Friday, October 31, 2008

The Coming Crash Of The Euro

There isn't a soul in the connected world who isn't watching and awaiting the inevitable next episodes in the unfolding financial drama. First came subprime, then came the banking crisis. Now it's the 'country' crisis with Korea, Iceland, Ukraine, Hungary and maybe even Britain likely to play a part. But that's all as nothing. The collapse of the Euro will throw all the current crises to date into the shade. Read on..

Monetary opinion published 27th October 2008.

How About the Euro?

Then there is the problem with the euro. The US housing crash has set off a chain reaction in Europe, whose major banks are having a similar problem with Eastern European countries as the British (and European) banks have with theBRIC and Asian rim countries. Untold billions of euros were pumped into the economies of the former USSR satellites – and those are now crashing, a la Reykjavik. They can’t pay the money back, so it simply disappears from the balance sheets of the European lenders, and therefore from the EU economy.

Because of the structure of the euro-zone EMU arrangement, the ECB doesn’t have the money-printing and policy-setting monopoly of a US Federal Reserve. Member countries, on the other hand, no longer have sufficient tools available to deal with their own monetary problems, having abdicated much of their power to the ECB. As a result, both institutions (ECB as well as member-country central banks) are stuck in the mud of the US-originated credit crisis.

This causes stresses that can easily tear the EU’s monetary union apart. As it falls apart, member countries will have to revive their legacy currencies and will probably be forced to honor obligations they incurred in euros in the form of their revived national currencies. Likewise, ‘euroeuros’ (euro-denominated deposits circulating outside the euro zone) will have to be converted to legacy currencies – but of which country? There is no way of tracking which part of what deposit originated where.

That’s the big question – and the big challenge. The only way to effectively deal with this is to create a European version of the US Fed with similarly monopolistic banking regulatory and money-issuing powers. But then what? Will it really help, or will it be too late?

If it helps, the euro has a chance to rebound. If it doesn’t, the euro will simply disappear from the world scene, leaving a wake of financial destruction wherever non-EU euro-deposits cannot be converted into resurrected legacy currencies.

What a mess!

See full article HERE, by Wallenwein.

It seems like holders of Euros should dump them as fast as they can.

Thursday, October 23, 2008

Hurrah! Britain's Bullshit Economy Is Over

In amongst much sighing and gnashing of teeth, commentators in the UK are mostly crying over the falling pound, and the collapsing stock market. Of course they are right that many will be hurt by the falls - especially those hoping for a life of retirement on a pension.

I feel sorry for them. They've been conned by governments to put all their savings into a pension pot which offers no tax advantage after Gordon Brown inserted his fingers into the pile ten years ago. Since then the price of all assets have been artificially inflated to keep the economy growing for sixteen long years by excess cash being injected into the economy and interest rates kept too low too long, all to keep governments in the US the EU popular and to keep opposition at bay.

Now asset values are collapsing to more realistic values, and the poor pensioners who've been pushed into taking long positions only, are getting completely stuffed from every angle, while the sharks short away and reap huge profits on the crashing prices.

But for anyone not involved in the government pension con, it must be a great relief that everything will resume at least for a while a sensible valuation. What help is it to the public that houses are 40% overvalued, unless people enjoy paying 40% Inheritance Tax to fund Gordon Brown's ego endlessly? Sterling can come down to a level where British business can compete.

It won't cause inflation.

Commodities are tumbling far faster than Sterling. All manufacturers from overseas have been maintaining ludicrously high prices in the UK for a decade taking advantage of the froth. They can absorb the fall easily enough.

The only problem Britain now has left is the expensive government that created the bullshit economy. That too will now have to be cut back, once reality hits home and Gordon Brown's borrowing creates financial catastrophe, as it inevitably will. Government borrowing of GBP 100 billion before the recession strikes will seem like a walk in the park compared to six months from now when government revenues will inevitably take a huge hit. No one will lend Gordon Brown GBP 200 billion in a year. There will be blood on the carpet. Thank God though that reality is forcing herself back into the frame..

