What is the Repo Market? No, it is not the guy coming to repossess your automobile for those overdue payments.
The Repo Market is where over $3 Trillion in debt is financed each day worldwide. Repo is short for repurchase agreements. Most transactions are effectively collateralized overnight short-term loans.
The U.S. Fed uses the Repo Market to temporarily extend credit in tight markets.
Back on September 16th the federal Repo offering froze up, creating panic and fear. There was a mismatch in cash flowing out with securities coming in; this created a crunch for those needing cash driving up interest rates to above 10% which were normally at 2%.
To address the problem the U.S. Fed load out $75 Billion a day in cash over 4 days until the markets settled down.
Many, including the Fed, concluded in the immediate aftermath that two transitory events collided: investors used repo to finance the purchase of a large batch of newly auctioned Treasuries at the same time that quarterly corporate tax payments drained liquidity from that market. This combination of newly auctioned Treasuries and quarterly corporate tax payments is occurring this week again leading to a microscope being applied to the Repo market.
The BIS (Bank for International Settlements) issued a report outlining broader concerns about the U.S. Repo Market - September stress in dollar repo markets: passing or structural?
Four banks (Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo) that dominate the U.S Fed Repo market hold about 25% of the reserves in the U.S. banking system, but 50% of the Treasuries. This creates a concentration that is apt for problems.
There are many financial pundits and media outlets outlining fears that the Fed Repo crisis may be a bigger issue in December, and the September events were only a preview.
In the recent weekend the U.S. Fed has added billions in liquidity in an attempt to forestall any potential crisis. CNBC and other outlets covered the Feds weekend purchase operations in depth. The New York Fed issued an unusual statement about repurchase operations.
How will the situation shake out this week in December and in the upcoming year? Only time will tell. It appears the U.S. Fed is attempting to get ahead of the situation by providing more cash liquidity before critical junctures.
Showing posts with label macroeconomic. Show all posts
Showing posts with label macroeconomic. Show all posts
Tuesday, December 17, 2019
Sunday, December 8, 2019
Sunday, April 15, 2012
Does your employer collect your state income tax and keep it for themselves?
More than 2,700 companies collect your state income tax, and then keep it for themselves under deals they have struck with the states. GE, Goldman Sachs, P&G, Chrysler, Ford, GM Nissan, Toyota, and many others all benefit. The practice is more pervasive than thought.
Reuters has a good summary article.
Taxed by the boss
Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday.
The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid.
General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says.
Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.
(more at url above)
Reuters has a good summary article.
Taxed by the boss
Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday.
The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid.
General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says.
Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.
(more at url above)
Saturday, December 10, 2011
Europe on the Brink: Bank Failures
Is this the time to start a betting pool on which large European bank fails first or pray for some short-term fix that will delay the inescapable failures?
The horrible truth dawned on Europe’s leaders late last year; the Euro has no future except for the disassembly of the system. Any recent meetings will only stave off the inevitable.
The next leg appears to be failure of multiple banks in Europe. Collectively these institutions need to immediately find €114.7bn of extra capital in order to weather the storm. The banks can no longer depend on the Euro zone governments as a backstop; the major governments are even unable to combine to offer a common bond auction. Individually the recent government bond auctions have been severely under-subscribed; no one wants to purchase European government debt at any type of reasonable price – only at yields effectively implying the entire EU is in default.
Will one of France’s large banks be the first to fail; BNP Paribas, Credit Agricole and Societe Generale. All were downgraded by Moody’s on Friday. Germany’s Commerzbank appears to be teetering on the brink. Do the government coffers in France and Germany still contain enough funding to bail-out these entities with a significant cash infusion, or is the entire Eurozone banking system on the edge of collapse as the banks run out of assets to pledge to keep vital funding lines open.
It appears that the U.K was very wise when they rejected any further involvement with this debacle.
The horrible truth dawned on Europe’s leaders late last year; the Euro has no future except for the disassembly of the system. Any recent meetings will only stave off the inevitable.
The next leg appears to be failure of multiple banks in Europe. Collectively these institutions need to immediately find €114.7bn of extra capital in order to weather the storm. The banks can no longer depend on the Euro zone governments as a backstop; the major governments are even unable to combine to offer a common bond auction. Individually the recent government bond auctions have been severely under-subscribed; no one wants to purchase European government debt at any type of reasonable price – only at yields effectively implying the entire EU is in default.
