Crisis may make 1929 look a 'walk in the park' - Telegraph

What happens when the global bond markets decide to shut down for a protracted period?

Banks and financial organizations still hold their assets, though nobody wants to buy them or even trade for something else.  This leaves the organization with a valueless asset, until the market can bear it again.

With all of these assets supporting capital requirements, revaluating them has some important implications.  Banks are required to hold a certain amount of capital according to Basel regulations, and if this doesn't happen, liquidations occur.

But what if there is still no market for the liquidated assets?

Managers and execs will probably decide to go on holidays for awhile...

Glance at the more or less healthy stock markets in New York, London, and Frankfurt, and you might never know that this debate is raging. Hopes that Middle Eastern and Asian wealth funds will plug every hole lifts spirits.

Glance at the debt markets and you hear a different tale. Not a single junk bond has been issued in Europe since August. Every attempt failed.

Europe's corporate bond issuance fell 66pc in the third quarter to $396bn (BIS data). Emerging market bonds plummeted 75pc.

"The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history," says Thomas Jordan, a Swiss central bank governor.

Crisis may make 1929 look a 'walk in the park' - Telegraph

Another scary graph... the music stopped in August and it has been eerily silent ever since.

RGE Monitor - Brad Setser's scary graph

Doesn't this look like something a bunch of lemmings would walk off of?

Basically a drought in US bond purchases is posing a problem with liquidity.

A big drought.  A really, really big drought.

The fall in demand for US corporate debt (especially from the UK) has been especially sharp.

The sharp fall in total bond inflows line from the preceding two graphs is, of course, a reflection of the fall in total inflows to the US in my scary graph. It is based on the same underlying data. The higher frequency graph – updated for October – isn’t quite as scary as before, but it doesn’t suggest rude health either.

RGE Monitor

Finally Woken: Donald Trump's Scotland Golf Plan Rejected.... and then the council was fired.

Trump was talking this one up at the Wealth conference I went to last month. Seems he bought 2000 acres of pristine Scottish waterfront years ago, and some 'loonie' farmer dressed in a kilt was stirring up a ruckus because he wanted to develop it.

Looks like the farmer had his way with ye! Gosh and Begorrah! With heart, faith and steel. In the end there can be only one.

Donald Trump's Scotland Golf Plan Rejected

It's not everyday Donal Trump faces a rejection. But his plan to build a £1 billions (that's Rp 20 trillions or about one-third of Indonesia State Budget of Revenues and Expenditures!) golf complex and housing development at the Menie Estate in Aberdeenshire was rejected last weekend by Aberdeenshire Council's infrastructure committee.

Source: Finally Woken: Donald Trump's Scotland Golf Plan Rejected

I got a really bad taste in my mouth when he mentioned this project at the conference, and it wasn't from the crappy overpriced food I ate in the Jacob Javitts Centre. In my opinion it was disgusting that something of such beauty and natural heritage could be turned into a golf course & housing complex. Golf courses are notorious for their water consumption and effects on the environment, not to mention high-density housing & recreational development.

I do appreciate Trump's view that golf courses are beautiful things and he's going to put a bunch of money into the country and revitalize the economy. However, there has got to be a better way to appreciate your heritage without affecting the environment drastically. Why not build a Trump eco-university with a mini-putt course? The world's largest roadside attraction? Or just buy St. Andrews?

Of course I'm biased because I suck at golf.

Now if they made the ball 1 foot around and played golf in an undeveloped field maybe it would be more fun, and perhaps I could get it in the net. It could be friendly to the environment too... or at least friendlier than a water-sucking golf course.

A place I went to in the summer really showed me how one teacher and a few students with very little money can restore an area and turn it into one of the Seven Best Views in Canada.

Cape Enrage is next to Alma, New Brunswick. I stayed in Alma in the summer of 2007, at the only hotel, next to the only gas station. There wasn't a whole lot to do in Alma. I asked the hotel clerk what he did for fun there.

The clerk, in his late 30s, said to me,

"There's a nice golf course up the hill. I try and go there twice a week when the weather is nice."

Needless to say, I didn't go golfing. I did, however, go to Cape Enrage and Fundy National Park. The whole area is probably one of the quietest and most serene places in the world (except for the constant sound of surf crashing on the rocks).

The main thing to do in the area was to watch the tides come in.... 30 feet per day!

According to one of Trump's associates in the video, "I think it was the people in Aberdeen, the Shire, that were really let down today."

Hopefully the people of Scotland and the council of Aberdeenshire will learn a lesson from Costa Rica, turtles are way more important than golf courses.