Government costs far too much, is far too big and is far too arrogant. The crashing share market and tumbling commodities will tell people clearly that they are being ripped off and conned, as they have been for a decade or more. Mercifully common sense is at last returning, and the arrogant shits who manipulated all the froth such as Brown, can now take the bath they deserve. It's a pity about the people who've played along and tried to believe all the bollocks, voting for Tony Blair, and buying their pension in the only way the government permits them to do. The real story is now coming to light. It will unfortunately hurt too many people while reality reintroduces itself into Britain after a decade of absence, but if it didn't show its face now, the next time it would only be ten times worse.

The problem looking ahead will be that as the next generation wants to rebuild the economy, get jobs, build industries and save for retirement, they will find their way blocked on all sides by mountainous unworkable mind-numbing barmy regulations which have been allowed to clog up the works. The final piece that has to crash, for Britain to recover her economic and social health, is the source of all this weed growth and raw sewage in her economic water supply - membership of the EU.

Personally I am happy to be out of the UK - away from dealing with overpaid useless government robots on a daily basis - away from the hopelessness of the political system that has been swallowed by Brussels and corrupted to its very core. Sure I miss friends and family sometimes, but life goes on and is very much easier here in the Philippines where costs are lower, people are respectful and government is undeveloped. The great thing about not everything being based on petty rules is that people matter more, and here in Manila survival depends not on an overgrown inappropriate bureaucratic rule book as has sprawled all over the place in Britain, but on relationships between people.

Freedom means getting rid of government and people working out their own solutions, away from all the bullshit that in particular British people have to live with. I pity the poor bastards. They've mostly got to the stage of pretending it isn't as bad as it is as the only way to cope.

Come on Britain. You could do it if you told all those slimy useless arseholes in Brussels to fuck off once and for all. God, it would be a pleasure to come home, talk to people straight and not in some strange scarcely intelligible crypto-speak steering around all the latest fashions of political correctness, and enjoy the smell of free British clear air once more - with no one to order you how and when to empty your wheelie bin, forcing you to drive your car over child-killing speed bumps, no more bloody forms from the council or from central government poking in their noses into your family lives. No more government databases being left around on trains like confetti on supply to the mafia who then steal your identity, your bank account and your peace of mind.

But never mind. I know Brits are not yet ready to reclaim their freedoms from the government and the EU that have stolen them. Keep breathing the pollution and swallowing all the bullshit.

You're all so used to it now, and enjoy the EU propaganda where they keep telling you how much good they are doing, trying to stop the sun from shining too much or too little, whichever version of the climate bullshit they are using to frighten you into conforming with sacrificing your liberty this week.

Stay under the Euro-thumb, as that is what's now familiar. It is the taste of freedom that frightens you most now. Keep the blinkers on. Enjoy the taste. The sweetness of the lush tropical fruit of freedom would overpower your dulled senses now you've been ground down to the level of serfs eating factory flavoured chemically regulated EU-approved cardboard. Don't dare offer any criticism. You might lose your job, not be promoted or not be offered the club membership you desire. That's right. Carry on being the creeps you've all become. The taste of EU arseholes has never been better. Keep licking them my lovely fellow Brits. It is so clearly what you all desire.

FOR EXAMPLE - See this

Monday, October 20, 2008

Your Phone Is The Agent Of The State

Everyone who buys a mobile telephone will be forced to present their passport and register their identity on a national database under government plans to extend the powers of state surveillance. Whitehall officials have raised the idea of a register containing the names and addresses associated with the UK's 72m mobile phones in talks with phone companies. Pay-as-you-go phones are popular with terrorists because they can be bought without supplying a name or address. (Sunday Times)

What a joke. You think terrorists and others concerned about the state monitoring their every move might not think of buying their phones in another country. You can buy SIM cards abroad too and use roaming. This has nothing to do with terrorism and everything to do with eliminating liberty.

Saturday, October 18, 2008

Golden Simplicity In Era Of Manic Complexity

Reading today Andrew Lilico on CH I was struck by one of his sentences -

Under reforms introduced in the 1990s by the Conservatives, the British government must cover all its expenditure through either taxation or borrowing. It is not allowed to print money to spend.