Will one of France’s large banks be the first to fail; BNP Paribas, Credit Agricole and Societe Generale. All were downgraded by Moody’s on Friday. Germany’s Commerzbank appears to be teetering on the brink. Do the government coffers in France and Germany still contain enough funding to bail-out these entities with a significant cash infusion, or is the entire Eurozone banking system on the edge of collapse as the banks run out of assets to pledge to keep vital funding lines open.
It appears that the U.K was very wise when they rejected any further involvement with this debacle.
Sunday, October 9, 2011
Bond Spreads suggest BoA is going out of business
It is interesting to note the greatly increasing credit default swaps for Bank of America over the past few weeks. When viewed in a traditional context, the acceleration of the increased spreads suggest that BoA will be out of business somewhere in 2012.
The increased spreads for BoA is noted in a recent WSJ article. The article does not take the next step to compare the spread increase to those of other financial institutions that have required re-organization or cash infusion to remain solvent.
"Bank of America credit default swaps have spiked to 4.60 percentage points this morning, up from 4.40 percentage points Monday. The annual cost of protecting a notional $10 million of the bank's senior bonds against default for five years is now $460,000, suggesting banks are under more pressure than ever and banking events overseas are just one negative force weighing down the sector."
The stock price below $6 is not a good sign either, but not as pertinent as the debt spread situation.
The increased spreads for BoA is noted in a recent WSJ article. The article does not take the next step to compare the spread increase to those of other financial institutions that have required re-organization or cash infusion to remain solvent.
"Bank of America credit default swaps have spiked to 4.60 percentage points this morning, up from 4.40 percentage points Monday. The annual cost of protecting a notional $10 million of the bank's senior bonds against default for five years is now $460,000, suggesting banks are under more pressure than ever and banking events overseas are just one negative force weighing down the sector."
The stock price below $6 is not a good sign either, but not as pertinent as the debt spread situation.
Saturday, April 16, 2011
Bill introduced to reinstate Glass-Steagull
One of the key points that the recent financial crisis has demonstrated is that there is an need to separate investment and commercial banking. Investment banking is built on risk while commercial banking is built on safety. Allowing the combination of the two starting in the 1980's is the real root cause of our current financial crisis - enabling greedy risk prone practices to run amok in the traditionally prudent mortgage industry.
Glass-Steagull originally separated commercial and investment banking in 1933 after it became obvious that the catastrophic bank failures during the Great Depression were due to the jeopardy created by conflicting purposes.
Finally someone in Congress has come to their senses and introduced a bill to re-introduce the intent of Glass-Steagull. Help support HR.1489
Glass-Steagull originally separated commercial and investment banking in 1933 after it became obvious that the catastrophic bank failures during the Great Depression were due to the jeopardy created by conflicting purposes.
Finally someone in Congress has come to their senses and introduced a bill to re-introduce the intent of Glass-Steagull. Help support HR.1489
Thursday, March 10, 2011
Trade Deficit Destroys 3 Million Jobs a Year
Finally an economist steps up and places a "job loss" price on China's currency manipulation. Beijing undervalues the yuan by 40% leading to imbalanced trade, a flood of cheap imports, and loss of American jobs. While it is easy to "blame China" for the entire situation - typical American politics in Washington also deserves an equal share of the blame. It is time for the U.S to address the continuing trade deficit by placing appropriate tariffs on nations that do not freely float and manipulate their currencies. Only these type of measures will restore trade balance and American manufacturing.
Trade Deficit Destroys 3 Million Jobs a Year
A solution is proposed "The United States should impose a tax on dollar-yuan conversions in an amount equal to China's currency market intervention divided by its exports -- about 35%. That would neutralize China's currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it's self defense."
Trade Deficit Destroys 3 Million Jobs a Year
A solution is proposed "The United States should impose a tax on dollar-yuan conversions in an amount equal to China's currency market intervention divided by its exports -- about 35%. That would neutralize China's currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it's self defense."
Tuesday, March 8, 2011
Greece on the Brink
Default risk in the Euro zone is rising. Rating agencies are regularly behind the curve, the implication being that the default risk is greater than the current debt rating. Credit ratings of other Euro zone countries will be downgraded over the next few months - setting the table for a buffet of defaults in 2012/2013.
