Emergency funding aims to keep subprime woes from spreading.
By Ron Scherer | Staff writer of The Christian Science Monitor
from the August 10, 2007 edition
Page 1 of 2
New York - For the first time since 9/11, the Federal Reserve has had to step into the financial system with emergency funds to calm roiled credit markets.
The move Thursday followed an injection of capital into Europe's banking system. On both sides of the Atlantic, the central bankers began to recognize a crisis in confidence in the market known as asset-backed securitization, which funds everything from housing to student loans and has outstanding debt of more than $4.2 trillion. The banks' moves are seen as a signal that they're willing to provide liquidity to any bank that needs it.
By acting as lenders of last resort, the world's two largest central banks are trying to keep a liquidity crunch in this sector from spreading to the rest of their economies. If the crunch were to become more widespread, interest rates would rise and banks would have to pay more to fund loans, slowing the economy. In Europe already, interest rates skyrocketed to the highest level in six years after a major French bank froze three funds that had invested in asset-backed securities.
"It's a very significant event to have the Fed inject liquidity into the system," says Mark Zandi, chief economist at Moody's Economy.com. "It indicates a very high level of stress in the financial system."
The Fed acted because investors had stopped buying asset-backed securities following the difficulties in the US mortgage market.
The securitization industry, which involves financial institutions around the globe, provides liquidity that helps fund loans for housing, automobiles, credit cards, and student loans – and anything else where an asset can be bundled into a package and resold to other investors.
The crisis in the industry began to mount after the collapse of many mortgage lenders in the subprime market. That market makes loans to low-income people or those with less than stellar credit ratings. The crisis escalated after the collapse of American Home Mortgage, which was not in the subprime market. By early this week, buyers of overnight debt, which banks use to fund lending activity in the securitization market, had backed away. This caused BNP Paribas, a major French bank, to freeze withdrawals from three of its funds Thursday because it could not value the fund's assets.
The problems at BNP Paribas, a major European bank, caused the European Central Bank to inject $130.2 billion into the financial markets, according to Bloomberg News.
As the BNP problems suggest, sizable chunks of the risky mortgage securities are outside the US. "A lot of them were packaged and sold overseas," says Lacy Hunt, chief economist at Hoisington Investment Management Company, in Austin, Texas. "They were seeking higher yields."
Page 1 | 2 | Next Page
Saturday, August 11, 2007
The World's Biggest Market - Volatility Ahead
By Barry Downs
Aug 10 2007 2:42PM
www.kitco.com
Stock market investors, until just recently, thought they were well on the road to an uninterrupted banner year for 2007. In nominal terms, the biggest followed index, the Dow Jones Industrials Average, closed at 14,000.41 on July 19th. But in a world where central banks have a policy of perpetual monetary inflation, nominal values don’t count and its real values which constitute the bottom line. In real terms, the Dow would need to rise to above 14,200 just to break even and to offset the cumulative inflation, which has occurred since the previous DOW high which occurred in 2000.
The mantra of stock market bulls has been expanding global corporate earnings. Bond market investors, in the past period of cheap money, developed an insatiable appetite for the world’s riskiest and illiquid debt instruments. US bond investor’s mantra has been the relatively low historic inflation levels reported by the government. But, while everyone knows government inflation numbers are skewed, the rush into high risk debt instruments has been unprecidented.
Total US dollar daily turnover of all US stocks and the US government bond market is running just under $400 billion, but as we pointed out earlier in the year in our report entitled, “The World’s Biggest Market,” (Kitco 2/2/07) the foreign currency exchange market (FX), is indeed the worlds biggest market and is the fastest growing of all markets in global US dollar terms. The FX market has an average daily turnover, in US dollar terms, of over $3 trillion, which is more than 20 times that of global equity markets.
US money managers, who control about $20 trillion in assets, continue to be the biggest US dollar diversifiers. Over the past four years those money managers have cumulatively diversified over $1.2 trillion into foreign currencies. Foreign currency traders make money when there is volatility in foreign exchange markets. They make a lot of money when volatility levels rise and it now appears that a major sea change is about to occur in an area known as the yen carry trade, and that change will usher in considerably higher levels of volatility in FX markets.
