Rick Santelli: Rant of the Year

On CNBC

No Mercy!

Market Knoweth No Bounds To Its Fury :

1929-1932 chart is of the Dow Jones Industrial Average, as it collapsed 90%. That level of crash, if it were to occur now, will bring the DJIA down to about 1400. In otherwords, another 80% down from today's levels. That is an implausible scenario, if not impossible.

Rest of the charts are that of S&P500, which goes back only till 1957. It is a much broader index, more representative of the entire market. DJIA contains only 30 of some of the largest companies in the U.S., where as S&P 500 contains 500 of some of the largest companies in the U.S.

The tech crash at the earlier part of this decade happened over a period of 2.5 years.

On a positive note:
1. Dollar index staged a spectacular rally.
2. Option ARMs reset will be moderated by the collapse in interest rates, at least for now.

Big Three Update:

Executives at the Big Three flew into Washington in their corporate jets, carrying a tin cup
All three CEOs - Rick Wagoner of GM, Alan Mulally of Ford, and Robert Nardelli of Chrysler - exercised their perks Tuesday by flying in corporate jets to DC. Wagoner flew in GM's $36 million luxury aircraft to tell members of Congress that the company is burning through cash, asking for $10-12 billion for GM alone.

Writes IOUSA team:

“We have to face reality,” admitted Senate Majority Leader Harry Reid. Not the reality that an automaker bailout is a bad idea… but the reality that no one outside of Washington supports it.

Congress will recess until the week of Dec. 8, so members can go home, collect bribes, patronize their constituents, sleep with young aides and so on. When they return, the “Big Three” will present their case -- make one last stand -- and maybe, just maybe, this thing will be over.

Kashkari in the Hot Seat:



During last week's congressional testimony about the 700 billion TARP program, one of the congressmen asked Kashkari if he is a chump. With millions watching them on TeeVee, congressmen were just swinging for the bleachers. Despite what Kashkari wants you to believe, neither he nor Hank Paulson could care less about the home owners.

Status Quo Update:

President Elect Obama is likely to pick President of the New York Fed, Timothy Geithner, for the post of the Treasury Secretary. Boyish looking Timmy has been part and parcel of the NY banking establishment for the last 20 years, wheeling and deeling for the bankers, even as an epic credit bubble was ballooning in his backyard. If there is a shining beacon of unchange anywhere, Timmy is where you are likely to find it.

In another act of unchange, Democrats have decided to keep Neocon Joe Lieberman at helm of Senate Committee on Homeland Security and Governmental Affairs.

Is Bullishness Unwarranted?

Mish at the Global Economic Analysis suggests that there is unwarranted bullishness.

Here is what I think:

There is a technical reason, may be two for the bullishness.

First, "Change" is coming to White house, most likely. Do you think political hacks like Paul Krugman will be bearish once messiah "O" is declared the next president of the U.S?

Second, The sell off in the financial markets were spectacular and they are way oversold. The rally, even if it is very unlikely to take the markets to a new high this year, is likely to be just as spectacular. That's what volatile markets do.

Bulls are right; at least for a while they will be. Messiah "O" will instill confidence until he takes office, he will propose mesmerizing grandiose schemes to "save" the economy. It will all work until he gets into office. A rally is coming, and how long it will last or how far it will go is anyone's guess. Some time in the next 2-4 months, there will be another opportunity to go short, at is my speculation.

(Nothing personally against "O", I am not a big fan of his rival either. I supported Ron Paul during the primaries.)

The 2002 lows in S&P and Dow is likely to be taken out, possibly in 2009 or 2010. Ultimately the entire Dow could be bought for 1-2 ounce of Gold. Do you think that is a fantasy? In the last century it happened twice - once in the early 30s and again in the early 80s.

As for inflation, it is likely catch the deflationistas with their pants down.
Shorting long term U.S government bonds looking like a nice trade to go into. It is not a short term trade, instead a long term one. Tremendous supply of new treasuries coming to market, as the treasury tries to raise funds to fill the humongous budget gap. Also, watch out, Chinese, Indian, Russian and Saudi governments are likely to use some of their reserves to stimulate their economies.

Mandelbrot & Taleb Interview on PBS

Mandelbrot & Nassim Taleb on the credit crunch. Watch it here

Taleb is the author of "Black Swan: The Impact of the Highly Improbable"

Peter Schiff Interview On Glenn Beck Radio

Part I



Part II

RIP: Good Times

Silicon Valley has been trying to digest news of a secret meeting held by top venture firm Sequoia Capital earlier this week. At the meeting, leading Sequoia partners laid out bleak short and long-term scenarios for the world economy — and strong medicine for the firm’s portfolio companies.(HT: venture beat )

Sequoia Capital on startups and the economic downturn

View SlideShare presentation or Upload your own. (tags: depression recession)

Answers From Schlumberger's Top Brass (SLB)

During the conference call held to discuss the quarter, Chairman and CEO Andrew Gould initial statements included:

• The deterioration in the credit markets will have an effect on its customers, but this will largely impact North America only.
• Management does not know the extent to which current events will hurt 2009 drilling activity.
• Management is still looking for a slowing in the rate of growth in customer spending - not a decline.
• Even if activity is curtailed, due to the "age of the production profile and the decrease in reserve replacement ratios", any significant slowdown in exploration and production investment will cause a sharp drop in production, which will lead to a recovery.

Gould and the other executives were then questioned, some may say "interrogated", by analysts as to the extent and duration of any downturn.

( Click subject line for the entire article )

Motley Fool: Why Oil Prices Will Rise Again

Back in July, around the time the oil price peaked, common consensus went
along the lines of ...
The world is running out of oil.
World demand for oil is high and only going to get higher still in the years and decades ahead.
Most of the world's cheap oil has already been discovered.
Oil exploration companies increasingly have to drill for oil in more and more
difficult places. This adds to the cost of exploration and in the event of a
discovery, the cost of extraction. Either the price of oil stays high and goes
even higher, so that it makes these new discoveries economical for the oil
companies, or the oil stays in the ground. Given the increasing demand and the
world's complete reliance on the naturally depleting natural resource called
oil, it has to come out of the ground.
Oil was seen as a natural hedge for the falling U.S. dollar.

Click the subject line for the link to the Motley Fool article

Biggest % Gain Days for the DJIA

The rally that I have been expecting, is finally here. Howeverm, it is likely to be a short term phenomenon. Here is an interesting set of historic data for the dow, shows a list of biggest percentage gain days for the DJIA.

1. 1933-03-15 62.10 +8.26 +15.34
2. 1931-10-06 99.34 +12.86 +14.87
3. 1929-10-30 258.47 +28.40 +12.34
4. 1932-09-21 75.16 +7.67 +11.36
5. 2008-10-13 9,387.61 +936.42 +11.08
6. 1987-10-21 2,027.85 +186.84 +10.15
7. 1932-08-03 58.22 +5.06 +9.52
8. 1932-02-11 78.60 +6.80 +9.47
9. 1929-11-14 217.28 +18.59 +9.36
10. 1931-12-18 80.69 +6.90 +9.35
11. 1932-02-13 85.82 +7.22 +9.19
12. 1932-05-06 59.01 +4.91 +9.08
13. 1933-04-19 68.31 +5.66 +9.03
14. 1931-10-08 105.79 +8.47 +8.70
15. 1932-06-10 48.94 +3.62 +7.99
16. 1939-09-05 148.12 +10.03 +7.26
17. 1931-06-03 130.37 +8.67 +7.12
18. 1932-01-06 76.31 +5.07 +7.12
19. 1932-10-14 63.84 +4.08 +6.83
20. 1907-03-15 81.33 +5.10 +6.69

October 13, 2008 was number 5 in ranking. Most of the biggest rallies in the stock market have come in the midst of furious bear markets.

Poll: Whither Price Of Oil?

Collateral Damage

Chesapeak CEO Sold All Stock to Meet Margin Calls

Chesapeake Energy Corp. said its chief executive officer, Aubrey McClendon, involuntarily sold ``substantially all'' of his common shares of the company's stock over the past three days to meet margin loan calls.