Moody's downgrade tips Greece closer to brink
"Moody's Investors Service downgraded Greek debt to B1 from Ba1 - lower than Egypt - and said it may cut further."
Moody's downgrade tips Greece closer to brink
"Moody's Investors Service downgraded Greek debt to B1 from Ba1 - lower than Egypt - and said it may cut further."
Wednesday, November 17, 2010
The EU disintegration
When Humpty falls off the wall, it does not look like all of the EU's politicians, lawyers, economists, and businesses will be able to put the pieces back together. The shadow is rocking and only a short time remains before a mess is splattered across the entire continent.
An earlier post discussed possible outcomes to the EU currency default crisis. An excellent summary of the new awareness growing across Europe can be found in the Telegraph article - The horrible truth starts to dawn on Europe's leaders.
An earlier post discussed possible outcomes to the EU currency default crisis. An excellent summary of the new awareness growing across Europe can be found in the Telegraph article - The horrible truth starts to dawn on Europe's leaders.
Friday, May 21, 2010
The Future of the Euro
The fire and brimstone clouding the European sky is not the volcanic ash from Iceland but rather the bleak outlook for a unified currency. To put it mildly the Euro is doomed, it is just a just a question of how the entire scenario unfolds.
Currencies only work for a nation when their own central government has control over the money. A country using a currency while ceding control of the exchange mechanism simply makes the nation a victim of all the other entities using the notes. Germany and other northern European nations recently learned this harsh lesson. The Euro worked while all the economies across the continent were rising, but quickly imploded when a recession occurred. The southern European nations with poor financial controls that that have historically defaulted multiple times are now in a position to collectively drag down the entire collection of economies due to the common currency. Prior the Euro these countries would default and their individual currencies would be devalued.
It is true that the more people that use a currency then the stronger the value. Witness the strength of the deutschemark after the inclusion of East Germany. However a country must have sole control over their currency and not yield power to a central authority in order to be successful. I found that the Germans were very supportive of the merger of East and West Germany despite concerns over the poverty in the East at the time. Today, Germans are outright furious that the country is bailing out Greece and other nations. Most of the people on the street recognize what is going to happen next which is why they are lining up at banks to demand Euro notes with X’s in the serial numbers that are associated with Germany and not other countries.
While the entire situation can play out in multiple scenarios; there are two obvious ones. The first is that the Euro will divide into two segments, the stronger northern European nations with one version of the Euro and the southern European nations with a version of the Euro which is next to worthless. This explains why German citizens are lined up demanding “their national Euro notes”. It is likely that outside notes will soon be devalued.
The second possible scenario involves individual countries withdrawing from the Euro exchange mechanism and reinstituting their own national currencies. A good number of barriers and political negotiations will have to be overcome to allow this type of withdrawal. On the other hand people rioting in the streets generally has the tendency to make central union decision making to move with more haste.
Another likely scenario involving individual nations withdrawing from the Euro focuses on the central union giving countries with debt problems the boot and demanding that they withdraw from the Euro. As the size and scope of the debt issues become more apparent there will be a greater howl across the continent for the offending nations to withdraw.
In the long term where will this leave the Euro? It would be best if it was used as a basket of currencies for international trade as it was originally intended – 23% franc, 34% deutschemark, etc. rather than being used as a universal note in retail trade across the entire EU block. The disbanding of the common Euro is the best solution and the obvious path for continent.
Currencies only work for a nation when their own central government has control over the money. A country using a currency while ceding control of the exchange mechanism simply makes the nation a victim of all the other entities using the notes. Germany and other northern European nations recently learned this harsh lesson. The Euro worked while all the economies across the continent were rising, but quickly imploded when a recession occurred. The southern European nations with poor financial controls that that have historically defaulted multiple times are now in a position to collectively drag down the entire collection of economies due to the common currency. Prior the Euro these countries would default and their individual currencies would be devalued.
It is true that the more people that use a currency then the stronger the value. Witness the strength of the deutschemark after the inclusion of East Germany. However a country must have sole control over their currency and not yield power to a central authority in order to be successful. I found that the Germans were very supportive of the merger of East and West Germany despite concerns over the poverty in the East at the time. Today, Germans are outright furious that the country is bailing out Greece and other nations. Most of the people on the street recognize what is going to happen next which is why they are lining up at banks to demand Euro notes with X’s in the serial numbers that are associated with Germany and not other countries.