The re-pricing of credit risk, which got underway in late July, will likely be the event to curtail the phenomenon of the yen carry trade estimated at upwards of $1 trillion. The yen consequently will lose its appeal as a vehicle in which to borrow cheaply. Higher yielding currencies like the Aussi and New Zealand dollar, which have been the recipients of carry trade hot money, will then begin adjusting downward.
The carry trade phenomenon has involved borrowing yen at 0.50% and investing in places like Australia which pays 6.25%, New Zealand which pay 8.25%, or Iceland with rates of 13.5%. Popular with hedge funds, which operate on a highly leveraged basis, the carry trade not only invests in high yielding currencies, but gambles in a wide array of markets where they think money can be made.
As long as the yen doesn’t appreciate, the carry trade is all right, but the yen in times of re-pricing credit risk now appears prone to appreciation and that places increasing pressure on any investors holding leveraged yen short positions.
So far the yen’s appreciation has impacted on the New Zealand dollar, which is down about 5% since late July. The yen’s tendency to strengthen is becoming correlated with bouts of stock market weakness, and when the currency’s rise becomes steady, major adjustment will show up in the Aussi dollar, New Zealand dollar, and Icelantic krona. If the time has come in the highly leveraged world economy (the US being the Summa Cum Laude of leverage) and economies succumb to the approaching credit crunch, deflationary forces could overwhelm central bank intervention. In that scenario, commodity prices will fall and the commodity currencies like the Canadian and Austrian dollar will weaken and only add to high volatility levels in FX markets.
The unwinding of the yen carry trade is out there looming and may begin sooner rather than later. The bank of Japan is expected to raise interest rates to 0.75% in late August, which will eat into the differential in interest rates, the carry trade exploits, but the yen’s appreciation is the real key to the unwinding process.
The relatively low levels of currency volatility in the past period will end as the enormous debt pyramid amassed over many years begins to unravel in one shock after another. Rising volatility levels in FX markets are certain to occur as currency readjustments kick in and speculators flee those currencies representing countries with the biggest debt problems. Perhaps kicking off the volatility will be the unraveling of the carry trade hedge funds. Pension and profit sharing funds and investors seeking to protect capital will continue to seek the diversity and liquidity of the world’s biggest market, the FX market..
Massive excesses in the world’s credit market, inclusive of mortgage debt, weren’t created over night and the fallout is likely to continue for years, producing a period of rolling volatility in all markets. Rising fear levels will reduce the desirability of risk and a full blown credit crunch is the likely outcome.
Fund managers with a proven track record in the FX market will be highly sought after and are sure to capitalize on volatile market conditions the world will experience in the period ahead. There is a standout Nevada based currency fund which comes to mind, with a 27 year track record and which boasts a 40% annual compounded return. Fund managers of that stature will be hard to find.
Barry Downs
(775) 852-3875
e-mail: downsb@prodigy.net
Ronald Gilchrist
(406) 493-0612
e-mail: rgilchris6135@bresnan.net
Aug 10 2007 2:42PM
www.kitco.com
Stock market investors, until just recently, thought they were well on the road to an uninterrupted banner year for 2007. In nominal terms, the biggest followed index, the Dow Jones Industrials Average, closed at 14,000.41 on July 19th. But in a world where central banks have a policy of perpetual monetary inflation, nominal values don’t count and its real values which constitute the bottom line. In real terms, the Dow would need to rise to above 14,200 just to break even and to offset the cumulative inflation, which has occurred since the previous DOW high which occurred in 2000.
The mantra of stock market bulls has been expanding global corporate earnings. Bond market investors, in the past period of cheap money, developed an insatiable appetite for the world’s riskiest and illiquid debt instruments. US bond investor’s mantra has been the relatively low historic inflation levels reported by the government. But, while everyone knows government inflation numbers are skewed, the rush into high risk debt instruments has been unprecidented.
Total US dollar daily turnover of all US stocks and the US government bond market is running just under $400 billion, but as we pointed out earlier in the year in our report entitled, “The World’s Biggest Market,” (Kitco 2/2/07) the foreign currency exchange market (FX), is indeed the worlds biggest market and is the fastest growing of all markets in global US dollar terms. The FX market has an average daily turnover, in US dollar terms, of over $3 trillion, which is more than 20 times that of global equity markets.