They haven't learned quite yet. The project is still a go.

Council Leader Anne Robertson welcomed the decision, saying: "What is important in all this is securing the economic future of the north-east of Scotland.

The application by Trump International Golf Links Scotland was recently rejected by the Council’s Infrastructure Services Committee (ISC) and was called-in by the Scottish Government.

Support for the plans will be put forward by the council as an enhanced consultee as it is now no longer the planning authority, a role now fulfilled by the Scottish Government.

This explains why the hotel we stayed at in Costa Rica ran out of water during my friend's wedding.

If you get a chance, go see New Brunswick's Cape Enrage. You can even play a round at the nine-hole they have down the road. There's no traffic, but watch for bears & moose.

And the Canadian Dollar is still below par right now... at $0.9978 per Amero.

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Update: Apparently the people of Aberdeenshire are 93% in favour of the development. Of course, they did interview a window washer in the news clip. What's he going to do? Turn down a billion pounds to develop some craggy rocks? You'd have to be nuts to do something like that! Maybe dance around in a field wearing a kilt? :)

There's no way this course will get vetoed now.... Trump threatened to send it to Ireland and sic'ed his lawyers on the council, and frequently brings up his mother in talking about the deal. And he's only going to build one course in Europe anyway... because, according to him, "it's too far away."

Yeah, eeecht hoors frae new york is aways Ah guess. It is aw abit scottish heritage thocht.

http://www.youtube.com/watch?v=uV3OtNzkasU

Th' comments fur thes video bonnie much sum up th' varioos opinions. reality is funnier than fiction.

Sorry, foond th' Scottie Translator. Aw future postings will noo be in scottish.

Update: they fired th' guy fa was glaikit enaw tae vote against trump an' turn Scootlund intae a potential Venezuela fur business.

Update: Here's a thread from Aberdeen locals with seemingly close connections to the project.

Update: McConnell 'broke rules' on £300m Trump golf deal

Salmond to appear at Trump probe

Scotland's name globally besmirched over the Trump nonsense

Something tells me Michael Forbes the farmer and his 83 year-old mother are going to become tourist attraction all by themselves. He would be well advised to start building his mini putt course and put up some road signs.

Trump and .... Conrad Black's email?

Mish's Global Economic Trend Analysis: Fitch Discloses Its Fatally Flawed Rating Model

Good article that predicted the subprime failure.. and shows the dependency of banks on their models.

Questions To Ponder

• How many billions of dollars will be lost because of absurd pricing models?
• How can it be that an entire system of investment decisions are based on ratings that the ratings companies tell everyone not to use for investment purposes?
• Were the ratings companies grossly incompetent or just foolish?

Mish's Global Economic Trend Analysis: Fitch Discloses Its Fatally Flawed Rating Model

CADUSD=X Chart - Yahoo! Finance

Looks like we may be in for a pop in the Canadian Dollar again....  an uptick in RSI along with a spike yesterday seems to indicate moves above par for the next little bit. 

Link to CADUSD=X Chart - Yahoo! Finance

FT.com / Home UK / UK - Can managers reduce the risks of lean production?

I wonder if the same goes for the production of credit & the money supply?

Accepting the relationship between risk and stock levels is key, but reducing stock levels without first reducing risk is tantamount to commercial suicide.

FT.com / Home UK / UK - Can managers reduce the risks of lean production?

Another article from Roger Martin, Dean of Rotman School of Management, that provides a contrarian view to portfolio management theory.  Michael Lee Chin bets the farm on 1 stock & wins.

http://www.rotman.utoronto.ca/rogermartin/OM_Excerpt1.pdf

The part I like the best is the comment that "The Chinese character for 'crisis' combines the characters for 'danger' and 'opportunity'".  I wonder how you write Fear & Greed in Mandarin?

Organization of Debt into Currency by Charles Holt Carroll

Sounds like a dry book to me, but it's strikingly similar to the current situation with CDOs, SIVs, and other derivative products. 

But the difference is that it was first brought up around 1858. 

Although both borrower and lender cannot have the same dollar at the same time, both are privileged to check upon it, and may offer it for purchases; thus it produces the same effect upon market prices, by degrading the exchange value of money, as double the amount of gold and silver in the hands of individuals. A sum thus available at sight by a check on the bank is as much currency as the bank note deposited in one's pocket.

