The Debts of the Lenders: Bears Engulf Emerging Markets

After making a fortune shorting financials, the bears are now targetting entire countries' economies. This is reflected in the CDS costs of US and European banks that have narrowed while sovereign default insurance has ballooned. Of course the possibility of a major European and/or US collapse are distant at this point. The real money is in shorting the emerging market indices.

Brazil, Russia, Mexico, India, Indonesia, and S. Korea have suffered heavily in the past 3 weeks. I am not sure what their CDS costs are but they should be pretty high. In any event, there is more solid evidence of their instability - daily circuit breakers being applied (mkts temporarily shut down), short selling bans, strict capital controls, and other signs of panic.

Although insulated from the worst excesses of the credit bubble storm that has wracked the developed world, developing nations are now facing sharply falling demand for their goods as consumers tighten their belts. Many- if not most - emerging markets are one trick ponies; good only for a particular export or raw material sector.

For ex: Brazil's Bovespa is dominated by agriculture and mining, Russia's by oil and natural gas; and the East Asian economies by cheap manufactured goods. Moreover, credit problems in the West are exacerbating importers' problems in securing short term credit...even in the face of slumping freight costs.

Mutual fund redemptions are hurting the emerging market indices as the flow of funds from account holders reverts back to the US. Fund managers are liquidating the higher priced foreign stocks and triggering further sell-offs in lower trading stocks.

Finally, emerging market economies remain vulnerable due to their debt exposure to foreign currencies. Unlike the EU and the USA, most emerging markets do NOT have the luxury of having their debt denominated in their native currencies. They are unable to adopt the
sweeping corporate welfare programs that the US and EU have adopted due to fears of higher inflation. Government ministers imported inflation through monetary and fiscal ties such as currency pegs to grow their export engines. While inflation was a necessary evil during the expansionary boom times, it has the potential to become a greater demon within the borders of emerging markets. Countries such as Russia, Iran, and Venezuela already have to contend with double digit rates of inflation (15-40% according to which source you believe).

The Debts of the Lenders: Shipping Costs Jump From Export Markets

This is what they have not discussed but it is happening. This translates into Food shortages et al.

http://www.ft.com/cms/s/0/0d9c4f7e-9ad2-...

The cost of shipping bulk commodities such as iron ore, coal or grains on Thursday tumbled to its lowest level in more than six years as recession fears intensified and the difficulty of obtaining trade finance left many ships without any cargo.

The Baltic Dry Index, a benchmark for shipping costs and seen as an indicator of global economic activity, fell 6.75 per cent to 1,506 points, its lowest level since November 2002. The index has plunged 53.2 per cent since the end of September.

The average daily cost for the largest dry bulk vessels – known as Capesize and used mostly to ship iron ore from Brazil and Australia to China – on Thursday sunk 11.4 per cent to just $11,580 a day.

The Capesize rate has collapsed 95.1 per cent since it hit an all-time high of $233,988 a day in early June.

Steve Rodley, director of the London-based shipping hedge fund Global Maritime Investments, said some vessels were anchoring, waiting for better times, while some shipping companies were thinking about scrapping their older vessels.

“The whole shipping market has crashed,” Mr Rodley said. “But the biggest ships are suffering particularly,” he added.

The slowdown in Chinese commodities demand was confirmed yesterday by Tom Albanese, Rio Tinto’s chief executive.

“In the near term, the ­Chinese economy is pausing for breath. China is not ­completely insulated from an OECD recession and we will see an impact on Chinese exports,” he said.

The index’s latest fall follows several weeks when the short-term spot market on which the index is based has seen very little activity because of the current difficulty in arranging letters of credit, a key trade finance instrument.

Peter Norfolk, director of research and consultancy at London-based Simpson, Spence and Young ­shipbrokers, said: “You face continued freezing of ­activity because of the ­problems with credit in ­particular.”

Although it is traditionally regarded as one of the safest forms of financial activity, rates for trade credit have risen sharply in recent months as banks have withdrawn facilities to bolster their own liquidity.

Shipowners are suffering from banks’ reluctance to issue letters of credit, normally straightforward instruments used to assure a shipper of payment for a cargo after it is loaded on to a ship, but before the buyer receives it.

There was also a ­continued stand-off between Brazilian iron ore producers seeking to raise prices and Chinese steel mills now ­cutting production and using up stockpiles in retaliation.

“All of this means that, in a very short space of time, we have very little chartering activity,” Mr Norfolk said. “There’s even talk of owners laying up tonnage because the market is so weak.”

London-based brokers added that some charterers where defaulting on their contracts and returning the vessels to their owners due to lack of demand.

The Baltic Dry Index has fallen 86 per cent from May’s all-time high of 11,893 points.

