From the blogs

From the UK

Chris Dillow: SELL THE RESERVES

Alan Beattie in the FT defends Gordon Brown’s sell-off of gold reserves. He says:

The function of British foreign exchange reserves is not for the government to manage wealth on behalf of the country. British citizens do that themselves. The UK does not have a sovereign wealth fund that aims to maximise returns, and nor should it.

This raises the question. If it was right to get rid of our gold reserves, why have foreign exchange reserves?
Alan says their purpose is to “stop a run on sterling or to pursue monetary policy objectives.” I’m not sure. Our reserves did nothing to stop sterling falling in late 2008 – and nor should they have, given that a weaker pound had a (marginally) useful expansionary effect. And monetary policy can be conducted through interest rates or quantitative policies, in isolation from FX reserves.
Our reserves are a barbarous relic – a legacy of the dark days when governments tried to manage exchnage rates. Such a job is neither possible nor desireable.  So, why not sell them off and return the money to the people? Doing so would have three advantages:
1. It would stimulate the economy and cut the deficit. Our net FX reserves stand at $42.8bn (pdf), or just under £26bn. Selling half of these would be enough to give every household almost £500 – which would go a long way to offsetting the squeeze on household incomes. Insofar as this money is spent, VAT revenues would rise, thus cutting the deficit by a few billion. And if the move weakens the pound, so what? Exporters could use the (slight) benefit.
2. It would steal the thunder of Ed Miliband’s talk of a “squeezed middle”. Osborne could argue that he is doing something to address the problem. And given that Brown sold off gold reserves (cheaply), Labour would be in no position to complain.
3. It would be a libertarian gesture which would placate some of the Tory right. Osborne could say: “The government takes on too many jobs. In selling reserves, I’m ending its function as a wealth manager, and returning money to the people. This is a step towards smaller government.”
Of course, there are practical problems here. Even in a market as liquid as the FX one, an explicit policy of dumping reserves would move prices against us. But if Treasury civil servants are as smart as they think they (which, admittedly, is unlikely as no-one’s that clever) this problem shouldn’t be insuperable.

British manufacturing declines, as does Vince Cable’s reputation

What a difference a week makes.

Vince Cable, 27th April 2011:

If you drill beneath the overall growth figures this morning, you’ll see that manufacturing growth is being sustained, which is exactly how it should be.

Reuters, 3rd May 2011:

British manufacturing activity grew less robustly than expected in April, at its weakest pace in 7 months, and a sharp slowdown in new orders cast a cloud over what has been a rare bright spot in the UK economy.

Liberal-Tory Economics Sends Focus Into Administration

On top of figures recently showing that the only growing part of the economy – manufacturing – was itself turning down, the truth about the Liberal-Tory economic policy is seen today with the announcement of the Focus DIY chain that it is going into administration.
It has 187 stores, and employs 3,900 people. The company boss said that sales have turned down as people adjust their spending to the new economic environment of austerity. It comes as the land registry has announced that house prices fell last month again.

USA

America!!!

Los Angeles Accuses Deutsche Bank of Being a Slumlord

This week seems to be open season on Deutsche Bank. The Department of Justice suit on them over FHA loans was singling them out when a lot of US banks are every bit as guilty. Now we have a Los Angeles prosecution over Deutsche acting as a slumlord, with the city attorney looking to launch cases against other major securitization trustees, namely HSBC, US Bank, and Bank of New York.

We have pointed out, that banks (more accurately, securitization trustees and servicers) are awful property managers, as anyone who lives in a neighborhood with foreclosed properties will attest. This inattention becomes disastrous in densely populated areas. The story in the Los Angeles Times is about as gripping as real estate gets.

John J. XenakisCrash Of Silver Prices May Signal Further Market Plunge

It all started on Sunday evening, when a dramatic international price collapse began when silver fell 12% in Asian markets, according to Barrons(Access). After reaching $48.35 last week on Friday, by Thursday it had fallen almost 30% to $34.95.

Silver barsSilver bars

The price collapse accelerated on Thursday and, as of this writing (on Thursday evening), the price of silver is still falling in after hours trading, according to the Wall Street Journal(Access).

The collapse of silver has had a “contagion” effect on other commodities prices, according to CNBC. On Thursday, oil fell 9%, gold fell 2%, rice fell 5%, and soybeans and wheat feel 2-3%.


10-year historical silver (top) and gold price charts. (Monex)
10-year historical silver (top) and gold price charts. (Monex)

A survey of economists by Reuters indicates that many of them expect the plunge in commodity prices to continue. According to Shawn Hackett of Hackett Financial Advisors:

“I’ve been pretty bearish over the last several months due to the unrealistic chasing of commodities that has taken place.

My expectation is that ultimately from the highs that we’ve recently set to the lows that we will likely set, I am looking for a minimum of 20 percent down.

The inflation trade got super crowded. There were record-long speculative positions in all commodities, the TV was telling you how hyper-inflation was around the corner … they were all signs that markets were not going up based on fundamentals, but they were going up because money was chasing money.