Source: Organization of Debt into Currency by Charles Holt Carroll

Ever wonder why it takes a day to get your savings transferred to your chequing?  Perhaps it's because savings accounts don't really have any money in there.  You are loaning the bank money, which it "sweeps" out of your account on a regular basis, lends out, bundles into derivative products, gambles on the markets, or pays its employees & shareholders.  Your bank balance is just a computer printout until you sweep the money back into your hand from an ATM.  It duplicates, triplicates, fabricates the currency until it is many times leveraged. 

A similar thing happens to your chequing account, though on a smaller scale, since some reserves are sometimes required.

What if the money you're depositing isn't really anything either? 

"The term "deposit," as applied to the amount at the credit of a borrower, is in truth a misnomer, for the borrower deposits nothing—there is no money in the transaction; it is simply an exchange of debt. Yet it is effectually currency to be used as equivalent to coin at any moment. In event of a bank contraction, however, it is apt to become a most embarrassing claim upon both bank and borrower, for real dollars that are nowhere—that never existed."

This is another situation currently happening in the markets.  Lack of liquidity in derivative instruments has forced some financial institutions to write off their "mark to model" assets at a heavy discount.  Because they need a certain amount of capital or assets to maintain their credit worthiness or to stay within loan limits, this is causing some serious crunches.

"But the effect upon the general commerce and the individual prosperity and happiness of the people of this country is our concern in this matter. Nothing will prevent the precious metals from going where there is an effective demand for them, and nothing will prevent them from leaving the country where such demand does not exist. If we do not use them for currency they will go where they have that use in addition to other uses; for, like all other commodities, where they possess the highest utility they possess the highest value, and under the keen instincts of commerce they are as obedient to the law of value as matter to the law of gravitation. They only are money; a promise to pay them is debt, and that debt is not equivalent to money, unless coin is exchanged for or remains deposited and pledged to meet it."

This is a bit antiquated, as currency has really become a psychological gold.  Because so many instruments, assets, and debt are traded with currency, gold is forgotten in many circles.  It is only when there is a crisis in the markets that the gold factor is really hyped.  The key reason?  Maybe it's to sell more debt to dig for more gold... and use the debt and assets raised to purchase other things.  Really it's all in your head, as is the concept of money.

The other thing that was found when analyzing these complex financial instruments, was that the bundles they had of debt were sometimes duplicated or triplicated, or worse.  Your mortgage was sold to one party, then bundled and sold to another.  They both paid for the same virtual good, and will expect to hold title to that good.  When things will get interesting is when they decide to pick up their purchase, or audit their books to figure out what the heck it was they actually paid for.

The auditing is what happened in August.  Inventory didn't go so well that month.

"We cannot eat our cake and have it too; this truth was settled to the satisfaction of each one of us in the nursery; nevertheless, we try the same absurdity in principle in our currency, and the consequences are demonstrated in financial revulsions, such as that which befell the country last fall. We must accept money or debt for currency; we cannot have them both for the same sum at the same time."

Again, this was the 1850s.

List of Canadian Securities Dealers

Here is a list of Canadian Securities Dealers. 

Some facts about Canadian Securities taken from this list.

Ontario has the bulk of securities dealers with 126 firms.  If you want to corner the market and be a deep thought in a shallow pond, go to Saskatchewan, Manitoba, or Nova Scotia.

There are around 27 cities in Canada with securities dealers.

The largest?  Toronto of course... nothing's got Bay St. beat.

A suprise?  Westmount Quebec has 3 dealers.  Quebec City has 2.  There's a dealer in Uxbridge, Ontario (First Leaside Securities Inc) and Red Deer Alberta (Retire First Ltd).

There are a few Americans on the list, some with Canadian company names, others with Canadian company addresses (but American head offices).

Liquidnet Canada is stationed in New York.

optionsXpress Canada, which I just printed out my application for, is in Chicago.  I never did finish my e*Trade application, even though I attempted it 3 times.

If you're looking for a security dealer and you're not happy with your bank, one of these should do.

The Global Financial Market's play the Telephone Game

Ummm.... does this work in real life?  It never worked when we played the telephone game in school.  By the time the conversation got to the end of the line it would be a mangled mess. 

The so-called ''originate-to-distribute'' business model involves a chain of stages with different counterparties transferring risks between them. At the outset of the chain, a mortgage company provides a housing loan to a borrower, categorised as ''sub-prime'' due to their less creditworthiness. Then, the lender, or the originator of the mortgage loan, sells it to commercial banks and investment banks, which then bundle different loans together to form securitised products such as mortgage-backed securities (MBS) and collaterised loan obligations (CDOs). In this process, these arrangers of securitised products deal with credit rating agencies to obtain ratings from them. In the final phase of the process, these securitised products are sold to end-investors through distributors, typically large investment banks. At each stage of this process, credit risk is transferred from one party to its counterparty. Supposedly, accurate information on the risk should also be transferred from one party to another in due manner in this process.