``These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis,'' McClendon said in today's statement. ``In no way do these sales reflect my view of the company's financial position or my view of Chesapeake's future performance potential.''

McClendon, 49, owned 33.5 million shares, or 5.8 percent of the company's common stock, according to a Sept. 30 filing with the U.S. Securities and Exchange Commission. He was the company's third-largest shareholder.

Chesapeake, this year's worst-performing petroleum producer in the Standard & Poor's 500, fell 6.7 percent in New York trading today amid concern hedging contracts won't protect the company against a plunge in natural-gas prices. McClendon's divestiture was announced after the close of regular trading on U.S. stock markets.

``You have to imagine Aubrey's lost a large portion of his fortune,'' Benjamin Dell, an analyst at Sanford C. Bernstein & Co., said today in a telephone interview. He rates the stock at ``market perform'' and owns none.

The Oil Drum has a good thread on this

A Market Bottom?

Scary time in the financial markets, fear reigns supreme, usually an indication that market is close to a short term bottom. I am not clairvoyant, but this level of pessimism usually marks at least a short term bottom. Market's biggest Panglossian cheerleaders I know of, are peeing in their pants.

Market has a fear index - it is calculated based on the price premiums on 'options' - a form of stock derivative. The fear index ( VIX ) is at a record high. Fed might cut the funds rate this week, just a speculation.

I could be totally wrong, which happens more often than I am willing to admit.

What caused the credit crisis?

Even though I don't completely agree with every argument/statments expressed in this video, I still believe it has a lot of merit.

Peter Boockvar: Let The Market Fix The Crisis

Peter Boockvar makes a case against the bail out of the plutocrats.

War on Your Wallet

Comrades,

When government declares war on something or somebody, whether it is war on drugs, war on poverty, war on terror, that means they are about to pick your wallet. Today, the government declared war, almost literally, against the turmoil in the financial markets. The Government, like mafia or a protection racket, is always looking for dragons to slay. It is on the prowl, looking for the next enemy.

The Government will use Tax Payers wallets as a sink for illiquid, financial carcasses. Every attempt will be made to keep a semblance of stability until after the presidential election. For instance, short selling - a strategy used by speculators to make profit from falling price of a financial instrument, will be banned until Friday Jan 16, 2009. Coincidence? You decide.

Recently Steve Jobs blamed short sellers for the falling price of Apple stock ( which is often a red flag - Execs sometimes use short sellers as a cover for their own incompetence. Not suggesting that as a certainty in this case ). A healthy number of short sellers a.k.a bears a.k.a skeptics is what keeps markets in balance. The skeptics usually pick apart the reports, they read the fine print, they read between the lines and they usually are the ones who blow the whistle at corporate corruption.

Policing Short Sales :

Companies are now lining up at SEC to add their ticker to the list that will be "protected" from short selling. Pakistani state apparatus recently tried to police short selling during their own version of market tumult. Immediate reaction of the punters was to drive up the markets, soon followed by a 25% crash. Later on, angry mob vandalized the Karachi stock market.

Don't be Fuld again:

"They called him the Gorilla - the brawler known as the scariest man on Wall Street," writes the Times of London about Richard Fuld, CEO of Lehman, and the story tells of his rise and fall. Here is a striking annotated painting posted outside Lehman offices for staff to post their comments on. Click here to view. (Thanks to mises.org)

Matt Simmons on Bloomberg

Simmons discusses Saudi Arabia, Gas prices, Oil prices, Peak Oil etc.

Boone Pickens on Price oil, alternatives and Speculation

Here is the video link

Matt Simmons discusses Peak Oil on CNBC

Colbert on the economy

Jim Rogers on Federal Reserve

Part - I:


Part - II

Warren Buffet on Peak Oil and resource depletion

Greenspan babbles, also questions the need for a central bank

Gold and Economic Freedom - Dr. Alan Greenspan

Subprime Explained - Hilarious

Credit Bubble Implosion

Glen Beck Interviews Peter Schiff

Jim Jubak on Peak Oil

Credit Bubble Update - 07/13/07

Banks losing up to $52 bln over subprime
Credit Suisse analysts estimated banks could lose up to $52 billion over time due to their exposure to collateralized debt obligations that invested in U.S. subprime mortgages.

Most of the losses would stem from loans to hedge funds, compared with an expected $5 billion to $10 billion from banks' direct investment in subprime CDOs, the Credit Suisse analysts said in a report dated July 6.


1,300 arrested in Zimbabwe prices crackdown
More than 1,300 shop owners and business managers have been arrested in Zimbabwe as part of a crackdown on firms accused of flouting government-imposed price controls, police said Monday.

Most of the 1,328 bosses had been fined but the number also includes around two dozen company executives arrested since Friday who are due to appear before magistrates, said police spokesman Chief Superintendent Oliver Mandipaka.


Sarkozy's blitz puts paid to pact on policy

French President Nicolas Sarkozy threw down the gauntlet in Brussels last night, vowing to press ahead with his plans for a "fiscal shock" regardless of EU rules on budget policy.

Softening his tone slightly after a blizzard of criticism, he told eurozone finance ministers that his government would "aim" for a balanced budget by 2010, but refused to give real ground.


Bernanke: Anchored expectations mute price swings

Swings in volatile energy and food prices will have minimal impact on inflation as long as expectations of future price gains are held steady, Federal Reserve Chairman Ben Bernanke said on Tuesday.

"If inflation expectations are well anchored, changes in energy (and food) prices should have relatively little influence on 'core' inflation, that is, inflation excluding the prices of food and energy," Bernanke told the National Bureau of Economic Research.


Japan Should Diversify Reserves, Abe Adviser Ito Says

Japan, the largest overseas holder of U.S. Treasuries, should invest $700 billion of its currency reserves in higher-yielding assets such as stocks and corporate bonds, said Takatoshi Ito, an adviser to the prime minister.

The reserves should be managed by a special fund that will gradually diversify into euros, Australian dollars and emerging- market currencies, Ito said in an interview in Tokyo.


Russians Selling Off US Currency

The Central Bank of Russia says the amount of U.S. dollars held by individual citizens of this country is rapidly declining. The bank says Russians are also moving increasing sums abroad. Moscow correspondent Peter Fedynsky follows the money trail and reports that Russians are gaining confidence in their own economy.

New figures released by the Russian Central Bank indicate the amount of U.S. dollars held by private Russian citizens has dropped since 2002 from $35 billion to less than $12 billion as of July 1.

Australian hedge fund warns about withdrawals

An Australian hedge fund manager with $1bn in structured credits and junk-rated loans warned investors yesterday it could restrict withdrawals to ensure its survival as it reported losses of 14 per cent in one fund in June.

Basis Capital, based in Sydney, said in a letter to investors it had been hit by “indiscriminate” repricing of “otherwise fundamentally sound collateral” amid the crisis in US home loans to less creditworthy investors. It said it had deliberately avoided the worst-hit 2006 subprime loans.


Kuwait revalues as dollar weighs on Gulf currencies

Kuwait allowed its dinar to appreciate against the dollar for a second time this year after the US currency’s slide raised pressure on pegged exchange rates throughout the world’s biggest oil exporting region.

The dinar would trade at 0.28690 per dollar from Thursday, an appreciation of 0.4 percent, the central bank said, confirming expectations it would respond to the dollar’s tumble to record lows against the euro this week.


LBO Credit Quality Falls to Lowest in Nine Months

Loans used to finance leveraged buyouts are the riskiest in at least nine months on speculation that losses on subprime mortgage securities will spread to other markets, according to traders of credit-default swaps.

The iTraxx LevX Index of credit-default swaps on loans to 35 European companies fell as much as 1 percent to the lowest since the index started last October, according to Deutsche Bank AG prices. The LCDX index of loans to 100 U.S. companies dropped as much as 0.57 percent to 96, Phoenix Partners Group in New York said.


Dollar Slumps to Record Low Versus Euro as Retail Sales Drop

The dollar dropped to a record low against the euro and slumped versus the yen after a government report showed retail sales fell last month by more than analysts expected.