While the entire situation can play out in multiple scenarios; there are two obvious ones. The first is that the Euro will divide into two segments, the stronger northern European nations with one version of the Euro and the southern European nations with a version of the Euro which is next to worthless. This explains why German citizens are lined up demanding “their national Euro notes”. It is likely that outside notes will soon be devalued.
The second possible scenario involves individual countries withdrawing from the Euro exchange mechanism and reinstituting their own national currencies. A good number of barriers and political negotiations will have to be overcome to allow this type of withdrawal. On the other hand people rioting in the streets generally has the tendency to make central union decision making to move with more haste.
Another likely scenario involving individual nations withdrawing from the Euro focuses on the central union giving countries with debt problems the boot and demanding that they withdraw from the Euro. As the size and scope of the debt issues become more apparent there will be a greater howl across the continent for the offending nations to withdraw.
In the long term where will this leave the Euro? It would be best if it was used as a basket of currencies for international trade as it was originally intended – 23% franc, 34% deutschemark, etc. rather than being used as a universal note in retail trade across the entire EU block. The disbanding of the common Euro is the best solution and the obvious path for continent.
Thursday, April 29, 2010
Saturday, April 17, 2010
Analysis: SEC vs. Goldman
The civil fraud charges filed by the Securities and Exchange Commission Friday accused Goldman Sachs of "defrauding investors by misstating and omitting key facts". These financial charges also mark a new era of government regulatory enforcement of Wall Street. No longer will the SEC simply come to consent decrees with financial firms where they do not admit guilt and in most cases pay a small fine viewed as a cost of doing illegal business.
One immediate question is how do the SEC charges filed against Goldman Sachs change the playing field? Do these charges even mean anything in a broader regulatory context? In my opinion, the actions from the SEC on Friday defines a new playing field by Washington marked with the following game-changing alterations:
a) A broader effort to get the derivatives market properly regulated to minimize the possibility of future meltdowns.
b) The Goldman Sachs charges are expected to be the first of a lengthy string of government actions against multiple firms that contributed to the financial meltdown. The lack of accountability by firms which accepted bailouts is no longer acceptable to main street and their representatives in Washington.
c) A dismantling by regulation of firms that are "too big to fail"; including the scaling back of previous government legislation that allowed the merger of commercial and investment banks.
d) The teeth of the SEC are back in place. For the last twenty years the SEC has been a toothless enforcement entity; forcing state AGs to take a leading prosecution role in financial malfeasance. This is likely to be the start of a change where the federal government will have deep roots in the policing of problems involving large financial firms.
The roll out of these regulatory reforms are expected to take years; however as noted by an AFP news article "We suspect that after Friday, others on Wall Street may have a harder time sleeping."
Another good clip is Ratigan on MSNBC where he compares Goldman Sachs to an automobile manufacturing company that deliberately took critical component from the inside of cars (CDOs) and then sold the cars as being great investments while betting on the side that the cars they created would all blow up spectacularly. An apt analogy - watch it here.
One immediate question is how do the SEC charges filed against Goldman Sachs change the playing field? Do these charges even mean anything in a broader regulatory context? In my opinion, the actions from the SEC on Friday defines a new playing field by Washington marked with the following game-changing alterations:
a) A broader effort to get the derivatives market properly regulated to minimize the possibility of future meltdowns.
b) The Goldman Sachs charges are expected to be the first of a lengthy string of government actions against multiple firms that contributed to the financial meltdown. The lack of accountability by firms which accepted bailouts is no longer acceptable to main street and their representatives in Washington.
c) A dismantling by regulation of firms that are "too big to fail"; including the scaling back of previous government legislation that allowed the merger of commercial and investment banks.
d) The teeth of the SEC are back in place. For the last twenty years the SEC has been a toothless enforcement entity; forcing state AGs to take a leading prosecution role in financial malfeasance. This is likely to be the start of a change where the federal government will have deep roots in the policing of problems involving large financial firms.
The roll out of these regulatory reforms are expected to take years; however as noted by an AFP news article "We suspect that after Friday, others on Wall Street may have a harder time sleeping."
