Gold amid the muck

I was watching the Citigroup share price tumble last week. It eventually reached US$3.77 a share - a tenth of its value earlier this year - before the US government announced it would bail thr group out. It occurred to me that there was no way this ank would be allowed to fail and it might be a really good idea to buy as many shares as one could...knowing there would be a big bounce when the bailout came.

I didn't do it.....the other half would have KILLED me for a punt of the sort I had in mind.

But today those shares were at US$6.85.

Had I bought them last week when it came to mind, I'd have almost doubled my money in a few days. That would have been very cool. More than cool.

I suspect there are people in the markets making a killing on the volatility we're seeing right now.

Debt and Interest rates: Addicts raiding the medicine cabinet?

The global financial system is suffering the consequences of a debt binge of historical proportions. Governments everywhere have deemed it necessary to effectively underwrite the several trillions of dollars of bad debts to prevent banks from collapsing. They have also moved to guarantee deposits to reassure depositors and avoid runs on the banks and further chaos.

Worried about what evil may lurk in the balance sheets of others, banks aren't lending to one another as easily and cheaply as they used to. That means money is more expensive.

In an attempt to counter this, central banks like our own Reserve Bank have moved to cut interest rates rapidly. One affect is to make credit cheaper. With the governments effectively underwriting all the banks (wow!), the intention is to restore confidence.

But isn't cheap credit where we all went wrong? Shouldn't we be encouraging saving rather than borrowing? What about rising inflation?

Let's have a look at what's happening on the savings side.

Falling interest rates have seen the return to savers cut by 20% in just a few weeks. My own savings were receiving interest at 8.3% just 2 months ago. That rate is now down to 6.6% and likely to fall again. I'm looking at my money in the bank thinking it may no longer be a good idea to keep it there. It might be better off invested in an asset with some prospect of appreciating intead of remaining in cash.

In NZ, that usually means buying a property, but property values are falling. In my own area, houses that were asking $500,000 a year ago are selling for $380,000 or less. A house in my street selling for $590,000 in January and $550,000 in May, was sold at a mortgagee sale recently for just $350,000. But how far down will they go? The effects of the slowdown overseas aren't really being felt here yet and won't be for months. Real spending power will fall.

Lower interest rates have seen the value of the New Zealand dollar fall. Lower rates here attract less cash from overseas seeking a return. The lower dollar may see inflation - already at 5% in NZ - stay high or go higher and again erode the value of savings.

At the same time, the National party is proposing to cut the savings power of the KiwiSaver pension scheme in half to fund tax cuts today and limit employers' contribution to savings. I just joined KiwiSaver and that will affect me directly were it to proceed.

Looks to me like savers are getting a raw deal all round. Hasn't that always been the way in New Zealand?

You don't have to be a rocket scientist to see that higher inflation combined with lower interest rates will erode the value of savings. At 6.6% my after-tax return on my savings is lower than the rate of inflation so my savings are now shrinking rather than growing, thanks to central bank interest rate cuts and the credit crunch.

Whatever happened to interest rates as a measure of risk? It seems they have been converted into a monetary tool and risk is no longer a strong element. No wonder people went wild. Money was too cheap...and we're moving Heaven and Earth to keep it cheap, apparently.

Overall, it looks to me like the addiction to cheap money is winning and the addicts are raiding the medicine chests of the world. Meanwhile the savers are seeing the value of their savings eroded, providing less incentive to save and provide money to be lent at those lower rates.

Looks like the lower interest rates may be a short term fix, driven in some cases by electoral considerations. If inflation doesn't fade, I think we may see higher interest rates again before too long. Otherwise, the new financial regime will be no more sustainable than the one that just fell over.

Somehow we have to wean the debt addicts off cheap credit.

You knew it was going to happen......

Can't say I'm surprised.

No Right Turn blogs today about a UK bank (Lloyds TSB) who recently received a huge pile of money to bail them out.....and is now attempting to translate that into a dividend for shareholders.