Andrew then points out that this measure might soon be changed to fit the times.

When the world's economy had an inflation-tendency, printing money was instantly problematic. Increasing the money supply faster than the output of the economy by borrowing has arguably been just as problematic in causing inflation, but the game was not to inflate the currency and trigger real world political problems like strike action from workers fearing price rises.

But now all is changing. You can almost smell the oil on the money printing machinery being quietly cranked up around the globe, to plug the gaping holes left by things like sub-prime lending, excessive government borrowing, derivatives, swaps and so on. Deflation of asset prices is occurring now and will no doubt continue as fear stalks the wobbling global financial structures - houses, equities and commodities all falling in one go.

But as a mountain of money is printed to fill the holes that the financial crash is creating, it is very likely that fiscal rectitude will become a quaint idea from a former era, no longer thought of as necessary any more. Inflationary effects will inevitably come along next.

In the past deflationary and inflationary periods were strung out for decades. But like everything else in the modern world, the speed of fluctuation will no doubt increase as the monetary reaction to slump by governments leads to the next boom and inflationary burst.

The economic cycle has not been abolished. It seemed to have been temporarily suspended, but it was a financial trick to keep expanding credit to stop the downturns. With leverage (borrowing and forwards trading) way out of control, the up and down cycles will become accelerated, making real world businesses far harder to run successfully. People will yearn for the security of the dull years when economies took years to give shape and go through their cycles. Now instant remedies will be applied to instantly appearing collapses. No wonder people all over the world are turning to buying bars, and bits of something simple of a thing that they can understand - gold and silver.

The politicians try to hide their guilt behind the faces of the bankers, but it was they who permitted and encouraged the continued lending that created the first 16 year period of uninterrupted growth in history. The bible knows the cycle of life - the seven good years followed by seven bad. This natural flow of growth and fallback had been stretched by economists to create three good years for every one bad year, but it was only the arrogance of the modern world equipped with information technology which tried to do without even one occasional bad year, by endlessly boosting credit to overpower any downturn. Banks were encouraged by politicians to lend even to people who had nothing and were required to provide no share of the price they were borrowing to spend.

Now inevitably those who believed they had created endless economic growth, will be forced to move in and stop the house of cards they built from crashing to the floor. But will anyone believe them all a second time? With every citizen of every developed country now aware that their governments have been living like reckless gamblers, allowing money to be splashed all around, how will they want to live the same way as they have been these last 16 or so years? The borrowers will all become savers, and slump demand. They will want money in reserve in future, not blow it all and borrow yet more.

If governments on the other hand try to inflate their way out of trouble by printing shed loads of money, the ordinary man in the street will want something in his pocket, something which he can understand and which he can trust. It will not be governments, currencies and banks which people will rely on in future, but shiny yellow metal.

THOUGHT - What Andrew Lilico might have mentioned is that the rule about not printing money was part of the Maastricht monetary criteria. The Conservatives were only applying the rules they had agreed to at Maastricht. They will only be able to ignore Maastricht if it is decided on an EU-wide basis that printing money is now going to be OK. Italy, Spain and Greece would no doubt be happy to turn the printing machines, but will the Germans?

71% German Women Want The Deutschmark Restored

From the Telegraph In Europe, the ECB has its own distinct headache. Inflation is 3.1 per cent, the highest since monetary union. This is already enough to set off a political storm in Germany. A Dresdner poll found that 71 per cent of German women want the Deutschmark restored.
With Brünhilde fuming about Brot prices, the ECB has to watch its step. Frankfurt cannot easily cut rates to cushion the blow as housing bubbles pop across southern Europe. It must resort to tricks instead. Hence the half trillion gush last week at rates of 70bp below Euribor, a camouflaged move to help Spain.
The ECB's little secret is that it must never allow a Northern Rock failure in the eurozone because this would expose the reality that there is no EU treasury and no EU lender of last resort behind the system. Would German taxpayers foot the bill for a Spanish bail-out in the way that Kentish men and maids must foot the bill for Newcastle's Rock? Nobody knows. This is where eurozone solidarity stretches to snapping point. It is why the ECB has showered the system with liquidity from day one of this crisis.