Another good clip is Ratigan on MSNBC where he compares Goldman Sachs to an automobile manufacturing company that deliberately took critical component from the inside of cars (CDOs) and then sold the cars as being great investments while betting on the side that the cars they created would all blow up spectacularly. An apt analogy - watch it here.
Friday, June 19, 2009
A Tale of Two Depressions
Finally, an article complete with charts that compares the economic decline in 1929 to the situation today. After reading the information, it leaves little doubt the the current scenario in terms of industrial output decline and other factors is worse than the 1930s. It only leaves the question if the government policy reponse of massive stimulus and bailouts will actually improve the economic recovery this time around.
A Tale of Two Depressions
http://www.voxeu.org/index.php?q=node/3421
A Tale of Two Depressions
http://www.voxeu.org/index.php?q=node/3421
Friday, March 20, 2009
Today's must read article
One article showed up in my inbox today which is an excellent read. It has some solid information describing the differences between a Recession and a Depression mixed into the overview. Ray Dalio, founder of Bridgewater Associates and manager of what is now the world's biggest hedge fund, believes we are in the middle of a global depression.... or a 'D-process' as he calls it.
Inside the world's biggest hedge fund
http://biz.yahoo.com/hftn/090319/031809_okeefe_bridgewater_fortune.html?&.pf=retirement
"Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both."
Inside the world's biggest hedge fund
http://biz.yahoo.com/hftn/090319/031809_okeefe_bridgewater_fortune.html?&.pf=retirement
"Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both."
Sunday, March 1, 2009
Trillion Dollar Bailout
Come play the game: Trillion Dollar Bailout
"Punish greedy fat cats and save honest peoples! Hand out moneys to homeowners. Put the hurt on dudes in suits! Do it right and save the world!"
Drag the slap symbol to deny a bailout and drag the cash bag to provide assistance to the various characters that pop-up.
Here are some hints - don't give the money to banks & only give to homeowners who are not in foreclosure. Go to the Addicting Games site to play.
"Punish greedy fat cats and save honest peoples! Hand out moneys to homeowners. Put the hurt on dudes in suits! Do it right and save the world!"
Drag the slap symbol to deny a bailout and drag the cash bag to provide assistance to the various characters that pop-up.
Here are some hints - don't give the money to banks & only give to homeowners who are not in foreclosure. Go to the Addicting Games site to play.
Tuesday, February 24, 2009
The Math that Destroyed Wall Street...... and Main Street
Wired magazine recently presented a good article about the underlying math which destroyed Wall Street.
Recipe for Disaster: The Formula That Killed Wall Street
Page 3 actually outlines the basic math of the Copula Function approach which underlies the CDO market.
Recipe for Disaster: The Formula That Killed Wall Street
Page 3 actually outlines the basic math of the Copula Function approach which underlies the CDO market.
Tuesday, August 12, 2008
The Socionomics of the Russia Georgia conflict
Socionomist and EWI Analyst who predicted Russia-Georgia conflict to appear on Bloomberg TV today at 5:30 p.m. ET.
In November 2007, the Socionomics Institute’s Alan Hall issued the 20-page research report, "Sizing Up A Superpower." It assessed the relationship between Russia's turbulent history and its then-current social mood.
More specifically, he spoke of "Georgia's desire to bring its pro-Russian separatist regions under control, but Russia has military plans to stop any move by Georgia to secure these regions."
Mr. Hall will discuss the developing situation in the region today, Tuesday, August 12 at 5:30 p.m. ET on Bloomberg television. Be sure to tune in! You can stream Bloomberg TV live online here.
See http://pages.tvunetworks.com/ to download their player.
In November 2007, the Socionomics Institute’s Alan Hall issued the 20-page research report, "Sizing Up A Superpower." It assessed the relationship between Russia's turbulent history and its then-current social mood.
More specifically, he spoke of "Georgia's desire to bring its pro-Russian separatist regions under control, but Russia has military plans to stop any move by Georgia to secure these regions."
Mr. Hall will discuss the developing situation in the region today, Tuesday, August 12 at 5:30 p.m. ET on Bloomberg television. Be sure to tune in! You can stream Bloomberg TV live online here.
See http://pages.tvunetworks.com/ to download their player.