US money managers, who control about $20 trillion in assets, continue to be the biggest US dollar diversifiers. Over the past four years those money managers have cumulatively diversified over $1.2 trillion into foreign currencies. Foreign currency traders make money when there is volatility in foreign exchange markets. They make a lot of money when volatility levels rise and it now appears that a major sea change is about to occur in an area known as the yen carry trade, and that change will usher in considerably higher levels of volatility in FX markets.
The re-pricing of credit risk, which got underway in late July, will likely be the event to curtail the phenomenon of the yen carry trade estimated at upwards of $1 trillion. The yen consequently will lose its appeal as a vehicle in which to borrow cheaply. Higher yielding currencies like the Aussi and New Zealand dollar, which have been the recipients of carry trade hot money, will then begin adjusting downward.
The carry trade phenomenon has involved borrowing yen at 0.50% and investing in places like Australia which pays 6.25%, New Zealand which pay 8.25%, or Iceland with rates of 13.5%. Popular with hedge funds, which operate on a highly leveraged basis, the carry trade not only invests in high yielding currencies, but gambles in a wide array of markets where they think money can be made.
As long as the yen doesn’t appreciate, the carry trade is all right, but the yen in times of re-pricing credit risk now appears prone to appreciation and that places increasing pressure on any investors holding leveraged yen short positions.
So far the yen’s appreciation has impacted on the New Zealand dollar, which is down about 5% since late July. The yen’s tendency to strengthen is becoming correlated with bouts of stock market weakness, and when the currency’s rise becomes steady, major adjustment will show up in the Aussi dollar, New Zealand dollar, and Icelantic krona. If the time has come in the highly leveraged world economy (the US being the Summa Cum Laude of leverage) and economies succumb to the approaching credit crunch, deflationary forces could overwhelm central bank intervention. In that scenario, commodity prices will fall and the commodity currencies like the Canadian and Austrian dollar will weaken and only add to high volatility levels in FX markets.
The unwinding of the yen carry trade is out there looming and may begin sooner rather than later. The bank of Japan is expected to raise interest rates to 0.75% in late August, which will eat into the differential in interest rates, the carry trade exploits, but the yen’s appreciation is the real key to the unwinding process.
The relatively low levels of currency volatility in the past period will end as the enormous debt pyramid amassed over many years begins to unravel in one shock after another. Rising volatility levels in FX markets are certain to occur as currency readjustments kick in and speculators flee those currencies representing countries with the biggest debt problems. Perhaps kicking off the volatility will be the unraveling of the carry trade hedge funds. Pension and profit sharing funds and investors seeking to protect capital will continue to seek the diversity and liquidity of the world’s biggest market, the FX market..
Massive excesses in the world’s credit market, inclusive of mortgage debt, weren’t created over night and the fallout is likely to continue for years, producing a period of rolling volatility in all markets. Rising fear levels will reduce the desirability of risk and a full blown credit crunch is the likely outcome.
Fund managers with a proven track record in the FX market will be highly sought after and are sure to capitalize on volatile market conditions the world will experience in the period ahead. There is a standout Nevada based currency fund which comes to mind, with a 27 year track record and which boasts a 40% annual compounded return. Fund managers of that stature will be hard to find.
Barry Downs
(775) 852-3875
e-mail: downsb@prodigy.net
Ronald Gilchrist
(406) 493-0612
e-mail: rgilchris6135@bresnan.net
The Aborted Italian Gold Sales Plan
By Julian D.W. Phillips
Aug 10 2007 3:14PM
www.goldforecaster.com
Sales of gold by European Central Banks are primarily for the adjustment of national reserves in terms of structure or size. They are not intended under the rules of the European Union, intended to pay the bills of the governments of Europe, so when the subject came up, after a consistent record of the Bank of Italy’s refusal to even contemplate the sale of the country’s gold reserves, everyone was surprised. The reality was suddenly the government of Italy wanted to put their hand into the country’s coffers in an exercise that would never have solved the country’s debt problems.