Source: The Global Financial Market... : FSA

The Japanese Commissioner to Japan's Financial Services Agency (FSA), Takafumi Sato agrees.

In reality, however, this may not have been the case. Rather, there is a possibility that in many cases information was transmitted in a distorted manner and accurate information was not transmitted between counterparties. For a party who was going to transfer credit risk by selling its claims to the counterparty, there might have been little incentive to carefully examine the quality of the credit due to be sold. Moreover, there may have been disincentives for the party in question to disclose accurate information to its counterparty. Thus in many cases, end-investors, and probably arrangers and distributors as well, may not have been adequately informed of, and may not have fully understood, the true nature of the risks they were bearing.

 

Could your home foreclosure cause a hedge fund to fail overseas?  This is the Butterfly Effect taken to a new level.

CXOAG Trading Calendar - December

 Looks like vacation days are good trading days in December...

Trading Calendar - December

The following chart shows the average month-to-date percentage change in the S&P 500 index by trading day during December from 1990 through 2006. Day 0 represents the November close. The index during December tends to be quite positive, with the gains coming mostly at the beginning of the month and toward the end of the month (Santa Claus rally). We have not used data for trading day 22, because most Decembers do not have 22 trading days. Also, sample size is only 12-17 for specific trading days, so these results are only weakly suggestive rather than predictive. For 1990-2006, 14 Decembers have been winners and only three losers.

Source: CXOAG Trading Calendar - December

Financial Consumer Agency of Canada - Money Tools

 This service allows you to compare bank fees and credit cards in Canada.

 

Cost of Banking Guide - For quick and direct access to information on current banking account packages available in Canada. Find out which one works best for you.

Credit Cards and You - Find the credit cards that best suit your spending habits. Compare cards in detail — side-by-side, feature-by-feature.

Source: Financial Consumer Agency of Canada - Money Tools

Innocent bystanders and government bailouts

 Don Kohn, Vice Chair of the Fed, talks about justifications for the bailout of lenders and borrowers in a November 28, 2007 meeting with the Council on Foreign Relations.

Are these innocent bystanders (lenders) really that innocent?  Didn't they know that a resetting ARM mortgage is a risky way to lend money, and instead of just keeping hands in the pockets of their customers they were pulling off their clothes? Are the banks planning on getting in the business of selling used clothing?

How about the borrowers?  To a lesser extent, they should have understood that there's no such thing as a free lunch, and that debt is usually a bad thing, especially when there's a time-delay bomb attached to the loan.  But free money is hard to refuse.  And being able to borrow free money and make payments on a house you can't affort is a great thing while it lasts.  Especially if you don't need to justify why you need to borrow the money.

The FOMC vice-chair speaks on morals...

The first issue I want to discuss is moral hazard. Central banks seek to promote financial stability while avoiding the creation of moral hazard. People should bear the consequences of their decisions about lending, borrowing, managing their portfolios, both when those decisions turn out to be wise and when they turn out to be ill-advised. At the same time, however, in my view, when the decisions go poorly, innocent bystanders should not have to bear the cost.

And then goes into repricing assets for liquidity

In general, I think those dual objectives -- promoting financial stability and avoiding the creation of moral hazard -- are best reconciled by central banks focusing on the macroeconomic objectives of price stability and maximum employment. Asset prices will eventually find levels consistent with the economy producing at its potential, consumer prices remaining stable, and interest rates reflecting productivity and thrift.

And then he compares the tech bubble to the housing bubble

Such a strategy would not forestall the correction of asset prices that are out of line with fundamentals, nor would it prevent investors from sustaining significant losses. Losses were evident early in this decade in the case of many high-tech stocks, and they are in store for houses purchases at unsustainable prices and for mortgages made on the assumption that house prices would rise indefinitely.

Does this mean they're going to pay me back the money I lost on bid.com & Nortel?  Whohoo!

Then he goes on to Joe Economy, and how he is currently being held hostage. 

To be sure, lowering interest rates to keep the economy on an even keel when adverse financial-market developments occur will reduce the penalty incurred by some people who exercise poor judgment. But these people are still bearing the cost of their decisions, and we should not hold the economy hostage to teach a small segment of the population a lesson.

The solution?  Bail out the greater fool!