Monday, August 11, 2008
Gas at the Pump
A HingeFire survey early this summer asked readers about the projected price of gas at the pump on August 1st. The results showed the following:
Over $4.50 23%
Between $4.00 and $4.50 43%
Between $3.50 and $4.00 17%
Between $3.00 and $3.50 13%
Below $3.00 2%
The actual nationwide average price was $3.84 at the beginning of August. Congrats to the 17% who selected the $3.50 to $4.00 price range (I actually believed it would be above $4.00).
The good news for consumers at the pump is that it appears that the short term speculative bubble associated with oil has burst over the past couple of weeks. This will help both the market and your wallet when filling up the tank. As a note, 68% of readers in the most recent HingeFire survey believed that oil was in a speculative bubble. At this point, many analysts would say this perspective is correct.
Over $4.50 23%
Between $4.00 and $4.50 43%
Between $3.50 and $4.00 17%
Between $3.00 and $3.50 13%
Below $3.00 2%
The actual nationwide average price was $3.84 at the beginning of August. Congrats to the 17% who selected the $3.50 to $4.00 price range (I actually believed it would be above $4.00).
The good news for consumers at the pump is that it appears that the short term speculative bubble associated with oil has burst over the past couple of weeks. This will help both the market and your wallet when filling up the tank. As a note, 68% of readers in the most recent HingeFire survey believed that oil was in a speculative bubble. At this point, many analysts would say this perspective is correct.
Saturday, August 2, 2008
Fear grips banking customers in Venezuela
The march towards nationalization continues unabated. Over the past year the oil, telecommunications, electric, and steel-making sectors have been impacted in President Chávez’s ceaseless drive towards a socialist paradise.
Now the crisis has spilled over to the financial sector as the government seized control of a large Spanish-owned bank, Banco de Venezuela. Nervous depositors lined up seeking reassurance, and many fear a run on the bank in the coming week. Not helping matters, the central Venezuelan bank has been vague in attempting to reassure depositors that the banking system was solid.
Nearly all the companies seized by the government have been run into the ground over a short period of time; productivity has dropped and the feeble earnings have not been reinvested back into the companies.
Venezuelan bonds fell Friday for a second day reflecting “fears over the possible collapse of several banks because of rules forcing them to sell $5 billion of complex securities called structured notes. Banks bought the notes last year at values tied to high black-market rates of the dollar, exposing some of them to huge losses after the local currency, the bolívar, strengthened this year.”
Attempts of individual banks to negotiate their way out of the crisis has not paid returns as the IMF and World Bank have effectively shut off the spigot after being threatened with expulsion by Mr. Chávez.
Even the high price of oil can not cover the cost of large scale programs in Venezuela beyond the next couple of years. Any significant drop in the price of oil will cause an immediate fiscal crisis. At 32%, Venezuela also is experiencing the highest inflation in Latin America. Food-based inflation is above 52%, a crushing level for most of the population. The fiscal crisis and high inflation levels can be directly linked to government policies. This has left the poorest portion of the population, which Chavez claimed would be helped by the government’s policies, in even greater despair.
Now the crisis has spilled over to the financial sector as the government seized control of a large Spanish-owned bank, Banco de Venezuela. Nervous depositors lined up seeking reassurance, and many fear a run on the bank in the coming week. Not helping matters, the central Venezuelan bank has been vague in attempting to reassure depositors that the banking system was solid.
Nearly all the companies seized by the government have been run into the ground over a short period of time; productivity has dropped and the feeble earnings have not been reinvested back into the companies.
Venezuelan bonds fell Friday for a second day reflecting “fears over the possible collapse of several banks because of rules forcing them to sell $5 billion of complex securities called structured notes. Banks bought the notes last year at values tied to high black-market rates of the dollar, exposing some of them to huge losses after the local currency, the bolívar, strengthened this year.”
Attempts of individual banks to negotiate their way out of the crisis has not paid returns as the IMF and World Bank have effectively shut off the spigot after being threatened with expulsion by Mr. Chávez.
Even the high price of oil can not cover the cost of large scale programs in Venezuela beyond the next couple of years. Any significant drop in the price of oil will cause an immediate fiscal crisis. At 32%, Venezuela also is experiencing the highest inflation in Latin America. Food-based inflation is above 52%, a crushing level for most of the population. The fiscal crisis and high inflation levels can be directly linked to government policies. This has left the poorest portion of the population, which Chavez claimed would be helped by the government’s policies, in even greater despair.