The Italian parliament approved a reserve plan allowing the government to look into using the Bank of Italy's substantial gold reserves to cut the country's huge debt. Italy has some 62% of its foreign exchange reserves value in gold at about 2,452 tonnes. The resolution inserted into Italy’s next budget committed the government to:
"Undertake, also in its relations with the European Union, a survey of all instruments useful to producing a significant reduction of the national debt, through agreed ways of using the reserves of the central banks, in gold and currency, in excess of that required by the agreement with the E.C.B. for the defense of the Euro." The wording suggested that Italy’s government would try to re-think at EU level the existing limitations on the use of the gold and currency reserves of Europe’s central banks. This was bound to ruffle the feathers of the European Central Bank!
The government plan aimed to cut Italy's debt to 103.2% of gross domestic product (GDP) in 2008 from 105.1% of G.D.P. this year, about €27 billion ($36.9 billion), using the central bank's gold and foreign exchange reserves. If Italy were to sell 1740 tonnes of its gold it would have achieved this target. However it would have taken four years to do this under the ‘ceiling’ limitation of 500 tonnes [if the C.B.G.A. is extended again under the same terms] provided Italy was the only seller, during which time we have no doubt the Italian’s debt would have risen past the present level]. This achievement undoubtedly would have been swamped by the underlying problems in the Italian economy within a smaller period of time. Italy's debt is the world's third highest in absolute terms. This plan was unlikely to change that.
Was this plan reasonable? Not at all. Italy has had a very long record of poor management of its currency management in common with other European countries. One of the saving graces of the country with such a record is that it had the wisdom to hold large gold reserves in case the record continued, with gold always there to bail them out of the mess. The Italians could have undertaken sales of gold after Budget day 2008, once the Italian government had approved their next year’s budget. There was room though for gold sales, under the present agreement, for around 370 tonnes in the last two years of the agreement, which runs through until September 26th 2009, but no more. This would have made the exercise pointless.
It appears old fashioned now to think that national spending behavior should be limited to stop the bleeding, then repayment of debt undertaken, from new income. In high debt situations the sight of gold reserves to politicians in Europe [except in Germany] seems impossible to resist. Add to that a complete lack of understanding of gold as savings for a rainy day and you get another repeat of governments grabbing the piggy bank.
Wisely, the Bank of Italy kept silent. Because the plan crossed the lines of the Maastricht Treaty and impinged on European Central Bank territory, it was up to the European Central Bank to put the Italian government in its place. Italy’s approach was not solely an attack on gold reserves, but an attempt to adjust the policies of the Eurozone and interference in the activities of the European Central Bank.
The European Commission, was sharp in its response on the use of the Bank of Italy’s gold reserves to lower the country’s debt, saying, "It is up to the E.C.B. to decide about the foreign reserves [including gold reserves] of the € area member states, in full independence." Did we detect more than just a re-establishment of the order of financial seniority here? We would hope so in the days when the composition of reserves is becoming a sensitive issue, with the importance of gold in extreme times rising through the levels of priorities in the face of a weakening $ and shaky credit?
The matter is now put to rest, leaving a substantial shortfall in the ‘ceiling’ of gold sales for the entire Central Bank Gold Agreement [2,500 tonnes] and the balance of announced gold sales to date short of that by around 400 to 500 tonnes.
Please subscribe to: www.GoldForecaster.com for the entire report.
****
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.
By Julian D.W. Phillips
Aug 10 2007 3:14PM
www.goldforecaster.com
Sales of gold by European Central Banks are primarily for the adjustment of national reserves in terms of structure or size. They are not intended under the rules of the European Union, intended to pay the bills of the governments of Europe, so when the subject came up, after a consistent record of the Bank of Italy’s refusal to even contemplate the sale of the country’s gold reserves, everyone was surprised. The reality was suddenly the government of Italy wanted to put their hand into the country’s coffers in an exercise that would never have solved the country’s debt problems.