The data may add to concern that the U.S. economy will slow, lifting speculation the Federal Reserve will cut borrowing costs this year.


Retail sales drop worst in 2 years

Retail sales posted the biggest drop in nearly two years in June, the government reported Friday, fanning worries that consumers were starting to feel the pinch of higher gas prices and the slumping housing market.

"This report is a much weaker report than most analysts expected, and presumably it will come as a shock to people who bought retail stocks yesterday on the basis of [some] 'better' chain store numbers," Ian Shepherdson, chief U.S. economist with High Frequency Economics, wrote in a note Friday.


Foreclosure activity rises dramatically

Foreclosures continued to rise throughout the country, the state and the Bay Area in June, according to a report to be released today. Nationally, 164,644 foreclosure notices were filed in June, up 87 percent from June of last year, said RealtyTrac.com, an online marketplace for foreclosure properties. In the Bay Area, the number of foreclosure notices was 5,018, almost triple the 1,780 in June 2006.


The greatest economic boom ever

Just how red-hot is the current worldwide expansion? "This is far and away the strongest global economy I've seen in my business lifetime," U.S. Treasury Secretary Hank Paulson declared on a recent visit to Fortune's offices.

That may come as news to many Americans, whose boom-time memories are stuck in the 1990s, when Silicon Valley was the epicenter of our growth fantasies. But the fellow now occupying Paulson's old office at 85 Broad Street in downtown Manhattan shares that upbeat view. Just returned from a ribbon-cutting ceremony in the Middle East, Goldman Sachs (Charts, Fortune 500) CEO Lloyd Blankfein waves out toward the East River as he explains how the rise of the "BRICs" has altered his strategy and his travel schedule. (BRIC is an acronym Goldman coined in 2001 reflecting the rising economic power of Brazil, Russia, India, and China.)


U.S. trade deficit widens

The U.S. trade deficit widened to $60 billion in May as oil prices jumped and the volume of foreign oil coming into the country rose, the government said Thursday. But the overall trend still appears to be improving, economists said.

The Census Bureau said that the trade imbalance - the gap between what is imported and exported - grew 2.3 percent from April in seasonally adjusted terms. For the first five months of the year, however, the deficit grew at a slower pace than it did last year. From January through May, the deficit was $295.5 billion, compared with $317.8 billion in the first five months of 2006.


Moody's May Cut $5 Billion of Subprime-Backed CDOs

Moody's Investors Service may cut $5 billion of collateralized debt obligations after lowering the ratings of subprime mortgage bonds that make up the securities.

A downgrade would affect 184 pieces of 91 CDOs, representing about 3.6 percent of rated CDOs containing asset-backed securities, Moody's said in a statement today. Moody's yesterday sliced ratings on $5.2 billion of subprime bonds that back CDOs, which are also sliced into pieces to allow investors to choose how much risk they bear for the returns they receive.


D.R. Horton home sales plunge; expects loss

Home builder D.R. Horton said Tuesday declining home values would lead to its first quarterly loss since it listed on the New York Stock Exchange in 1995, sending its shares to a three-year low.

Hurt by the deteriorating U.S. housing market, the No. 1 U.S. home builder said net sales orders in its fiscal third quarter, ended June 30, fell 40 percent to 8,559 homes. The dollar value of the orders dropped 47 percent to $2.0 billion.


Zimbabwe: Inflation - the Endless Battle of the Zeros

WHEN Princess Nyathi retired to her rural home after a 20-year flirtation with a furniture shop, she was confident monthly payments in pension would be enough to buy the basic commodities.

But five years down the line, Nyathi is bitter after watching her monthly pension eroded heavily by inflation. "Six hundred dollars five years ago would buy you groceries, now with the $12 900 payment, you can only buy half a loaf of bread," she said.


Jeff Saut Presents: Subprime Sublime?

"Liquidity is a coward, when you need her most she runs away and hides.” That old market axiom has clearly stood the test of time. Most recently, the “liquidity cowardess” ran and hid from the subprime complex, causing the ABX-HE.BBB-Subprime Index to lose nearly 50% of its value. Concurrent with that price decline has been a sentiment slide, as reflected in The New York Times, whose reference to the subprime woes has seen a downward verbiage skein that has the glide path of a stone. To wit, “Largely contained,” “mostly contained,” “reasonably well-contained,” “severe but contained.” “Contained?” ... Well, maybe on a macro basis, but try telling that to investors in certain subprime-focused investment funds that have seen their principal erode and in some cases evaporate. Indeed, just a few weeks ago the Bear Stearns (BSC) “bombshell” brought the issue home to roost with the implosion of a couple of highly-leveraged subprime hedge funds. "

Credit Bubble Update - 07/08/07

A Mortgage-Securities Hedge Fund Suspends Payouts

In another sign that troubles in the mortgage market are spreading, a prominent hedge fund that specializes in bonds backed by home loans has suspended redemption requests by investors.

The Horizon ABS Fund managed by John Devaney, a well-known trader of asset-backed securities who is based in Florida, said yesterday that it made the decision to block withdrawals after one investor who accounted for about a quarter of its $650 million in assets sought to leave the fund.


Italease blow-up stokes derivatives fears

A derivative blow-up at the Italian bank Italease has sent tremors through Milan's banking fraternity and exposed the hidden dangers of exotic credit instruments.

The bank has paid off 610 million euros (£419m) in recent days to counter-parties in what amounts to a massive margin call after interest rate rises in Europe caused hedging and derivative losses by clients to mushroom out of control.


Newmont Eliminates Gold Hedges, Creating the World's Largest Unhedged Gold Company, and Announces Strategic Initiatives

Newmont Mining Corporation today announced the elimination of its entire 1.85 million ounce gold hedge position, establishing the Company as the world's largest unhedged gold producer. Newmont also announced plans to monetize components of its royalty and equity portfolio in the next twelve months, resulting in the discontinuation of the Company's Merchant Banking Segment as a separate business unit.


Berlin defends its 'crown jewels'

Germany is drawing up detailed plans to stop strategic assets falling into the hands of "giant locust funds" controlled by Russia, China and Middle East governments.

Finance minister Peer Steinbrück said "telecoms, banks, post, logistics and energy" were among the sectors that would be shielded from sovereign wealth funds, the new state trusts that are fast swamping global asset markets.


Canadian dollar hits high vs. greenback

The Canadian dollar climbed to a 30-year high against the U.S. currency Friday, bolstered by higher oil prices, a strong economy and a looming interest rate hike.

Canada's currency advanced as high as 95.53 U.S. cents Friday, pushing past the 95 U.S. cents mark for the first time since May 1977. It has risen 10.8 percent so far this year.


As 'China effect' reverses, inflation threatens

When the Prime Minister appears on television vowing to "get to grips with inflation", you know that a serious problem is taking shape.

Gordon Brown had the good fortune to be Chancellor over a golden decade as the industrial revolutions of China, India and emerging Asia supplied us ever cheaper manufactures.

In this miracle world, we have had 5pc global growth for five years - the best since the Second World War - without overheating.


Money falls from sky

A German motorist surprised by euro notes swirling in the air around her car hit the brakes and collected a "substantial amount of money" before turning it over to police, authorities in Worms said on Thursday.

A police spokesman in the small western town said the 24-year-old woman saw the money flying through the air in her rear view mirror late on Wednesday. She pulled over and tried to collect all the notes, unsuccessfully.


Subprime risks come home to roost for hedge funds

Bad bets revealed by some hedge funds in recent weeks may mean other funds will be forced to accept the market's deteriorating views on subprime mortgages and report their own losses soon.

Some managers have resisted accepting market views on their assets, claiming declines represent short-term market volatility and not underlying financial value in their subprime bonds, analysts said. Since the bonds trade infrequently, managers' have turned to pricing models that may ignore market sentiment, buoying prices.