Under the term of the bailout agreement, they supposed to pay back the funders of the bailout first....not their shareholders.

Shameless.

Socialise the losses and privatise the....bailout cash.

How quickly they forget their very recent desperate situation.

Wall St bail-out feeding frenzy?

I'm beginning to wonder if the Wall St bail out is a good idea after all. What would happen if there was no bail out?

This NY Times story from last week gives us a hint of what any bailout might be like - a gold rush for any greedy bastard who made a bad investment:

“Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

“Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

“At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

“Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions.”

That behaviour reminds me of our local Contact Energy getting in early and grabbing people's tax cuts in Wellington and the South island with its 11% - 12% price.

Look to the East

The financial crises hollowing out many major banks in the West is revealing more signs of China's growing influence and wealth.

In March 2006, China eclipsed Japan as the largest holder of foreign reserves of currencies of all kinds - more than U$8.5 trillion.

In June of 2008 China's reserves of US dollars passed the US$1.8 trillion mark.

Last week, in the wake of the Lehman Brothers investment bank failure, the government-owned Chinese Investment Corporation (CIC) was being touted around as a possible saviour should Wall St top dog, Morgan Stanley, run into trouble. The CIC already owns 8.8% of Morgan Stanley.

Whether they buy Morgan Stanley or any other bank hardly matters. What does matter is that when no US organisation other than the government had the resources to step in, it was to China (and Japan) they turned for cash.

That is as clear an indicator yet that the baton of global power and wealth has already shifted to the Far East. There is no way a United States mortgaged to China (and others) and dependent on its manufacturing can be anything other than polite to the country (China) that now makes its things and funds its lifestyle.

It now remains only for perceptions to catch up with that reality.

Though still the world's largest economy, the United States won't be number one for much longer. It's decline has been rapidly advanced by the very policies that were supposed to see the opposite occur.

Life is like that sometimes.

Socialising the losses

Anyone remember the chaos in Argentina a few years back? That country followed the "strong medicine" of the IMF and others and went though economic hell for a couple of years until the people revolted and (peacefully) changed the government.

When the shoe is on the other foot, and the rich countries who formerly gave out that advice are on the receiving end of some richly deserved, well-earned financial chaos, apparently there is no limit to the amount of money that can be spent on behalf of their respective nations to buy their way out of the problem.


The taxpayers of these nations will now be required to pay many times over for the losses others incurred. Nationalising the debt-eaten corpse of a former market high-flyer is small consolation for the people who will have to stump up the US$ 1 trillion (plus) estimated to buy out all that bad debt. 

Of course the alternative would have been worse: Companies crashing as the streams of falling dominoes headed off in all directions; millions out of work; banks falling over by the dozen. Not a god look to destroy wealth on that scale just as the baby boomers begin to retire. Bad enough the present situations has already shrunk their pension funds just as millions upon millions will looking to begin to draw on them in retirement.

My own super fund is now worth barely two thrids of what it was worth 2 years ago.  I would have been far better off to put the cash in a box under the bed. The advisers say it will be ok in the longer term. But for someone (not me) who is 65 today or in the next few years at least, that isn't going to help much at all.  It looks like those who took the advice to save for their retirement have been made fools of.

Someone got fat eating my money.....and now tax payers in many countries will have to pay for these losses twice over: through taxes on what they earn and again through reduced incomes. Both as a consequence of actions taken by others who clearly screwed up on a monstrous scale.

All the evidence I've seen indicates free markets are REALLY a place where the consequences of corruption and incompetence can be maximised.

From poisoned milk to collapsed buildings to global property bubbles, too much market freedom for people who think only of money is more obviously than ever a bad thing.

Subprime Primer

(h/t to Russell Brown at Public Address)

To see the presso, click here. 

How many are left?

With Hanover falling over, how many finance companies are left? There would be so little interest in putting money anywhere near one of them that they must all be struggling with lack of deposits / investments versus some proportion of under or poorly performing borrowers. In each case, we hear about thousands of investors who have either lost their money or won't see it for a long time. How many of those people are elderly and dependent on income for that money?