The Italian parliament approved a reserve plan allowing the government to look into using the Bank of Italy's substantial gold reserves to cut the country's huge debt. Italy has some 62% of its foreign exchange reserves value in gold at about 2,452 tonnes. The resolution inserted into Italy’s next budget committed the government to:
"Undertake, also in its relations with the European Union, a survey of all instruments useful to producing a significant reduction of the national debt, through agreed ways of using the reserves of the central banks, in gold and currency, in excess of that required by the agreement with the E.C.B. for the defense of the Euro." The wording suggested that Italy’s government would try to re-think at EU level the existing limitations on the use of the gold and currency reserves of Europe’s central banks. This was bound to ruffle the feathers of the European Central Bank!
The government plan aimed to cut Italy's debt to 103.2% of gross domestic product (GDP) in 2008 from 105.1% of G.D.P. this year, about €27 billion ($36.9 billion), using the central bank's gold and foreign exchange reserves. If Italy were to sell 1740 tonnes of its gold it would have achieved this target. However it would have taken four years to do this under the ‘ceiling’ limitation of 500 tonnes [if the C.B.G.A. is extended again under the same terms] provided Italy was the only seller, during which time we have no doubt the Italian’s debt would have risen past the present level]. This achievement undoubtedly would have been swamped by the underlying problems in the Italian economy within a smaller period of time. Italy's debt is the world's third highest in absolute terms. This plan was unlikely to change that.
Was this plan reasonable? Not at all. Italy has had a very long record of poor management of its currency management in common with other European countries. One of the saving graces of the country with such a record is that it had the wisdom to hold large gold reserves in case the record continued, with gold always there to bail them out of the mess. The Italians could have undertaken sales of gold after Budget day 2008, once the Italian government had approved their next year’s budget. There was room though for gold sales, under the present agreement, for around 370 tonnes in the last two years of the agreement, which runs through until September 26th 2009, but no more. This would have made the exercise pointless.
It appears old fashioned now to think that national spending behavior should be limited to stop the bleeding, then repayment of debt undertaken, from new income. In high debt situations the sight of gold reserves to politicians in Europe [except in Germany] seems impossible to resist. Add to that a complete lack of understanding of gold as savings for a rainy day and you get another repeat of governments grabbing the piggy bank.
Wisely, the Bank of Italy kept silent. Because the plan crossed the lines of the Maastricht Treaty and impinged on European Central Bank territory, it was up to the European Central Bank to put the Italian government in its place. Italy’s approach was not solely an attack on gold reserves, but an attempt to adjust the policies of the Eurozone and interference in the activities of the European Central Bank.
The European Commission, was sharp in its response on the use of the Bank of Italy’s gold reserves to lower the country’s debt, saying, "It is up to the E.C.B. to decide about the foreign reserves [including gold reserves] of the € area member states, in full independence." Did we detect more than just a re-establishment of the order of financial seniority here? We would hope so in the days when the composition of reserves is becoming a sensitive issue, with the importance of gold in extreme times rising through the levels of priorities in the face of a weakening $ and shaky credit?
The matter is now put to rest, leaving a substantial shortfall in the ‘ceiling’ of gold sales for the entire Central Bank Gold Agreement [2,500 tonnes] and the balance of announced gold sales to date short of that by around 400 to 500 tonnes.
Please subscribe to: www.GoldForecaster.com for the entire report.
****
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Silver Forecaster / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.
Full Blown Liquidity Crisis Hits Gold and Stocks
By Chris Laird
Aug 10 2007 9:26AM
www.prudentsquirrel.com
As news of new subprime losses emerges around the world, stock markets are selling off. What began as the first string of losses at Bear Stearns has now become wider. In fact, it is beginning to look like a developing world liquidity emergency.
This week, the large French bank Paribas froze 3 funds worth about $2 billion after it became clear they cannot value the mortgage derivatives held by the funds. Soon after this news, EU banks and institutions started to flee to cash.
The ECB had to lend an unprecedented $130 billion to stave off a banking/liquidity crisis. European investors said the ECB was acting on an emergency basis.
EU Bankers said it was not just concerns about Paribas, but like the Bear Stearns situation, investors were very worried about how many more losses are developing.
The mortgage derivatives market is literally frozen, and no one will buy either the derivatives, nor buy mortgage originations, which is now paralyzing the US mortgage market.