That was written on September 22nd. I can only imagine that by now there are few German women left who still want to keep the Euro. How much longer can the Euro go on? That's the key question.

Monday, October 13, 2008

The EU Clobbers Europe's Banks And Itself

As the dust settles on the 'British' bank recapitalisation programme just announced, it becomes more and more obvious that the banks have not been recapitalised but clobbered. Take The Royal Bank of Scotland (RBS) for example. Its current shareholding will shrink to 43% from 100% of the company's equity overnight. In addition to that the insistence by Brown (= EU) of GBP 5 billion of Preference Shares funded at 12% per annum will require GBP 600 million each year merely to pay the interest. It will be some years before the RBS can turn to the equity market and claim to be anything other than a tortured miserable entity created as an act of revenge by a bunch of communist era bureaucrats bent on bringing capitalism to its knees.

The only route out of the credit crisis is to create optimism, not to reinforce misery. This is not it.

The supposed 'rescue' reminds me of the Treaty of Versailles where some imagination about the future might have created a long lasting peace, but instead a new war was made inevitable. In 1918 a country needed to be put back together with imagination, as now an economy needs to be recreated from the bottom up, with all confidence and hope obliterated. The few people in power in 1918 made a right hash of it, as are the current few in Brussels doing the same now.

The banks must be made financially strong optimistic and dynamic, capable of handling the highly risky situations currently to be found in all markets. That means as of now - not in ten years time once they've served enough time in financial jail, and suffered enough at the hands of Brussels' small-minded pen-pushers. Only if banks are set free from their current burdens could they create the kind of scenario which we all desire - one where lending can grow and the credit crunch can end. Now we are being treated to a total irrelevance - the need for half-witted politicians like Brown, Sarkozy, Merkel and Barroso to impose themselves in power over an already critical situation. It will not work.

By seizing 57% of RBS and not 49%, the EU has sent a strong signal to the world that it is not in the business of rebuilding banks but in permanently clobbering them. The EU like the Allies at Versailles is bent on hammering the banks as punishment for the mess they are in - when in truth it is the EU's regulations that are largely responsible, imposing unworkable accounting practices, limiting the operations of banks, and creating the notorious Basel II framework which generated the sub-prime mortgage crisis and credit crunch in the first place. The banking crisis is above all a failure of regulation, not a failure of trustworthiness on the part of the bankers. The fools who brought us the credit crunch are now showing us that they know exactly how to make it quickly get a whole lot worse.

The Conservatives must vow to get rid of the Preference Shares, and reduce the government's stake in all banks and financial organisations to below 49% as soon as they win power. A successful economy will not come about unless the banks are strong, confident, liquid and highly profitable. The current situation is a great business opportunity for all with so many people desperate to borrow to get through the current crisis. Many would be willing to pay well above current lending rates for their businesses to survive, but a bank locked in public ownership, hamstrung with exorbitant preference shares is a disaster written in Downing Street - or should I say Brussels. George Osborne, are you listening?

The government should rightly take 49%, and then shower the banks with cheap money and in the process fatten them up for privatisation in a few years time, both the government and the banks making a fortune by having the courage to step in and sort out the crunch now at the moment it needs sorting out urgently worldwide. Only the banks can do that.

The EU is ensuring that banks will be unable to do so, and that shareholders will turn away and buy gold and silver bullion rather than help to rebuild the economy by buying bank shares.

The crisis will now rumble on and get worse. The political pendulum will swing eventually and throw the Brussels bank bashers to oblivion where they belong, like the old French generals at Versailles who condemned another generation to suffer as they had, unable to visualise a future without bitterness and suppression. What a disaster. This is not 1929, where finance failed, but 1918 where politics has.

From today - the eurozone plan has to be a government process for the approval and disapproval of loans. Since the market is no longer functioning, the decision on who gets to borrow how much at what rate — with a government guarantee — becomes a government decision.

There are two problems with this. First, governments are terrible at allocating capital. Politics will rapidly intrude to shape decisions. Even if the government could be trusted to make every decision with maximum efficiency, no government has the administrative ability to manage the entire financial sector so directly. Second, having taken control of interbank finance, how do you maintain a free market in the rest of the financial system?