Thursday, July 3, 2008
Global Inflation: The New Crisis
A new monster has raised its ugly head to spook investors. Inflation is accelerating at a rapid pace providing policy makers with a new set of ulcers. Unfortunately basic antacid tablets will not cure the unsettled guts of national regulators.
The spike in inflation gives flashbacks to the dreaded 1970s with stagflation era. Many older investors do not enjoy reminiscing about interest rates above 14%, food rising in price each week, investors hoarding gold coins, and long gas lines. The dilemma is that all the statistics indicate that we are heading towards a scenario with run-away rising inflation worldwide.
Regulators have commented on rising inflation, raised interest rates in hopes of moderation, and are shocked to see the numbers running upward like an out-of-control train down the tracks. With rising commodity costs, pent up wage increase requirements, and tightening credit; there is not very much the regulators will be able to do to apply the brakes.
Certainly the news flow has not been encouraging, the ECB raised lending rates today amid record inflation, while U.S. Treasury Secretary Henry Paulson said inflation was becoming the top economic focus of many countries.
Inflation is a global phenomenon; impacting countries as diverse as Iran (with 26% inflation), the Philippines, Brazil, India, Russia, South Korea, Mexico, and Indonesia. No country is immune and no market is safe. Rapidly increasing inflation is the top concern in most nations, and the situation rapidly appears to be heading towards stagflation.
The immediate question becomes how should an investor prepare for this situation? The first emphasis is that a greater portion of your portfolio needs to be placed in commodities and precious metals, or in stocks focused on these industries. There is also a need to have your income oriented investments placed in vehicles which are inflation indexed in regards to interest rates. The other alternative is the keep cash in shorter term CDs as inflation and interest rates rise, allowing an investor to ride the rising curve.
Successful investing in a rising inflationary environment is difficult. Usually the stock market returns are dismal and many other investments are also victims of an inflationary spiral. Still it is best to keep your focus on the long term, and maintain a diversified portfolio of stocks that have wide economic moats. These companies invariably become stronger in downturns as competitors fall by the wayside.
Investors should pay close attention to news about inflation during the remainder of 2008 and start making appropriate adjustments to their portfolio to ride out the storm.
The spike in inflation gives flashbacks to the dreaded 1970s with stagflation era. Many older investors do not enjoy reminiscing about interest rates above 14%, food rising in price each week, investors hoarding gold coins, and long gas lines. The dilemma is that all the statistics indicate that we are heading towards a scenario with run-away rising inflation worldwide.
Regulators have commented on rising inflation, raised interest rates in hopes of moderation, and are shocked to see the numbers running upward like an out-of-control train down the tracks. With rising commodity costs, pent up wage increase requirements, and tightening credit; there is not very much the regulators will be able to do to apply the brakes.
Certainly the news flow has not been encouraging, the ECB raised lending rates today amid record inflation, while U.S. Treasury Secretary Henry Paulson said inflation was becoming the top economic focus of many countries.
Inflation is a global phenomenon; impacting countries as diverse as Iran (with 26% inflation), the Philippines, Brazil, India, Russia, South Korea, Mexico, and Indonesia. No country is immune and no market is safe. Rapidly increasing inflation is the top concern in most nations, and the situation rapidly appears to be heading towards stagflation.
The immediate question becomes how should an investor prepare for this situation? The first emphasis is that a greater portion of your portfolio needs to be placed in commodities and precious metals, or in stocks focused on these industries. There is also a need to have your income oriented investments placed in vehicles which are inflation indexed in regards to interest rates. The other alternative is the keep cash in shorter term CDs as inflation and interest rates rise, allowing an investor to ride the rising curve.
Successful investing in a rising inflationary environment is difficult. Usually the stock market returns are dismal and many other investments are also victims of an inflationary spiral. Still it is best to keep your focus on the long term, and maintain a diversified portfolio of stocks that have wide economic moats. These companies invariably become stronger in downturns as competitors fall by the wayside.
Investors should pay close attention to news about inflation during the remainder of 2008 and start making appropriate adjustments to their portfolio to ride out the storm.
Subscribe to:
Posts (Atom)