US lender Country Wide is having trouble selling its new mortgage originations – and having to carry them. Country Wide accounts for a huge 25% of the US mortgage market.
Mortgage lenders are stating that the mortgage market is in worse shape than they have ever seen. Investors are not buying mortgages, causing lenders to have to carry their own loan originations – which is going to totally kill the US mortgage market if things are not fixed soon.
Alt A and sub prime mortgages (30% of US mortgages) are not selling – investors want nothing to do with them.
As these mortgage markets become illiquid, the trillions of dollars of mortgage derivatives – which EU banks have bought heavily – cannot be valued – which caused Paribas to have to freeze redemptions in their 3 funds which held those derivatives.
The implications of that situation is having broad and very bad ramifications to the world banking/financial industry which is wondering how bad things will get. Things are quite bad now, to say the least.
You cannot have multi $trillion markets just stopping – with out major building losses.
Of course, this spills over to stock markets as well as gold. The Yen is rising, and adding to the huge selling in general, as carry trade is being unwound in everything.
The USD, which had been moderately rising again, rose over .40 on the USDX (US dollar index) Thursday as investors fled to US Bonds. Libor rates in Europe rose an amazing half point. (Libor is private short term money banks and institutions use). It is said that will harm brokerages and other institutions who need short term money.
Gold and precious metals are selling off again because funds and institutions are fleeing into cash, and gold is a liquid asset that they can sell. There was so much demand for cash in the EU that the ECB had to lend $130 billion, and said they will supply unlimited money if necessary.
The ramifications of the US mortgage derivatives losses are snowballing, and it is being said that this is unprecedented. The present situation has already been compared to the 1987 financial crash in severity.
We at Prudent Squirrel have been talking about getting more liquid for over a month. In our last news letters and alerts, we discussed the impending market liquidations due to the huge losses in the mortgage derivatives market. In the last several weeks we have been sending alerts to subscribers that more serious stock and gold selling is in the cards. Our alerts sent early this week anticipated both the US stock selling as well as gold’s sell off. We anticipated this latest 2 week bout of world market selling two days before it began in a Tuesday July 24 alert, calling for a severe sell off similar to the February 27 market crashes.
The PrudentSquirrel newsletter is Chris Laird’s macro economic and gold commentary. Subscribers get 44 newsletters a year published Sunday, as well as mid week email market alerts as needed. Email alerts are not guaranteed delivery.
Stop by and have a look.
Christopher Laird
Editor-in-Chief
www.PrudentSquirrel.com
Aug 10 2007 9:26AM
www.prudentsquirrel.com
As news of new subprime losses emerges around the world, stock markets are selling off. What began as the first string of losses at Bear Stearns has now become wider. In fact, it is beginning to look like a developing world liquidity emergency.
This week, the large French bank Paribas froze 3 funds worth about $2 billion after it became clear they cannot value the mortgage derivatives held by the funds. Soon after this news, EU banks and institutions started to flee to cash.
The ECB had to lend an unprecedented $130 billion to stave off a banking/liquidity crisis. European investors said the ECB was acting on an emergency basis.
EU Bankers said it was not just concerns about Paribas, but like the Bear Stearns situation, investors were very worried about how many more losses are developing.
The mortgage derivatives market is literally frozen, and no one will buy either the derivatives, nor buy mortgage originations, which is now paralyzing the US mortgage market.
US lender Country Wide is having trouble selling its new mortgage originations – and having to carry them. Country Wide accounts for a huge 25% of the US mortgage market.
Mortgage lenders are stating that the mortgage market is in worse shape than they have ever seen. Investors are not buying mortgages, causing lenders to have to carry their own loan originations – which is going to totally kill the US mortgage market if things are not fixed soon.
Alt A and sub prime mortgages (30% of US mortgages) are not selling – investors want nothing to do with them.
As these mortgage markets become illiquid, the trillions of dollars of mortgage derivatives – which EU banks have bought heavily – cannot be valued – which caused Paribas to have to freeze redemptions in their 3 funds which held those derivatives.
The implications of that situation is having broad and very bad ramifications to the world banking/financial industry which is wondering how bad things will get. Things are quite bad now, to say the least.
You cannot have multi $trillion markets just stopping – with out major building losses.