ADDENDUM - what price should RSB shares be valued at?

In the good times RBS shares were valued at GBP 5.00 and more. But with the world's economy looking so shaky, a valuation for the company as things were given some stability might have been GBP 2.50

But with the loss of near 60% of the shares to government ownership through the dilution of the original shares, the optimistic GBP 2.50 becomes GBP 1.00.

That's before the GBP 5 billion/12% preference shares are taken into account. This measure plus taking into account the likely political interference from EU banking policies, with governments able to choose who gets funded and who doesn't, must put a big dampener on. The GBP 1.00 becomes 50p.

If the shares can only be expected to rise to 50p unless a major overhaul is to take place in the political arena with the collapse of the EU and the relaunch of British Conservative national government, the uncertainties only compound. In the current climate I would value the shares at around 12.5 pence each, not the 65p the government is underwriting the share offer at.

If the preference shares were cancelled, and the government only demanded 49% of RBS equity, not the 57%, the value would probably be around 50p per share. Brown and the EU could probably get the RBS relaunch 100% privately funded, if they made these changes, but they won't.

The takeover of the Bank is politically driven, not commercially, or with any consideration to the costs to taxpayers.

My instruction to my broker will be exactly that. Don't buy RBS unless it hits 12.5p per share as that is all it is worth once the EU have destroyed all the value it contains.

Who knows how many good managers and staff will be driven out in frustration at EU and government interference? By the time the bank breaks free of communist control, it could have become a shadow of its former self, with its client relationships in tatters.


From Open Europe According to the Telegraph, the European Commission has banned banks taking part in Gordon Brown's emergency bail-out from paying dividends to shareholders for five years. The article notes that "The intervention by Brussels officials threatens to deny investors significant income and could threaten the Government's scheme." The article also notes that "There are fears that this stipulation could lead to the collapse of the Lloyds TSB-HBOS merger." The issue is crucial as banks need to pay dividends to attract private investment. The Government had already set the rate of interest for its own "preference" shares in Lloyds TSB, RBS and HBOS at (an unusually high) 12%, hoping that this would allow the UK to comply with EU competition laws.

However, the Commission has said that this would not be an adequate incentive to ensure banks repay the state as quickly as possible, and stated that the UK bail-out could only proceed if dividend payments are banned until after the preference shares are repaid - which the article notes cannot be done for at least five years. Commission Spokesman Jonathan Todd explained "Initially the UK Government thought the penal interest rate would be sufficient disincentive for the banks. We insisted that the payment of the dividends should be suspended while the state still had the preference shares."

In an interview with the FT, Adair Turner, the Chairman of the FSA, calls for significant changes to capital requirements for banks. He said that Basel II framework would need fundamental improvements, and could even adopt a "countercyclical" approach to capital requirements. Turner admitted that such a framework would need to be agreed through an "international set of rules". The Basel II agreement is already implemented at EU level through the 2006 Capital Requirements Directive.

The Economist points to the challenges the EU will face as "a group of countries held together by overlapping pacts of solidarity...Take away the money, and it can start to look awfully fragile." It notes "A nasty recession will thus have political consequences for Europe. If inflation and unemployment rise sharply, EU solidarity could break down in some damaging ways."

Jean-Claude Juncker, Luxembourg premier and Eurogroup chair is quoted in the Telegraph as saying "Let everyone remember after this crisis, who solved it. Politicians did, not bankers."

Jean-CLaude is counting his euro-chickens before they've hatched.

The Way To End The Financial Crisis

The FT editorial today tells us the world's financial system's heart has stopped beating. That is pretty serious. It means that no bank can borrow, and so few can lend. This is impacting on all other markets as a temporary cash crisis has been created, where people are having to sell anything they can to raise cash - often simply to meet margin calls on things they hold futures contracts on. If this machinery continues to grind everyone down, as it surely must, share prices will be driven down to zero, and the real world effects of the financial game will be horrendous.