Spain selling gold to cover up worsening trade deficit

In an interesting commentary entitled “The Gold of Spain’s Central Bank,” Gerardo del Caz debates the reasoning behind Spain’s massive gold sales, selling off 30% of its reserves (80 tonnes) in just two months. In March of 2004, Spain held eleventh place in the world’s ranking with 523 tonnes, but today has little more than 300 tonnes.


Subprime poor practice risks turning to malpractice

Regulators tread a fine line between the Keystone Cops – galumphing hopelessly after escaping criminals – and Captain Renault in Casablanca. The Financial Services Authority has put paid to the first criticism by warning intermediaries and subprime mortgage lenders before poor practice turns to malpractice. But given the subprime scandal unfolding in the US, the regulator can’t really be “shocked, shocked” to have uncovered market weaknesses.


LBO Loans May Follow Subprime Collapse, Moulton Says

Loans to fund leveraged buyouts may dry up just like subprime mortgages in the U.S., according to Jon Moulton, the British venture capitalist who tried and failed to buy the carmaker MG Rover.

``It's near the top. There are some difficulties beginning to emerge in the debt markets,'' Moulton, who runs the private equity firm Alchemy Partners, told a meeting of the U.K. Parliament's Treasury committee today. ``At some stage no one will be willing to underwrite fresh debt.''

Credit Bubble Hysteria - 07/02/07

S&P, Moody's Mask $200 Billion of Subprime Bond Risk

Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.


Pound hits 26-year high against dollar

The pound today hit a new 26-year high against the dollar, lifted by expectations that the Bank of England will hike interest rates on Thursday, to 5.75 per cent.

Sterling hit $2.0160 in afternoon deals. The dollar was also weaker against the euro, falling to within half a cent of a record low against the shared currency.


Who's behind the global credit bubble?

The storm warnings are coming thick and fast.

The Telegraph business section this morning has a distinctly bearish tone - even by The Telegraph’s standards.

We’re certainly not ones to criticise - it’s refreshing to see the concerns we’ve been raising for a considerable length of time now getting a serious airing in the mainstream press.


India May Trade Gap Widens to $6.2 Billion on Imports

India's trade deficit widened in May from a year earlier as imports of machinery and other goods surged in an economy that's growing at the fastest pace in almost 20 years.

The trade deficit was $6.22 billion in May compared with $4.26 billion a year earlier, the Ministry of Commerce and Industry said in a statement in New Delhi today. Imports grew 26.4 percent, outpacing an 18.1 percent rise in exports. The trade deficit reached a record $7.1 billion in April.


Wall Street played role in creating subprime troubles

Some on Wall Street want to blame the little guy for the latest hedge-fund mess. People with shoddy credit histories couldn't pay their mortgages so that pushed some funds to the brink of collapse and sent shock waves through financial markets.

Talk about a cop-out — that shifts blame away from the Wall Street firms and banks that had a hand in creating the subprime-mortgage mess but aren't taking responsibility for it.


When will the credit bubble burst?

To understand why there’s a credit bubble, how it’s inflating the price of stocks and what it will mean for you when it bursts, let’s consider the acquisition of Avaya.

The large telecommunications equipment maker recently announced it is being acquired by two private-equity firms, Texas Pacific Group and Silver Lake Partners.


Subprime problems hit WaMu

The Chicago job market continues to be haunted by problems in the nation's subprime mortgage industry, even as federal regulators fashion guidelines they hope will improve conditions in the sector.

Washington Mutual Inc. has disclosed that it is closing a subprime mortgage office at One Pierce Place in Itasca, leaving more than 100 employees out of work, according to a filing this week with the Illinois Department of Commerce and Economic Opportunity.


Liquidity Nightmare... Drowning In Cash

In 2005, Stephen King, managing director of economics at HSBC and also a columnist for the Independent.uk news site stated that there was a crisis of faith among central bankers. Two years later, we can see why this confession should have read as: central bankers must stick to their pseudo-religious tones to proliferate public delusions of invincibility.


Zimbabwe: IMF Says Govt Inflation Figures Understated

THE International Monetary Fund (IMF) this week painted a bleak picture of Zimbabwe's economic crisis predicting that annual inflation will hit the five-digits mark by year-end.

The Bretton Woods institution in written responses to the Zimbabwe Independent on Wednesday said the country was now experiencing hyperinflation as its month-on-month rate had shot above 50%.


Inflation risks still skewed to the upside

US. Core inflation fell more quickly than anticipated so far thanks to lower owners’ equivalent rents and the markdowns for apparel. In the short term, it could even still slide into the Fed’s comfort zone. But the tight labor market, recordhigh energy prices as well as strongly rising import prices will lead to higher trend inflation again over the medium term (pages 4-6).


Move away from U.S. dollar reserves still all talk

Central bank holdings of U.S. dollars continue to mount, despite talk of diversification into other currencies, but questions remain about the sustainability of the rise in dollar reserves.

On Friday, the International Monetary Fund said global central banks' hit a new record in reserves held in U.S. dollars at $2.24 trillion in the first quarter, a 4.0 percent increase from the final quarter of 2006.


Rolling in gold but still poverty-stricken

IN 1865, Jamsetji Nusserwanji Tata - a one-time opium trader and scion of a sparkling line of Parsee priests, Zoroastrians who had fled to western India from persecution in Iran - attended a lecture in Manchester given by Thomas Carlyle.

Carlyle, a cantankerous Scot, was known for his historical and philosophical essays, but he also put his mind to the budding field of political economy.


Report: China raises minimum wages

China's government has ordered minimum wages raised to help the poor cope with soaring food costs, a state news agency reported Friday.

Chinese leaders have been alarmed by a spike in inflation that saw the price of eggs rise 37.1 percent in May from their price in the same month last year. Meat and poultry were 26.5 percent more expensive in May compared to a year ago.

Credit Bubble Update - 06/28/07

Stocks and Bond Bull Markets - The Beginning of the End?

LIKE the often-prophesied end of the world, major correction in global bond and equity markets is a long time in coming - so much so that many investors are tempted to think that it may never happen. But, as two of our eminent investment experts comment in the panel discussion below, the most dangerous words in the English language are: 'This time it is different.'


BANK OF INTERNATIONAL SETTLEMENTS WARNS OF GREAT DEPRESSION

The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.

Boston: State, top lenders will seek remedies to foreclosure woes
State officials and executives from leading mortgage lenders are expected to meet today to discuss possible remedies to Massachusetts' wave of foreclosures.

The meeting was called by Dan O'Connell , the Patrick administration's secretary of housing and economic development , who wrote a letter asking the chief executives of the top 10 mortgage lenders in the state to attend, according to a person who has seen the letter but asked not to be identified. The letter did not spell out an agenda for the session, to be held at in the offices of Daniel Crane , director of the Office of Consumer Affairs and Business Regulation.

Subprime woes led to 50 lender failures: MBA

Nearly 50 mortgage lenders have folded due to the subprime crisis as part of a natural thinning of the industry, the leading trade association for those lenders said on Wednesday.

"About 50 (lenders) have suffered the consequences and many of those would have been our members," said John Robbins, chairman of the Mortgage Bankers Association, addressing the Reuters Global Real Estate Summit via teleconference from Washington.

Axed deals reflect subprime chill

Companies are pulling financing deals across the globe, in one of the clearest signs yet that investors’ worries about rising interest rates and US subprime mortgages could be infecting other areas of the credit world and driving up the cost of corporate borrowing.

MISC, the world’s biggest owner of liquefied gas tankers, day shelved its $750m bond offering.

Opaque Derivatives, Transparent Fed, `Bubblenomics': Timshel

The most stunning aspect of the demise of two hedge funds belonging to Bear Stearns Cos. is the almost total absence of transparency surrounding the bailout.

The debacle may finally provoke regulators, who have long suspected that buying derivatives is akin to running through a fireworks factory with a lighted blowtorch in each hand.

Carry trade threatens a deflationary global collapse

Concerns that the credit cycle may be turning down are growing. But so far, the impact on stock markets has been fairly limited.

Investors take comfort in three misguided beliefs. They believe that equities are not expensive and that there is no sign of any diminution in the flood of global "liquidity". Furthermore, they believe that if the worst happens, the US Federal Reserve will come to the rescue.