Of course, this spills over to stock markets as well as gold. The Yen is rising, and adding to the huge selling in general, as carry trade is being unwound in everything.
The USD, which had been moderately rising again, rose over .40 on the USDX (US dollar index) Thursday as investors fled to US Bonds. Libor rates in Europe rose an amazing half point. (Libor is private short term money banks and institutions use). It is said that will harm brokerages and other institutions who need short term money.
Gold and precious metals are selling off again because funds and institutions are fleeing into cash, and gold is a liquid asset that they can sell. There was so much demand for cash in the EU that the ECB had to lend $130 billion, and said they will supply unlimited money if necessary.
The ramifications of the US mortgage derivatives losses are snowballing, and it is being said that this is unprecedented. The present situation has already been compared to the 1987 financial crash in severity.
We at Prudent Squirrel have been talking about getting more liquid for over a month. In our last news letters and alerts, we discussed the impending market liquidations due to the huge losses in the mortgage derivatives market. In the last several weeks we have been sending alerts to subscribers that more serious stock and gold selling is in the cards. Our alerts sent early this week anticipated both the US stock selling as well as gold’s sell off. We anticipated this latest 2 week bout of world market selling two days before it began in a Tuesday July 24 alert, calling for a severe sell off similar to the February 27 market crashes.
The PrudentSquirrel newsletter is Chris Laird’s macro economic and gold commentary. Subscribers get 44 newsletters a year published Sunday, as well as mid week email market alerts as needed. Email alerts are not guaranteed delivery.
Stop by and have a look.
Christopher Laird
Editor-in-Chief
www.PrudentSquirrel.com
The Shoddiest Export-from USA
By Peter Schiff
Aug 10 2007 3:45PM
www.themarkettraders.com
For years, Americans have been able to pay for enormous trade deficits by exchanging IOU's for imported consumer goods.
Unfortunately for foreign creditors, a substantial percentage of those IOU’s have recently taken the form of mortgaged backed securities.
Sporting higher yields than Treasury bonds, investment grade ratings from reputable agencies, and juicy commissions for the investment banks that packaged them, these structured mortgage bonds have quickly become America’s greatest export. Ironically, amid all the recent hoopla about defective Chinese exports, America has proved that when it comes to flooding the world with shoddy merchandise, nobody beats the good old USA.
This week, several of Wall Street’s best foreign customers announced staggering losses on the American mortgaged backed securities they had been sold.
The fundamental issue underlying these losses is that Americans borrowed more money than they can afford to repay. As initially low teaser rates expire and mortgage defaults increase, foreign lenders are discovering that the residential properties that collateralize the mortgage bonds are not worth anywhere near the loan amounts.
It will not be long before American borrowers come to a similar realization. When they do they will be faced with the shocking reality that all of their home equity is gone -- having disappeared just as quickly as did the paper profits of the Internet stock mania. However, this time around the situation is more dire. Although paper profits have vanished much as they did in 2001, all the mortgage debt, much of it about to get much more expensive to service, still remains.
When American homeowners come to grips with their diminished net worth, the excess consumption that has been the rule over much of the past decade will grind to a halt. If any money is left after making higher ARM payments, homeowners may actually decide to save some to repair their personal balance sheets.
As consumer spending collapses, the U.S. economy will plunge into a severe recession, compounding the problems in the housing market and exacerbating the recession.
The last straw will be the value of the U.S. dollar. Already teetering on a precipice, a recession will push it over the edge.
As the dollar falls, interest rates and consumer prices will rise even more sharply, compounding the problems for both housing and the economy. In fact, the fear of further dollar declines has been the most important factor in restraining the Fed's ability to cut interest rates. Rather than admit its concern over the dollar, the Fed justifies current policy with assurances that the economy is strong and is not in need of stimulative rate cuts. In Jack Nicholson fashion, since Bernanke feels investors can not handle the truth he feeds them a lie instead.
As more of our nation’s creditors finally realize that they have been duped, the credit well fueling American consumption will run dry. Foreign lenders will simply refuse to accept our IOU’s as payment for their merchandise.
Lacking in savings and productive capacity, we will be forced to accept dramatic reductions in our standard of living as a result.