What can be done? Governments must lend to the key banks and other key selected financial institutions unlimited amounts at 0%. Any margin they make - say 10% even - will be used to rebuild their balance sheets. From a strong core of banks known to be fully funded and secure, making vast short term gains, and profits from being granted the power to buy and to lend at high rates, will a new platform be created - maybe in time to keep life from grinding to a halt.

These financial mega-giants will become enormously powerful and will be able to control markets to their own advantage. They will need to be broken up after a period of time into smaller units. The government should demand 50% ownership now, as its share in the proceeds, and these shareholdings can be sold off a generation later to pay back the debts accumulated by fixing this crisis.

At this stage governments are fantasising that they will be able to reestablish confidence by 'guaranteeing' or promising that they will fund all the cracks that will appear in an unfunded system. It's ludicrous and impossible to do. Only by giving unlimited funds at zero cost can the institutional infrastructure be created that will deal with the current crisis.

Organisations need to borrow urgently to save themselves from bankruptcy. They should be charged 25% per annum possibly to cover the risk of loss to the lender. Lending should be priced now purely at the risk factor of being repaid, until the crisis is over. Governments won't stand a chance of pricing the risks. Only banks will be able to do such a thing. It would be best for governments to fund all reputable banks with unlimited funds at 0% now while the banks are still in place to carry out the rescue, and deregulate all lending so that lenders can protect themselves from risk by charging high rates.

As soon as the markets are safe, the rates will tumble back down, but right now there is no market. The heart has stopped beating. The only way to bring the beat back is to mainline into the veins zero-cost unlimited finance with no limits set on re-lending rates, until the beat returns. There can be no other solution.

Governments must identify the organisations in the banking sector to use to base the recovery on. There must be no flinching or turning back, once the banks have been selected. They must be made fully secure overnight and allowed to operate at will without restriction, in return for sacrificing equity. If they refuse to cooperate, then they will have to e compelled to save the system that all are dependent upon.

All EU regulations restricting lending by institutions partly or wholly owned by governments, and all other lending restrictions and directives must be ignored instantly and permanently. If the EU refuses to back away and allow the world's economy to be saved, Britain and any other country that wishes to survive must withdraw, and seize its own sovereignty back, as of right now.

In Britain Peter Mandelson will be quite unable to consider such a solution. George Osborne might have the guts to realise that the current situation will need a completely new start, and propose these changes. Until someone does, the numbers of people threatened and their suffering will only get worse. The size of the problem will also balloon into unmanageable proportions. The longer governments imagine that they can turn around this crisis, the worse and more prolonged it will be.

Only by joining forces with the relevant private sector leaders will anything be able to be done, and as the FT points out, time is running out. See FT leader - Banks at a minute to midnight HERE. The FT using such phrases signifies that the world is indeed in extreme danger, and it must find someone capable of leadership.

Saturday, October 11, 2008

Money Is Information

Low prices tell you two things. One is that current owners of assets are in fear or distress or both. The other thing is that you should be considering buying the assets because they are becoming very cheap.

The short-sellers have had all the running so far. The moment will come when they are the ones to be burned, and the longs will collect the bonus cheques. Think five years ahead, not minute by minute.

It is impossible to pick the exact bottom of a market so sensible advisers say it is best to buy spreads, buy the same stock once a month for six months, for example, rather than buying all in one hit.

You buy a stock that has fallen by 80%, for example, but it might fall 95% and wipe out 75% of your stake. By buying six spread out bets, you will get a good average price. Just don't be upset if your original bet gets decimated. The important thing is to keep buying.

If more people start buying, in the way described above, they will make superb profits over the long term, and help to bring the credit crisis to an end. If private investors don't get active and start buying the bargains that exist now, governments will move in and close down the freedom of markets killing off the future growth potential of the world's economy.

Pick companies that are most unlikely to go bust, and buy at least six different ones in equal amounts. If you are unlucky and one of your picks hits the skids, the gains on the five or more others will very likely cover the loss.

This is the best chance most of us will get to buy stocks at any time in our lives. Don't let the gloomy news coverage persuade you into wasting this amazing opportunity. What's more the world needs you to act, so no guilt trips are required for seeking profits at others' expense or something. Go for it!!!