Banks 'set to call in a swathe of loans'

The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.

Gold jumps, but bugs still suspicious

Gold closed Friday up $10.20 in New York, close to the year's high. But that followed a week in which the failure of the metal to respond to usually helpful influences - a reeling dollar, surging metal prices, various economic and political factors - had caused widespread gold bug grief and rage. Over the weekend, that's been intensified by rumors of renewed official-sector gold selling.

What Does a Dollar of Debt Buy You?

This weekend I am in La Jolla at good friend Rob Arnott's conference. Princeton Professor Burton Malkiel, of Random Walk fame, will be one of the luminaries at the annual Research Affiliates Advisory Panel. So, with that thought in mind, this week we take a seemingly random walk through the data to see if we can discern a trend.

How much debt does it take to grow GDP? You probably missed it, but the Bureau of Labor Statistics gives us data that contradicts the recent labor numbers. Why is consumer sentiment so moribund? And that recession I predicted for 2007? I have a few thoughts on that as well. It should make for an interesting letter with a lot of great charts and graphs.

Pickens Tells CNBC Oil Is Heading Higher

Pickens predicts a new high for oil price this year.

Housing Bubble Accomplices Preparing for Death: Caroline Baum

Each asset bubble has features and sponsors unique unto itself. Some folks went wild over tulip bulbs in 17th century Holland while others flipped over not-as- yet-constructed Florida condominiums almost four centuries later.

Yet they both -- they all -- share one thing in common, and it has to do with human nature. Just as terminally ill patients go through five stages of dying as described by the late psychiatrist Elisabeth Kubler-Ross in her 1969 book, ``On Death and Dying,'' so, too, do bubble participants experience denial, anger, bargaining, depression and acceptance.

Short-seller Chanos eyes more housing sector woes

Problems in the housing sector are likely to deepen and cause damage among financial institutions that loaned the industry money, a prominent hedge fund manager said on Wednesday.

"I think we'll continue to be surprised by the extent of the problems in the sector," James Chanos, president of Kynikos Associates, told the Reuters Hedge Funds and Private Equity Summit in New York.

How Mortgage Troubles Impact U.S. Banks -- Part One

If you have picked up the paper in the past month, you know that the subprime (also called nonprime) mortgage business has blown up in recent weeks. New Century Financial (NEWC), one of the largest players in the industry, filed for bankruptcy protection on April 2. At first, it seemed like the problems were confined to the low-quality subprime business, mainly stemming from firms that were funding mortgages with short-term borrowings. However, we're starting to see problems creeping into higher-quality mortgages, and as a result, we've identified two short-term risks for our bank coverage universe.

Zimbabwe: Best Performing Stock Market in 2007?

CNBC and other stock market tabloids are notorious for making simplistic linkages between the stock market and gross domestic product (GDP). They tell us that any event that stimulates GDP growth inevitably drives stock prices up, and any event that hurts GDP growth pushes stocks down.

Since the largest share of GDP is consumption, consumer demand becomes the all-important figure driving growth. When the consumer gets too excited, the Fed must step in to cool them down with interest-rate hikes. When the consumer isn't spending, Fed interest-rate cuts stimulate demand.

The Capital Commerce Debate: Round 1

Will the housing slowdown tank the rest of the economy, or will job and income growth continue to support and eventually strengthen the current expansion? These are just two of the critical questions that will be vigorously analyzed and argued this week in the inaugural Capital Commerce debate.

Out of the Gate: American Home Mortgage

At least five Wall Street analysts downgraded shares of American Home Mortgage Investment Corp. after the home lender said its mortgage loans are fetching lower prices from investors.

Treasury Yields Rise to Eight-Week High as Job Growth Increases

Treasuries fell, pushing 10-year note yields to the highest in eight weeks, as a more-than-forecast increase in hiring and a drop in the unemployment rate in March eased speculation the Federal Reserve will cut borrowing costs.

Two-year notes, more sensitive than longer-maturity debt to rate changes by the Fed, fell the most since March 9, when the previous monthly employment report also was stronger than economists forecast. In interest-rate futures markets, the odds of a rate cut by mid-year fell almost to zero.

Profit Opportunities in US Oil Production Decline

Imagine an army of “nodding donkeys” scattered across windswept plains.

These pumping units toil without fanfare. Up and down, day and night, most draw less than a dozen barrels daily from wells long past their prime. Yet combined, they account for a shockingly high percentage of the oil produced in a country that was once the world’s top producer.

Overlapping Subprime Exposure Mask Risks of CDOs, Moody's Says

Some collateralized debt obligations that invest in subprime mortgage bonds, related derivatives and other CDOs may be less diversified than they appear, raising investors' risks, according to Moody's Investors Service.

Greater use of credit-default swap contracts is creating more situations in which CDOs may be doubling up on exposures to the risks of specific bonds, either through multiple direct investments or purchases of other CDOs' bonds, according to a report this week by Moody's.

HANK, WHY ARE YOU IGNORING MY FOIA REQUESTS?

Dear Mr. Paulson:

How ya doing?

I think you're doing a wonderful job as Treasury Secretary. And don't think I'm saying that just because I'm looking for a favor.

You have been pretty invisible compared with others in that job and, frankly, that worries me a little. It also gets me to the point of this letter.

Hank, I don't trust you. There are just too many ways for you and your former Wall Street firm, Goldman Sachs, to cheat the financial markets.

Michael Panzner on Kudlow and Company.

Financial Armageddon

The Armageddon Gang

There are those who fret that current troubles in real estate will lead to an economic slowdown, maybe a recession. Then there's Peter Schiff. "Our standard of living is going to decline," the Connecticut stockbroker confidently declares. "There's no way around it, and it has just started."

Schiff owns Euro Pacific Capital, a smallish firm that specializes in moving clients' money into nondollar assets like foreign stocks and bonds. Over the past couple of years, he has become a regular, hectoring presence on cable-TV business shows--on CNBC they call him "Dr. Doom." Now he has a book out, ominously titled Crash Proof: How to Profit from the Coming Economic Collapse.

Financial Armageddon

Crash Proof

U.S. Bank Revenue From Derivatives Surged to Record

U.S. bank revenue from trading derivatives rose to a record $18.8 billion in 2006, driven by high client demand among hedge funds and other large institutional investors.

Revenue grew 31 percent from $14.4 billion in 2005, the previous record, the U.S. Office of the Comptroller of the Currency said in its quarterly bank derivatives report released today in Washington.

Copper Prices Head for Biggest Monthly Increase Since April

Copper prices are headed for a fourth consecutive weekly gain and the biggest monthly increase since April on signs of robust demand for the metal.

Inventories monitored by the London Metal Exchange have fallen for a seventh straight week, the longest decline since July 2005. Producers including Codelco and Freeport McMorRan Copper & Gold Inc., the two biggest, said this week that Asian demand will remain strong. Copper prices have more than tripled in four years on demand from China, the largest consumer.

Bloomberg Special Report - Phantom Shares

The stock is dead, long live commodities, says Rogers

Investment guru Jim Rogers says the rise of China and the change in the status of the US dollar as a reserve currency is having a profound impact on global demand.

Investment guru Jim Rogers believes that the bull market for stock and bond markets is over and says investors should get into commodities. There is a long-term bull market in commodities which will extend to 2014-2022, he told the Credit Suisse Asian Investment Conference in a keynote speech yesterday.

Kass: Harley Hogs Feed at the Subprime Trough

Judging by the commentary and the virtual invulnerability of worldwide equity prices, most see only a speed bump in the recent subprime scare. There is still a general belief on the part of the investment community that the mess is a containable fluke.

I have stressed the likelihood of a subprime contagion. After all, subprime is subprime and credit is correlated. Lower-quality, more-levered lending (with less collateral) is not confined to consumer loans, credit cards, homes, recreational vehicles and autos -- as investors might soon find out.