Though our creditors will finally be forced to realize some losses on their prior investments, they will no longer bear the burden of subsidizing the U.S. economy. With diminished competition from Americans, foreign consumers will finally gain the upper hand. Goods previously too expensive for citizens of non-dollar economies will suddenly become affordable. Savings currently squandered on American consumption will be freed up to finance productive investment at home.
Though these positive aspects may be lost in the recent synchronized sell off in global stocks, foreign markets will soon diverge from ours. As the American caboose is decoupled from the global economic gravy train, the rest of the cars will move that much faster without all that dead weight slowing them down.
For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.
More importantly, don’t wait for reality to set in. Protect your wealth and preserve your purchasing power before it’s too late. Download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
****
President
Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06820
phone 203-662-9700
toll free 888-377-3722
email schiff@europac.net
web www.europac.net
Aug 10 2007 3:45PM
www.themarkettraders.com
For years, Americans have been able to pay for enormous trade deficits by exchanging IOU's for imported consumer goods.
Unfortunately for foreign creditors, a substantial percentage of those IOU’s have recently taken the form of mortgaged backed securities.
Sporting higher yields than Treasury bonds, investment grade ratings from reputable agencies, and juicy commissions for the investment banks that packaged them, these structured mortgage bonds have quickly become America’s greatest export. Ironically, amid all the recent hoopla about defective Chinese exports, America has proved that when it comes to flooding the world with shoddy merchandise, nobody beats the good old USA.
This week, several of Wall Street’s best foreign customers announced staggering losses on the American mortgaged backed securities they had been sold.
The fundamental issue underlying these losses is that Americans borrowed more money than they can afford to repay. As initially low teaser rates expire and mortgage defaults increase, foreign lenders are discovering that the residential properties that collateralize the mortgage bonds are not worth anywhere near the loan amounts.
It will not be long before American borrowers come to a similar realization. When they do they will be faced with the shocking reality that all of their home equity is gone -- having disappeared just as quickly as did the paper profits of the Internet stock mania. However, this time around the situation is more dire. Although paper profits have vanished much as they did in 2001, all the mortgage debt, much of it about to get much more expensive to service, still remains.
When American homeowners come to grips with their diminished net worth, the excess consumption that has been the rule over much of the past decade will grind to a halt. If any money is left after making higher ARM payments, homeowners may actually decide to save some to repair their personal balance sheets.
As consumer spending collapses, the U.S. economy will plunge into a severe recession, compounding the problems in the housing market and exacerbating the recession.
The last straw will be the value of the U.S. dollar. Already teetering on a precipice, a recession will push it over the edge.
As the dollar falls, interest rates and consumer prices will rise even more sharply, compounding the problems for both housing and the economy. In fact, the fear of further dollar declines has been the most important factor in restraining the Fed's ability to cut interest rates. Rather than admit its concern over the dollar, the Fed justifies current policy with assurances that the economy is strong and is not in need of stimulative rate cuts. In Jack Nicholson fashion, since Bernanke feels investors can not handle the truth he feeds them a lie instead.
As more of our nation’s creditors finally realize that they have been duped, the credit well fueling American consumption will run dry. Foreign lenders will simply refuse to accept our IOU’s as payment for their merchandise.
Lacking in savings and productive capacity, we will be forced to accept dramatic reductions in our standard of living as a result.
Though our creditors will finally be forced to realize some losses on their prior investments, they will no longer bear the burden of subsidizing the U.S. economy. With diminished competition from Americans, foreign consumers will finally gain the upper hand. Goods previously too expensive for citizens of non-dollar economies will suddenly become affordable. Savings currently squandered on American consumption will be freed up to finance productive investment at home.
Though these positive aspects may be lost in the recent synchronized sell off in global stocks, foreign markets will soon diverge from ours. As the American caboose is decoupled from the global economic gravy train, the rest of the cars will move that much faster without all that dead weight slowing them down.
For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.
More importantly, don’t wait for reality to set in. Protect your wealth and preserve your purchasing power before it’s too late. Download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
****
President
Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06820
phone 203-662-9700
toll free 888-377-3722
email schiff@europac.net
web www.europac.net
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