The tanker market for crude oil shipment has also been hit by lower prices

The Debts of the Spenders: 30 Day Commercial Paper Destroys Fed Rate Cuts

The current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 75 basis points.

http://tinyurl.com/4xnm4x

The Debts of the Spenders: US Mutual Funds Face Record Redemptions

The stock market sell-off has triggered record redemptions from retail investors. Trimtabs estimates that equity mutual funds had an estimated $8.8 billion outflow on Friday, October 10, alone ($5.6 billion from U.S. Equity Funds and $3.2 billion from Global Equities) while bond funds had a record $10.2 billion one day outflow. For last week as a whole outflows were a whopping $65 billion, $40 billion from equity funds ($25.9 from U.S Equity, $14.1 billion from Global Equity and $25.5 billion from bonds). The $55.8 billion in equity fund redemptions so far in October, which would be the largest outflow since the ICI records started in 1984, easily surpasses the prior record set in July 2002, when $52.6 billion was withdrawn from equity funds.

http://www.trimtabs.com/site/fundFlow.php

The Debts of the Spenders: Bernanke and Paulson's Legacy of Incompetence

Since August 2007, Paulson and Bernanke have responded aggressively by unleashing monetary policy, cutting interest rates and injecting massive liquidity into capital markets, only to exacerbate food and energy price inflation, undermine financial institutions, and cripple economic growth. In their testimonies before the US Senate banking Committee and the US Congress in February 2008, they reassured lawmakers that the financial system was fully capitalized and interest rate cuts had favorably worked their way through the economy. Combined with a $170 billion stimulus package, this encouraged President George W Bush to anticipate strong recovery of the US economy in the second half of 2008.

http://www.atimes.com/atimes/Global_Economy/JJ16Dj02.html

The Debts of the Spenders: The Governments' Role in Money Creation

In the last post, I wrote about the private sector's role in money creation. Now, I will focus this post on the governments' role.

First, a quick review. The cost of credit is determined by factors such as trust and solvency. Trust and solvency lie at the heart of the TED spread, which is the gap between 3 month Treasuries and 3 Month Eurodollars. I already addressed the 3 month Eurodollar so now I turn our attention on 3 month Treasuries.

Treasury rates are set by regularly scheduled government auctions in the CBOT or Chicago Board of Trade. These are reverse auctions where traders compete against each other by offering HIGHER interest rate bids. Traditionally, the 3 Month treasury rates were at or near the fed funds rate.

The yield on the 3-month Treasury bill, seen by many as the safest place to put money in the short term, slipped to 0.63% from 0.69% late Tuesday, indicating investors are willing to take a very small return on their money. In the past 2 weeks, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.

However, all that has changed.

The factor in TED now is T bills being very near 0.

Now, in the United States the Fed says it will buy commercial paper; that is, it will buy up loans made to U.S. companies...or even loan the money directly to troubled firms. And not just financial firms. Any companies can apply -industrials, tech, retailers, etc. - just as long as they meet the criteria of "too big to fail". Whatever that means.

In the EU, government ministers have pledged to lend UNLIMITED amounts of money to banks after yesterday's coordinated rate cut failed to have any meaningful effects. Really, they should not be using words like "lend". Those are taxpayer donations to help ailing banks that will in all likelihood disappear down the drain.

In the UK, the government has had a long history of socialist intervention. British taxpayers barely protested when the authorities nationalized Northern Rock and HBOS. Now, they are being forced to subsidize the losses of Icelandic bank depositors after the entire country failed.

And the natural result of all these government interventions? Massive inflation.

http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP:IND

The Debts of the Spenders: The LIBOR Cartel

What is the cost of money? Or, to put it another way, what is the cost of debt? There are 2 answers to this question.

1) On the private side -LIBOR is an important interbank lending rate set by the private sector. It is rougly comparable to the US Fed Funds rate.

$USD LIBOR is set by the BBA, or British Banker's Association, a cartel of commercial banks every day. While the BBA has over 200 members and scores of associates, the inner circle which determines the private cost of short term US debt is composed of only the 16 largest members.

JPM, C, and BAC sit on this panel (GS and MS may sit here too since they are now retail banks. Their real status is still up in the air). The average of the middle 8 banks quotes is the daily rate reported by Reuters.


For years, LIBOR tracked the Fed Fund rate....until this year.

Starting in January LIBOR started diverging big time.

Like any cartel, the members inevitably resorted to undercutting and hiding information from each other to gain an advantage. Chief among these problems were members hiding the true extent of their Level 3 Assets.

The reason why LIBOR is so important is because it is the benchmark used as an index for most OTC derivatives....such as the $600 or $800 Trillion in CDS.

Conclusion:

Libor members sit on a panel that determines interest rate swaps...while also being the same counterparties to such swaps.

LIBOR "supposedly" averages the rate by taking the middle 8 and tossing out the top and bottom 4 quotes. However, there is still room for abuse ESPECIALLY when all the cartel members have been hiding Level 3 assets from each other.

2) On the government side - Coming soon.