A Brief History of Derivatives

The history of derivatives is quite colorful and surprisingly a lot longer than most people think. A few years ago I compiled a list of the events that I thought shaped the history of derivatives. That list is published in its entirety in the Winter1995 is sue of Derivatives Quarterly. What follows here is a snapshot of the major events that I think form the evolution of derivatives.

I would like to first note that some of these stories are controversial. Do they really involve derivatives? Or do the minds of people like myself and others see derivatives everywhere?

Dollar Drops Against Euro as U.S. Consumer Confidence Declines

The dollar fell against the euro and yen as a private report showed consumer confidence in the U.S. dropped this month, increasing the likelihood of a cut in borrowing costs by the Federal Reserve.

The U.S. currency also weakened as a private survey showed the price of homes in 20 U.S. metropolitan areas fell in January for the first time in at least six years and a Federal Reserve report showed a regional decline in manufacturing this month. U.S. consumer confidence declined in March from a five-year high as concern over mortgage delinquencies mounted.

Subprime Defaults May Spread to Auto Bonds, S&P Says

Bonds backed by automobile loans may be hurt by rising subprime mortgage defaults as people with poor credit struggle with their household debt, according to Standard & Poor's.

Capital One Financial Corp., Wachovia Corp., Wells Fargo & Co., and other lenders have lent more funds to people with bad credit scores in the past few years to sustain growth, S&P said today in a report by analysts led by Mark Risi. The loans are also for longer terms, increasing the probability of default, the analysts said. About 68 percent of 2006 subprime auto loans were due in five years or more, Risi said.

Capitalist Conspiracy: An Inside View of International Banking by G. Edward Griffin

A video adaption of a documentary filmstrip tracing the history of a small group of people who control the money systems of the world. It shows how this monopoly is protected by governments and how the group's vast wealth is derived from creating money out of nothing. We see how this group wields power through government, foundations, education, and the mass media. 48-minute video.

How the US sub-prime market got out of control

Stock markets around the world have bounced strongly this week, following the turmoil earlier this month.

In no small part, this was down to the Federal Reserve changing the wording on its latest interest rate statement on Wednesday. It left the key US interest rate exactly where it was, but indicated it was slightly more worried about growth, and a little less concerned about inflation.

Derivatives help, but don't ban risk-Fed officials

Booming credit derivative markets have spread risks more widely but have not made them disappear, top Federal Reserve officials said on Thursday as U.S. lawmakers debated the financial stress arising from the problems of subprime mortgage borrowers.

"I want to emphasize that the fundamental risks in credit markets have not been changed by the new instruments that are now being traded," Federal Reserve Governor Randall Kroszner told a credit market conference.

`Short Sellers' Who Predicted Subprime Rout See More Declines

The collapse in shares of subprime- mortgage companies over the past month rewarded so-called short sellers who bet that rising defaults among the riskiest borrowers would curb lenders' profits.

Some traders who predicted declines in shares of New Century Financial Corp., NovaStar Financial Inc. and Accredited Home Lenders Holding Co. say such stocks may fall further as loan delinquencies increase and demand for mortgage-backed securities wanes. New Century sank 90 percent last month, while NovaStar lost 73 percent. Accredited slid 54 percent.

OIL PRICES MORE THAN JUST A FUNCTION

As the global hunt for new oil reserves continues to escalate, attention focuses almost entirely upon supply and the development of the technology necessary to assure demand is met. But don't other factors enter into the equation?

Cramer reveals a bit too much

Pimco Says Subprime Woes May Spread to Alt-A, Jumbo

Pacific Investment Management Co.,(PIMCO) the fund manager that first predicted a collapse in U.S. home prices almost two years ago, said today that losses on subprime mortgage will spread to other ``aggressively underwritten'' loans.

The Great Unraveling

by Stephen Roach ( Morgan Stanley Managing Directory and Chief Economist )

From bubble to bubble – it’s a painfully familiar saga. First equities, now housing. First denial, then grudging acceptance. It’s the pattern and its repetitive character that is so striking. For the second time in seven years, asset-dependent America has gone to excess. And once again, twin bubbles in a particular asset class and the real economy are in the process of bursting – most likely with greater-than-expected consequences for the US economy, a US-centric global economy, and world financial markets.

Matt Simmons Interview

Economics 101: Look at the Facts; Don't Listen to Hysterics

Commodities investor Jim Rogers, who co-founded the Quantum Fund with billionaire investor George Soros in the 1970s, has looked at a small percentage of mortgage defaults and sees a real estate disaster right around the corner: “Real estate prices will go down 40-50 percent in bubble areas,” he warned on Friday. “There will be massive defaults. This time it'll be worse because we haven't had this kind of speculative buying in U.S. history.”

Pimco Says Subprime Woes May Spread to Alt-A, Jumbo

Pacific Investment Management Co., the fund manager that first predicted a collapse in U.S. home prices almost two years ago, said today that losses on subprime mortgage will spread to other ``aggressively underwritten'' loans.

Defaults could spread to borrowers with so-called ``Alt-A'' or jumbo mortgages, according to a report distributed to clients today by the mortgage group at Newport Beach, California-based Pimco, which oversees about $668 billion. Alt-A's are loans to borrowers with good credit scores who fail to meet other criteria for top- rated financing. Jumbo mortgages are loans of more than $417,000.

Foreign love for U.S. assets at risk in subprime drop

The deepest housing decline in 16 years could slow an inflow of global capital that has more than funded the massive fiscal and external deficits in the United States.

For years overseas investors have been buyers of American corporate debt, mortgage-backed securities and agency bonds at record pace, helping cover the U.S. current-account deficit -- the broadest measure of international transactions.

Goldman to Pay $2M to Settle SEC Case

Goldman Sachs Group Inc.'s clearing unit has agreed to pay $2 million in civil penalties to settle allegations that it allowed customers to illegally profit by selling securities short just before public offerings of stock, regulators said.

Housing Price Declines May Set Off U.S. Recession, Merrill Says

Tighter credit standards among mortgage lenders might lower U.S. home prices by 10 percent this year and push the economy into recession, a Merrill Lynch & Co. analyst said in a report.

New Century Financial Corp., the second-biggest subprime lender and other mortgage companies may fail as the number of customers falling behind on payments rose to a four-year high. More than 20 subprime lenders have closed or sought buyers since the start of 2006 and bank regulators are pushing lenders to raise credit standards.

Top investor sees U.S. property crash

Commodities investment guru Jim Rogers stepped into the U.S. subprime fray on Wednesday, predicting a real estate crash that would trigger defaults and spread contagion to emerging markets.

"You can't believe how bad it's going to get before it gets any better," the prominent U.S. fund manager told Reuters by telephone from New York.

"It's going to be a disaster for many people who don't have a clue about what happens when a real estate bubble pops.

Top investor warns of Russia stock bubble

Prominent emerging markets investor Jim Rogers said Russian equity markets were overvalued and could burst "sooner rather than later," revealing the skeletons in the cupboard of its "outlaw capitalism."

"I wouldn't put a nickel of my own money in Russia, and I wouldn't put a nickel of your money there either," Rogers, a long-time commodities bull, told Reuters by telephone from New York on Wednesday.

Subprime shakeout could hurt CDOs

After a mortgage is sold, it's usually packaged up with other home loans into a mortgage-backed security, or MBS.

But who buys the riskier parts of these derivatives -- the bits backed by subprime mortgages offered to poorer borrowers with lower credit scores? The answer may be collateralized debt obligations, or CDOs.

Unwinding of the Yen Carry Trade, Unravels Global Stock Markets

Millions of words have been written about the heavy handed tactics of Japan’s Ministry of Finance (MoF) in manipulating the value of the Japanese yen, the Japanese bond market, and squeezing short sellers in the Nikkei-225 futures market. Manipulation of markets through the use of jawboning, re-jigging of inflation statistics, and outright intervention is a time honored tradition at the MoF.

CDOs May Bring Subprime-Like Bust for Buyouts, Junk-Rated Debt

Bond investors rattled by mounting losses in subprime U.S. mortgages say trouble is brewing in collateralized debt obligations, the same securities that fueled the boom in leveraged buyouts and cut-rate finance.