The average investment at risk in Hanover's $465M from 13,000 investors is just under $36,000 each. Some will have been much larger and many smaller. But that's a reasonable sum to have at risk for anyone of modest means.

Now we have to wait and see what the impact of this is on other financial institutions and people dependent on Hanover. Will it amplify in the next failure? Or is this the last big puff of stink from a sector whose business model has disappeared?

BIS: Risk of global depression

The Telegraph reports the Bank of international Settlements (BIS), "the world's most prestigious financial body", is warning of a global depression caused by the credit bubble of recent years.

Individuals and businesses are borrowing far too much money and taking too much risk. A system already at risk of further major default is thus close to a situation where the last straw, a "tail event", might break the camel's back.

Of particular concern is what has been going on in China. I have to admit that I have not followed financial events there closely. The BIS says:

"The Chinese economy seems to be demonstrating very similar, disquieting symptoms," it said, citing ballooning credit, an asset boom, and "massive investments" in heavy industry.

Some 40pc of China's state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn.

It said China's growth was "unstable, unbalanced, uncoordinated and unsustainable", borrowing a line from Chinese premier Wen Jiabao

That doesn't sound too good at all. Clearly the situation as described is not sustainable should it remain that way.

The US Federal Reserve, (the US central banker), in particular, gets a whack:

In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.

It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment built up in the boom years had suffocating effects.

While cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and "sowing the seeds for more serious problems further ahead."

The BIS says the trading position of the United States is also perilous with a huge current account deficit equivalent to 6.5% of GDP

a rise in US external liabilities by over $4 trillion from 2001 to 2005, and an unpredented drop in the savings rate. "The dollar clearly remains vulnerable to a sudden loss of private sector confidence," it said.

Is money hard to get? Apparently not. Bankers have found new ways to get around credit risk by passing it off to third parties who may or may not realise the level of risk involved:

The BIS said last year's record issuance of $470bn in collateralized debt obligations (CDO), and a further $524bn in "synthetic" CDOs had effectively opened the lending taps even further. "Mortgage credit has become more available and on easier terms to borrowers almost everywhere. Only in recent months has the downside become more apparent," it said.

That last comment must mean one of the monkeys removed the hands from their eyes long enough to accidentally see some evil.

With that in mind, where is it all heading? The BIS looks at how sustainable many of the private equity transactions / mergers are given they levels of debt taken on assumed credit would remain cheap.

Mergers and takeovers reached $4.1 trillion worldwide last year.

Leveraged buy-outs touched $753bn, with an average debt/cash flow ratio hitting a record 5:4.

"Sooner or later the credit cycle will turn and default rates will begin to rise," said the bank.

"The levels of leverage employed in private equity transactions have raised questions about their longer-term sustainability. The strategy depends on the availability of cheap funding," it said.

That may not last much longer.

That's the bad news......and there is nothing any political party in New Zealand can do about it, whatever way it goes. Increasingly, this looks like a dumb time for tax cuts.

Electric cars: "Made in NZ"?

Scoop is carrying a press release from Carbon News this morning about the possibility of homegrown electric cars being made here in New Zealand.

[...]
Carbon News says entrepreneur and engineer Ian Macrae, the man who has funded Waikato University’s NZ Eco Ultra-Commuter electric vehicle project, is meeting a UK car maker with a view to establishing a UK/Australia/New Zealand consortium.

The consortium would produce an electric car and electric car technology in New Zealand, says Mike Duke, senior lecturer in mechanical engineering at the university.
[...]

Music to my ears. If they sell shares and the vehicle proposed looks viable, I'll invest in that.

Here is an opportunity for New Zealand to take the lead and make a product the world will see value in buying. The spin-offs for the rest of the NZ economy could be enormous.

The government does appear to be making some effort in this area. A new "Vehicle Energy and Renewables Group", incluing Ian Macrae mentioned above, is advising government on what incentives might be used to encourage manufacturers to use renewable energy sources in transport.