...really old folks in their ninty-odd now,who lived the depression poor....Thats the future...
I agree with all who are sure that this one is going to be worse....and will never get "better".Ever.Until our Idea of "better"fits closer to the reality of the rest of the world..

I agree totally with Hangedman...that was a incredibly insightful observation ilargi

No Oil,No country...

Anonymous said...

I'm not so convinced that oil is the sine qua non of military conflict. What you need is the will to fight in the cause of the generals. Training and equipment, and oil, make you more effective in fighting for the cause of the generals, but you will never be more effective than your will to fight. Asymmetric warfare means that oil and tech and training, help a lot to conquer a nation, but not to pacify it. An army with plenty of oil will beat an army lacking in oil in symmetric warfare, but that is all the more reason to go asymmetric.

Contrariwise, the underdog doesn't really need to beat the better equipped army, just make things costly enough that the more powerful army decides to go home, or to stay in their safe little fortresses in the occupied country rather than risking patrolling the dangerous bits.

As America's economy tanks and the home front becomes more and more dire how will America's soldiers react? Will they obey for the money to send home? Will they empathize with those they slaughter and start to hate their own generals? Will they wonder if the generals' cause is really their own? Will the officers plot rebellion in little cabals? Or will they become more and more the good little Fascists? The soldiers I talk to are full of mixed feelings already ...

Coutries existed before oil, and they can survive the scarcity of oil. What a country needs to survive is a unified political will, usually based around a culture, or history. This is what keeps the Palestinian country around despite decades of thorough conquest, and not much oil, and a strong opponent. This is why the British never really consumated the consumption of Ireland, even at the height of their imperial power. And it will work in the twilight decades of the age of oil too. And if America can't keep some vision of its own meaning as a country together, then it will fly apart. And the best tools TPTB have at the moment are 1) the Constitutional history, which they've battered so much they can barely hide behind it. 2) the American way of life of affluence, but when this goes away for most people, they won't have much loyalty to the system left, and 3) the mainstream media and education system, still going strong now, but I doubt it can sustain real loyalty for the US when things get bad. Past successful Fascisms have required a decent size class of folks actually loyal to and enthusiastic about supporting the Fascism, the Brownshirts, the Phalanxists, etc. Even Franco's Fascism required a fair bit of loyalty from the military. I'm not at all convinced that the US has much of this. Even if the US tries the Fascist strategy, as looks pretty likely, it is not a done deal that they will succeed at it, especially succeed at it for more than a decade or so.

-Brian M

scandia said...

Brian M... just had a conversation over lunch that raised some of your observations. Our conversation, as Cdns, arose out of an expectation that our corporate gov't will invite US domination of Canada.As Palast says we'll get to wave our flags without real sovereignty We all agreed that conquering Canada might not be a cake walk for anyone attempting it. Insurgents or freedon fighters( depending on one's perspective) can undo a high tech invasion. History proves it, is still proving it as I write. What a waste of resources, of life!