Thursday, May 13, 2010

Use the new term F**** Crash in a sentence

Weekly unemployment claims were down only slightly so no real job growth can be expected. Home foreclosures for last month were down 2% from the previous year and the only good news from that is they weren’t up. One and a quarter million homes are already in the foreclosure process currently and another six million are seriously delinquent and are just waiting their turn. The deadline for the federal home buying incentive has passed and after the last minute surge of sales are processed in June then the already weak housing market could be expected to nose dive.

Gold continues to climb in price with the prospect of inflation from the continued printing of bail out money. The Euro continues to be driven down by fears that the European banks are in much worse shape than earlier thought. The only good news from this is that is driving up US T-bills which sets the price of home mortgages so interest is down again. In theory more people should be able to get a mortgage to buy a house but good luck finding a bank to make a loan.

Speaking of home loans; the New York AG has started a criminal probe into the eight largest mortgage banks and their collusion with the three big bond rating agencies. They represented securitized debt obligations to be AAA grade as if they were as good as Treasury bonds when in fact they Nigerian email grade investments. They sold a lot of this crap to the European banks and it is believed a large chunk of this had to be eaten by the US Fed but they aren’t telling if they did. The Senate passed an amendment 97 to 0 that will authorize the CBO to audit the Federal Reserve during this two year period. Everybody seems happy about this so the fix must be in on the report.

The Federal Reserve had ended the program for loaning money to European banks and taking their currency as collateral but this was reinstated Sunday night to ward off a full blown market panic. China is doing its own currency swaps with Asian countries in order to get control of the influx of foreign money as investors flee Europe and the US to find relative stability.

China bears (short sellers, not the pandas) had been pointing to China’s running a practically first ever trade deficit as an ominous sign the dragon was dying but that trend has reversed and China is again accumulating surplus currency. China has 2.5 trillion and the neo-cons say China would never consider dumping it, but lots of things they said could never happen have been coming to pass lately. Can you use the new term, Flash Crash in sentence? My 401k went to zero because we had a…

Tuesday, May 11, 2010

What would you do without us?

World markets fell back today and the Euro sagged as the euphoria from the trillion dollar Euro bailout faded overnight. The euphoria turned out to just be a morphine rush and it’s sinking in that the economy is a terminal patient riddled with the cancer of predatory bankers and hedge funds. More people are beginning to doubt the long term value of currency as the central banks print more and more of it. In the digital age the phrase will need to be changed from “not worth the paper it‘s printed on” to “not worth the electrons that light up your computer screen“.

Gold bullion retailers say demand is the highest it has been the height of the panic in 2008 and prices have reached new highs. Although oil and other commodities that won’t fit in the personal safe are down sharply. This is partly from the USD going up relative to other major currencies making the USD go farther but not entirely so as precious metals are up sharply.

There is still no official word on why the flash crash occurred last Thursday but the fat finger trading theory has been laid to rest. The most rational explanation so far is that a hedge fund bought a large amount of derivatives betting that the stock market would crash. The people who sold them became nervous when the market turned down sharply and thinking that they were over extended with the market crashing, they themselves bought a much larger block of the same bets they had sold to cover themselves and a round robin of derivatives became a death spiral. This wouldn’t have affected actual stock prices except a machine somewhere was monitoring the derivative trading and mistaking this for a real trend, started selling stocks that it was in control of, and with no buyers it did as a slave to its programming, run the prices down to zero, all in a matter of seconds.

A real market panic would unfold much the same way with an event that turns into a trend and if enough traders are slaves to their programming or to their margin calls, the prices will run down to zero. The only thing that has kept this from happening is the injection of more and more cash from the Federal Reserve. Some where in the range of 14 trillion was created out of thin air during the panic two years ago to keep the myth alive that financial services is the driver of the economy and the Fed continues to lend at zero interest.

Yesterday’s trillion is already being seen as woefully inadequate. The right-wingers are saying we’re bailing out the socialists but the reality is we giving money to bloated banks so that they have enough cash flow to balance their books. They destroy the real economy so it’s harder and harder to support them and still they demand more since the world will end without them. “After all, look at how bad things are now, what would you do without us?”

Monday, May 10, 2010

Melt them down before they get us

World markets all finished up sharply today, it’s amazing what a trillion dollars worth of imaginary money can do. European central banks and the Fed have put up newly printed money to keep the Euro from going through the floor. They are also going to extend credit to Greece and some other countries that agree to accept onerous terms from the IMF. This will presumably keep the hedge funds from short selling the smaller countries bonds and driving up interest rates. Greece is looking at 20% interest making the reissue of their debt impossible so they will default and the contagion will spread to other countries potentially triggering trillions in derivatives.

Printing huge amounts of money won’t work on the long run because of that pesky inflation. They will all need to come to some agreement on banning this kind of predatory activity. Almost everything these hedge funds do was illegal prior to Reagan and the last of the restrictions were removed by the Clinton and the Republican Congress in the nineties.

The reason the equity markets have reacted positively is that this deal not only stabilized the Euro but other lesser currencies as well. This keeps the carry trade from collapsing. The sky rocketing USD was forcing investors who had used the cheap USDs to buy into foreign markets to repay more dollars than they borrowed. These traders can hedge their carry trades by buying derivatives or bets against the currency they have converted USD into. If this had been allowed to continue past the weekend it could also cause the quadrillion dollars worth derivatives to start to unravel. In theory derivatives would all balance out but in reality there are the AIG’s and the Goldman Sachs. Some lose all and some make billions. We get to starve among the wreckage of capitalism.

Thursday’s flash crash was just a taste of what we could have seen this week. Everything is done on credit and if you need to cover your margin call then you have to sell at any price you can get. They still aren’t saying what really caused the “machines” to panic and start selling stocks down to a fraction of a penny. The latest excuse is a miss match of trading rules between the various exchanges. This seems as far-fetched as the fat finger typing excuse they started with since these exchanges have been integrated for years and the market wasn’t doing anything that unusual before the screens all turned bright red. The machines are out to get us. They should all be melted down to make more cans for canned goods.