All of a sudden, all of the top-money leaves the market, and then the market has to find what the fundamental value is based upon supply and demand.

Real demand is not supporting these prices and the speculators are getting out.

My view is that a correction is going to take at least 6 months.”

The most relevant question for most people is whether the “contagion” is going to spread to stock prices.

The stock price bubble actually achieved something of a milestone in the past week: The Dow Jones Industrial Average actually rose above 200% of its long-term trend value for the first time since the Lehman collapse in September, 2008. So, for the first time since then, stocks are overpriced by a factor of more than 2. (See my Dow Jones historical page.) Stocks have been overpriced by this measure continuously since 1995.

Another way of looking at it is that the S&P 500 Price/Earnings ratio index is at 17.16, according to the Wall Street Journal. P/E ratios (also called valuations) have been above the historical average of 14 continuously since 1995, sometimes WAY above average. (See “4-Nov-10 News — Fed announces $600 billion quantitative easing.”)

So by applying the Law of Mean Reversion to either of these measures, we see that the market is overdue for a crash at least as far as the Dow 3000 level, and will stay there for many years.

Obviously, there’s no way to predict whether the current crash in silver prices, and the resultant selloff in other commodities, is going to be the trigger that leads to this panic and crash.

The selloff in silver isn’t the only ominous sign. The euro crisis worsens literally almost every day. It’s almost impossible to believe the bond yields (interest rates) for Greece, Ireland and Portugal — with Greece’s 2-year bond yield well above an incredible 20%. And let’s not forget that there could be a major Mideast crisis almost any day.

So all I’m going to do is warn my readers, as I’ve done on three or four occasions in the past, that we’re now at a particularly susceptible time, when a lot of factors appear to be converging in a dangerous way. You should take additional steps to protect yourself and your family for at least the next couple of months, until it becomes clear whether things are going to settle down again.

This FT story highlights two key problems, one, the possibility that a bubble in social networking is crossing with a bubble in Chinese offerings leading to a perfect storm in the capital markets, and two, the possibility that we are seeing the impact of weaker underwriting standards on the New York Stock Exchange now that the NYSE is a publicly traded company and is motivated to chase volume rather than quality listings.

Readers may recall the Facebook flap some months ago. An attempt by Goldman Sachs to lead a 1.5 billion dollar private placement to US investors ran into trouble when the valuation on the deal ($50 bn) and other glowing data about the company (600 million users!) found its way into the wider press. The problem with such leaks is that they are not balanced by risk factors that give investors a full picture of what is going on at the company.

The Renren IPO indicates a new problem as the FT story indicates: there is pressure on Facebook competitors to match the numbers that Facebook is allegedly putting on the board. That is reminiscent of the pressure that Worldcom put on the telecom sector a decade ago. ATT and Sprint racked their brains – and their workforce – to make the same profit margins as their competitor not realizing the Worldcom numbers were phoney. Of course, no one is suggesting there is funny business going on at Facebook but no outsiders really have a full picture of what is going on at the company either.

Combine that with the pressure on the New York Stock Exchange to weaken its historically strong diligence standards in order to attract listings now that it is a public company itself, and you have a formula that can lead to trouble.

Oh, and of course, there is the China problem: there is no genuine corporate governance or transparency in China even at companies listed on the NYSE.

None of this means Renren won’t make money for shareholders but the offering would seem to be off to a problematic start.

Global

WW4: Cannabis crop found at bin Laden’s compound

Rows of marijuana plants were found along with cabbages and potatoes on the border wall of the compound where Osama bin Laden was killed—while his Taliban allies stone people to death for smoking or growing.

Pakistan, China to hold joint military exercises

Pakistan and China will hold two joint military exercises in 2011, a Pakistani senior military leader said Tuesday.

The two exercises, one army drill and one air force one, will be held to celebrate the 60th anniversary of the establishment of diplomatic ties between Pakistan and China, said General Khalid Shameem Wynne, chairman of Pakistan’s Joint Chiefs of Staff Committee.

Continue Reading >> China Daily | February 23, 2011

Making the New Sub Prime – Part 2 – What’s in store

In the first part, The Backdoor to China, I suggested how the central Chinese authorities had effectively lost control of bank lending and property speculation within mainland China and argued that the new and rising power in China now lay in the growing relationship between China’s regional governments and international finance operating in Hong Kong.In this second part I want to look at what has been going on in Hong Kong.

What the Bankers have been up to.

Like most things that succeed what has happened in Hong Kong has been part planned and part a confluence of quite different interests. At the centre of it all are the bankers who are happy to service any one’s agenda they can profit from, but have also had their own agenda for years – and that has been to ‘open’ China. One of the organizations at the centre of these efforts in Hong Kong is the Hong Kong Monetary Authority.   In its archives you can find documents which, when you connect a few dots, tell you the history of the bankers plans. I’ll refer to only a few of them here. There are many more. [READ THE REST]

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