Sales of CDOs, which package loans, bonds and derivatives into new securities, rose by almost half to $918 billion last year, according to data compiled by JPMorgan Chase & Co. Demand for investments to use in CDOs has helped push risk premiums lower for everything from home loans to high-yield, high-risk bonds, forcing managers to borrow ever more money to maintain returns and stand out from the competition.

New Century's woes deepen, spread

Embattled mortgage lender New Century Financial Corp. warned Monday of a series of serious financial problems that cast its future in doubt - and cast a pall over much of the nation's financial sector.

The problems at New Century, No. 2 in lending to borrowers with weak credit, could also weigh on the nation's struggling housing market - and home prices - as a major source of mortgage financing dries up. Overall, lenders in the so-called subprime sector made $640 billion in mortgage loans last year, about a fifth of the total mortgage market and nearly double the amount from 2003.

Countrywide says its earnings may fluctuate

Countrywide Financial Corp. (NYSE:CFC - News), the largest U.S. mortgage lender, on Monday said it has low exposure to nonprime mortgages, but may still experience fluctuating earnings in the near term due to turmoil in the U.S. subprime market.

The company's shares fell 2.6 percent to $35.16 in early trading on the New York Stock Exchange.

NYT:Crisis Looms in Mortgages

Click on Subjectline to view New York Times article. Click on the image to enlarge.

Crash Proof - Peter Schiff.

Interesting analogy from Peter Schiff's new book - Crash Proof.

Let us suppose six castaways are stranded on a desert island, five Asians and one American. Their problem is hunger. So they sit down and divide labor as follows: One Asian will do the hunting, another will fish, the third will scrounge for vegetation, the fourth will cook dinner, and the fifth will gather firewood and tend the fire. The sixth, the American, is given the job of eating.

So five Asians work all day to feed one American, who spends his day sunning himself on the beach. The American is employed in the equivalent of the service sector, operating a tanning salon that has one customer: himself. At the end of the day, the five Asians present a painstakingly prepared feast to the American, who sits at the head of a special table built by the Asians specifically for this purpose.

Now the American is practical enough to know that if the Asians are going to continue providing banquets they must also be fed, so he allows them just enough scraps from his table to sustain them for the following day's labor.

Modern-day economists would have you look at the situation just described and believe that the American is the lone engine of growth driving the island's economy; that without the American and his ravenous appetite, the Asians on the island would all be unemployed.

THe reality, of course, is that the American is not the engine of growth, but the caboose, and the best thing the Asians could do would be to vote the American off the island--decoupling the caboose from the gravy train. Without the American to consume most of their food, they'd have a lot more to eat themselves. Then the Asians could spend less time working on food-related tasks and devote more time to leisure or to satisfying other needs that now go unfulfilled because so many of their scarce resource are devoted to feeding the American.

Ah, you say, but that analogy is flawed because in the real world the United STates does pay for its "food" and Asians do receive value in exchange for their effort.

Okay, then let's assume the American on the islands pays for his food the same way real-world Americans pay, by issuing IOUs. At the end of each meal, the Asians present the American with a bill, which pays by issuing IOUs claiming to represent payments of food.

The castaways all know that the IOUs can never be collected since the American not only produces no food to back them up, but also lacks the means and the intention of ever providing any. But the Asian accept them anyway, each day adding to the accumulation of worthless IOUs. Are the Asians any better off as a result of this accumulation? Are they any less hungry? Of course not.

Suppose an Asian Central Banker suddenly washes up onto the island and volunteers his services. Now each day the central banker taxes the other Asians on the island by confiscating a portion of the scraps of food the American throws them each day from his table. The central banker then agrees to return these morsels to the other Asians each day, in exchange for each Asian's daily accumulation of the American's IOUs, less a small percentage for himself because he, the central banker, also has to eat.

Does the existence of a central banker change anything? Do the Asians have any more to eat because their own central banker gives them back a portion of the food he took from them in the first place? Do the American IOUs have any more value because they can now be exchanged in this manner? Of course not.

The Asians will be better off without us

The real world lessnon is that if it doesn't make sense for the six make believe Asians to support millions of real-world Americans. The fact that they do so in exchange for worthless IOUs in no way alters this reality.

There is no question that in the short run, by allowing the U.S dollars to collapse (in effect, voting millions of Americans off the island), there will be some disruptions of Asian economies. Of course, there will be some initial losers, particularly among those Asians who currently profit from the present arrangement. However, these profits come only at the expense of greater losses borne by the entire Asian population.

In the end, the cessation of America's excess consumption, which is not a benefit Asians enjoy but rather a burden they now disproportionately bear, will be the best thing that can happen to them. Like the serfs being liberated from their lords, their scarce resources will be freed to satisfy their own needs and desires, and their standards of living will rise accordingly. As their savings finance increased capital investment, rather than being squandered on American consumption, their future standards of living will rise that much faster as well.

Jim Puplava Interviews Peter Schiff on Financial Sense.

PAULSON'S 'PLUNGE TEAM' MANIPULATING STOCK MARKET

The original purpose of the Plunge Protection Team was to prevent another 1987-type “Black Monday" stock market crash. This seems like a reasonable way to address the prospect of a major economic collapse following a terrorist attack or a natural disaster. However, the systemic weakness in the market and the great uncertainty surrounding hedge funds and derivatives suggests that the PPL is probably being used to stabilize an over-leveraged and thoroughly-debauched market system: Mike Whitney

Another Potential Crisis for Investors - Israel Plans to Attack Iran’s Nuclear Facilities

There's a heck of a lot happening right now! The markets have been volatile, so I want to give you a quick update on where I see things heading next. And I also want to tell you about a looming threat that many investors are still ignoring. Let me get right to it ...

First, with rare exceptions, my indicators on the U.S. markets are turning south. It appears that my warnings are coming to pass — investors are finally starting to notice weak real estate markets, too much debt in the country, peaking corporate earnings, and the weak dollar. So don't be surprised one iota if U.S. stock markets start to yo-yo like crazy, or even fall sharply.

Countrywide Financial Insider Trading

Click on the rectangle above to view the picture.

Subprime woes: How far, how wide?

Lending to homeowners and buyers without good credit has suddenly become a very bad business - and possibly a very big problem for the U.S. economy as a whole.

The sector is known as subprime mortgages, which pumped $640 billion into the economy through facilitating home purchases and refinancings in 2006, according to trade publication Inside B&C Lending. That's nearly twice the level of this kind of lending seen as recently as 2003.

Analysts warn New Century may not survive

Several analysts agreed Monday that New Century Financial Corp., one of the nation's largest subprime mortgage lenders, likely faces liquidation or bankruptcy following revelations that it's under criminal investigation and in violation of debt covenants with several lenders.

"New Century is more likely to enter the death spiral we had feared, as filing delays, financial difficulties, likely restricted liquidity and regulatory/criminal investigations could conspire to limit its options outside of bankruptcy," Merrill Lynch analysts wrote early Monday.

Lenders Take Beating in Subprime Fallout

Mounting concerns on Wall Street that mortgage lenders might be hurt by increasing defaults and delinquencies sent investors fleeing Monday from some of the biggest names in the industry.

The meltdown among lenders that specialize in home loans to people with weak credit, known in the industry as subprime lenders, again ravaged stock prices. Financial institutions from Britain's HSBC Holdings PLC to subprime leader Countrywide Financial Corp. sank amid reports of strained portfolios as loans went bad.

Lehman Cuts Prime Mortgage Lenders on Default Risks

Lehman Brothers Holdings Inc. cut its investment rating on U.S. mortgage companies including Countrywide Financial Corp. because a surge in defaults may be spreading beyond the riskiest loans.

Lehman analyst Bruce Harting changed his recommendation for the so-called prime lenders to ``neutral'' from ``positive,'' and dropped Countrywide, the biggest U.S. mortgage lender, to ``equal weight'' from ``overweight.''

HSBC's record write-off to ruin results

HSBC, Britain's biggest bank, is today expected to stun the stock market by warning that misadventures in the US mortgage market have forced to it to write off up to $11bn (£5.7bn).