Third topic: Liquidity provision in bank funding markets. Central banks have been confronting several issues in the provision of liquidity in bank funding. When the turbulence deepened in early August, demand for liquidity in reserve pushed overnight rates in interbank markets above monetary policy targets. The aggressive provision of reserves by a number of central banks met those demands, and rates returned to targeted levels.

In the United States, strong bids by foreign banks and dollar-funding markets early in the day have complicated our management of this rate. And demands for reserves have been more variable and less flexible in an environment of heightened uncertainty, adding to volatility in the overnight rate.

In addition, the Federal Reserve is limited in its ability to restrict the actual federal funds rate to within a narrow band because we cannot, by law, pay interest on reserves for another four years.

That statement caught my eye.  Paying interest on reserves?  Does that mean that bank reserves are now loans to the government rather than insurance against defaults?  That's got to be a substantial drain on taxpayers dollars to pay for the security of the banking system.  Maybe the money's coming from somewhere else?  Peter or Paul?  I hope I'm going to get some interest paid to me when my auto insurance comes up for renewal, instead of having to pay them monthly interest for something I don't really want anyway, but I'm legislated to have for my own protection. 

Of course, if I wasnt legislated to have insurance, I probably wouldn't have had it when my car was stolen or broken into, which caused me to keep buying more expensive car stereos, which caused them to keep getting stolen, which caused my premiums to go up, which caused my personal reserves to go down.  Note to self: next time, don't buy the most stolen car of the year and don't drive around with the stereo blaring.

Most Stolen Autos.

Reminds me of the story one of my former co-workers told me about his first job working for the government out of college.  He found out his starting salary was $28,000 per year.  First thing he did?  Bought a $27,000 Camaro.

His dad was driving around the car by the next year.

 

Ultimately the banks wouldn't be paying much interest anyway, since they may eliminate reserve requirements altogether.

MR. MEYER: Okay. Well, I hope you appreciate that that was an absolutely brilliant speech. It was incredibly forthcoming. It sounded nothing like anything you've heard since the last meeting from other FOMC members. That's not a surprise, because the only FOMC members that can change the message are the vice chairman and the chairman. And that was an absolutely brilliant speech. I'm breathless. This has answered all the questions I had, so I don't know what I'm doing up here. (Laughter.)

Source: C. Peter McColough Series on International Economics (Transcript) - Council on Foreign Relations

I'm out of breath here too... More on Financial Services Regulatory Relief from the minutes of October 25, 2006 Fed meeting.

The Chairman noted that the President had recently signed the Financial Services Regulatory Relief Act of 2006, which among its provisions gave the Federal Reserve discretion, beginning October 2011, both to pay interest on reserve balances and to reduce further or eliminate reserve requirements. The Act potentially has important implications for many aspects of the Federal Reserve's operations and the Chairman asked Vincent Reinhart, Director of the Division of Monetary Affairs, to form a committee of Federal Reserve System staff to consider these issues.

http://www.federalreserve.gov/fomc/minutes/20061025.htm

 

Ignorance is bliss, and recent Fed transparency & bank transparency changes are the opposite of ignorance.  Not sure if it is a good thing or not.  The Vice Chair isn't sure either...

But I do think the -- and expected some year-end pressures, but I have to admit -- speaking for myself and certainly not for the committee -- the degree of deteriorating that's happened over the last couple of weeks is not something that I personally anticipated. I think the losses that have been announced that seem entrain and have been announced were greater than people expected. This raised questions about financial institutions, how much capital they had, how vigorous they would be in pursuing new loans. Financial institutions became more cautious. And I think this process is one that we're going to have to take a look at when we meet in a couple weeks.

And my favourite question.

MR. MEYER: Okay. My last substantive question: Do you believe there was a Greenspan put?

Let me answer that with what he is obviously going to say anyway... You so crazy!

The questions after the interview are even more forthcoming.  US Dollar valuation, inflation, central bank intervention. Basel II implementation, etc.

Read the full transcript here.  C. Peter McColough Series on International Economics (Transcript) - Council on Foreign Relations

Pink Sheets: Disaster Preparedness Systems (DPSY)

This just proves that it makes sense to go public if you're crappy with your finances.

Let's look at the balance sheet where we see forty-four dollars in cash and $1,090 due from a related party.

During the nine month period ended August 31, 2007, the Company advanced $1,077 (2006 - $Nil) to a relative of a director. The amount is unsecured, non-interest bearing and due on demand. [Note 7 c]

Dude, pay the damn loan back!

Pink Sheets: Disaster Preparedness Systems (DPSY)