The scale of the write-off is likely to overshadow HSBC's announcement of record profits in 2006.

Asian Stocks Tumble on U.S. Economic Concern; Toyota, BHP Slide

Asian stocks tumbled, extending a global selloff that wiped at least $1.5 trillion from the value of global equities, on concern U.S. growth will stall.

Toyota Motor Corp., the world's second-largest carmaker, and BHP Billiton, the biggest mining company, slid after consumer confidence declined in the U.S., Asia's biggest export market.

Peak Oil Passnotes: Stock Markets Tumble but Crude Holds Firm

At the end of 2006, we saw the price of crude oil tumble, right across the forward curve. The non-appearance of the hurricane season in the U.S., tied up with the absence of any major geo-political event calmed the markets and opened the way for traders to take their monies off the table. Unsurprisingly they did not miss the opportunity.

After a brief surge around Christmas, crude fell back as the new year opened, but since then we have seen the price gradually inch its way back up hitting $61. This has all happened concurrently with emerging problems in the state of the world economy. The rising strength of the yen has hit the carry trade, the weakness of the dollar and the U.S. deficit unsettles many money managers, throw in the faltering mortgage and house markets in the U.S. and rising personal bankruptcies around the OECD nations and one can see some stormy times ahead.

Correction: this could become a crash after all

As traders brace for fresh turmoil, soothing words may simply be hiding reality

With his low opinion poll ratings, George Bush needs a crash on Wall Street like a hole in the head. The days are ticking away towards the end of his presidency and the Pentagon is warning that unless the "surge" in Iraq works the United States could be heading for another Vietnam.

Which market will blow up next?

China isn't the only country with an overheating economy and enormous domestic problems. Here's another I'd steer clear of for now -- despite its many attractions.

It's only logical to wonder after the 9% plunge in China's Shanghai stock market led to a global sell-off on Feb. 27. That ended with the Dow Jones Industrial Average ($INDU) down 416 points on the day.

OPEC's 254-billion-dollar upstream expansion plan to raise production capacity risks being delayed if oil prices drop below 50 dollars a barrel

JOHN MAYNARD KEYNES was a day trader. Besides his own fortune, he invested the money of his employer, King’s College of Cambridge University. From 1928 to 1945, when British equities shrank 0.5 percent a year on average, Keynes earned the college an annualized return of 13.2 percent, wagering on stocks and bonds, but also currencies and commodities, using insight into global events.

Inflation in the pipleline not Deflation - Stock Market is Correcting

According to deflationists, we are at the cusp of a collapse in the money supply. There are two articles I previously published titled "Diatribes of a Deflationist" and "Diatribes of a Deflationist II". I do not like to spew information contained in prior research articles because unless I see any change to an argument it is pointless to regurgitate the same information. As such refer to the archives section of this site under my name to review these and other prior material mentioned below.

Peak Oil Passnotes: Stock Markets Tumble but Crude Holds Firm

At the end of 2006, we saw the price of crude oil tumble, right across the forward curve. The non-appearance of the hurricane season in the U.S., tied up with the absence of any major geo-political event calmed the markets and opened the way for traders to take their monies off the table. Unsurprisingly they did not miss the opportunity.

A real monster behind the market plunge! (by Mike Larson)

If you think stock markets were the only ones that went haywire this week, look again:

The dollar fell sharply, especially against the yen ... Treasury bonds soared, with the long bond gaining almost a point and a half on February 27 alone ... and gold prices swung all over the place.

Berkshire Hathaway Annual Report

We’ve made large indirect currency profits as well, though I’ve never tallied the precise amount.For example, in 2002-2003 we spent about $82 million buying – of all things – Enron bonds, some ofwhich were denominated in Euros. Already we’ve received distributions of $179 million from these bonds,and our remaining stake is worth $173 million. That means our overall gain is $270 million, part of which came from the appreciation of the Euro that took place after our bond purchase.

When we first began making foreign exchange purchases, interest-rate differentials between the U.S. and most foreign countries favored a direct currency position. But that spread turned negative in 2005. We therefore looked for other ways to gain foreign-currency exposure, such as the ownership of foreign equities or of U.S. stocks with major earnings abroad. The currency factor, we should emphasize, is not dominant in our selection of equities, but is merely one of many considerations.

As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues to be high. I fervently believe in real trade – the more the better for both us and the world. We had about $1.44 trillion of this honest-to-God trade in 2006. But the U.S. also had $.76 trillion of pseudo-trade last year – imports for which we exchanged no goods or services. (Ponder, for a moment, how commentators would describe the situation if our imports were $.76 trillion – a full 6% of GDP – and we had no exports.) Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of
what we owned in order to consume more than we produced.

The U.S. can do a lot of this because we are an extraordinarily rich country that has behaved responsibly in the past. The world is therefore willing to accept our bonds, real estate, stocks and businesses. And we have a vast store of these to hand over.

These transfers will have consequences, however. Already the prediction I made last year about one fall-out from our spending binge has come true: The “investment income” account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse compounding” as we pay ever-increasing amounts of interest on interest.

I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption 16 of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual “tribute” so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking.

US property market, sub-prime mortgages, house prices, economic threats, John Stepek

Global stock markets tentatively recovered yesterday from Tuesday’s ‘Shanghai Surprise’ as The Telegraph dubbed it.

In the US, the Dow Jones rallied by 52 points - still a long way off the 400 or so plunge seen on Tuesday. The FTSE 100 didn’t do so well, ending another 114 points off, at 6,171, though the rally on Wall Street prevented even worse carnage.

Stock Sell-Off in China Hits Wall Street

A plunge in Chinese stocks rippled across global markets yesterday, triggering a massive wave of selling in the United States that sent the Dow Jones industrial average down 3.3 percent, or 416 points, its biggest decline since March 2003.

The news from Asia sparked the initial sell-off, but a confluence of other events, including news of rising real estate loan delinquencies, a surprisingly weak manufacturing report and a bombing near Vice President Cheney in Afghanistan, made an already difficult day worse.

Stocks Have Worst Day Since 9/11 Attacks

Stocks had their worst day of trading since the Sept. 11, 2001, terrorist attacks Tuesday, hurtling the Dow Jones industrials down more than 400 points on a worldwide tide of concern that the U.S. and Chinese economies are stumbling and that share prices have become overinflated.

Subprime loans slide with housing market

Homeowners with troubled credit histories are finding it harder to get mortgages or refinance homes because softening in the housing market is making lenders less likely to handle riskier loans.

Several lenders of subprime mortgages -- used primarily for home equity loans and for people with spotty credit -- have shown signs of trouble after the housing bubble popped and more homeowners began defaulting high-interest mortgages.

Feel Depression Coming On? We've Got Stocks for You

MAYBE IT'S THE February blahs, the short days and the endless slush. Or maybe it's the necrophilia dominating the cable news, with occasional interruptions from Baghdad.

I suppose there's even a small chance that my mood's been affected by the performance of the U.S. economy, which is nowhere near as strong as the statistics made it appear last month. Resilient, sure. Fundamentally sound, absolutely. But strong? Not quite, not with growth mired on the wrong side of 2.5% and inflation higher than the Fed would like.

Zimbabwe: Cash Flow Planning Under Hyperinflation

Cash flow planning is difficult enough in a low inflation environment. This is especially so for entrepreneurs and small business owners without a strong background in accounting or financial management.

What is the difference between deflation now and that during great deprssion? What can you do to protect yourself?

The economy is headed for a serious slowdown accompanies with deflation in most sectors. The last time it happened was in 1929-1934. It was the time of great depression. There are many parallels between the great depression and now. There are some significant differences too. Are you prepared to handle the differences?

UTI Mutual rolls out gold ETF -Video

UTI Mutual Fund today launched its gold exchange traded fund (GETF), becoming the second fund house in the country after Benchmark AMC to offer this asset class investment.

The new fund offer (NFO), with a minimum investment of Rs 20,000, would be available between March 1 and 12 and would be listed on the National Stock Exchange (NSE) on March 26.