Paulson says crisis sown by imbalance

Global economic imbalances helped to foster the credit crisis by pushing down global interest rates and driving investors towards riskier assets, outgoing US Treasury Secretary Hank Paulson told the Financial Times.

In a valedictory interview, Mr Paulson cast the crisis as partly the result of a collective failure to come to terms with the way the rise of emerging markets was reshaping the global financial system. These imbalances – arising from differences in the inclinations of different nations to save and invest – are reflected in large current account deficits and surpluses around the world.

Russian Manufacturing PMI Shrank the Most on Record in December

Russian manufacturing shrank at a record pace in December as slumping foreign and domestic demand led to production and jobs cuts, VTB Bank Europe said.

Euro Falls to Two-Week Low as European Manufacturing Shrinks

Jan. 2 (Bloomberg) -- The euro fell to a two-week low against the dollar and declined versus the yen after a European manufacturing report indicated the recession is deepening in the 16-nation region.

The euro, which became the currency of Slovakia yesterday, headed for its first weekly decline in more than a month on prospects the European Central Bank will cut its target lending rate from 2.5 percent to spur spending. The pound approached the lowest in almost seven years against the dollar as U.K. mortgage approvals slid to the weakest level since at least 1999.

“Europe is having more dismal data, and that’s why the euro is giving up its recent gains,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank by assets. “The European economy will follow the same path of the U.S., and the ECB may join the other central banks to have a zero interest-rate policy.”

Britons Awash in Debt ...

A Pre-Budget report out of the UK sent some worrying ripples through news headlines. There are some key reasons why debt is rising far beyond comfortable levels. The following link has a couple different blog posts that discuss the concern revolving around this situation.

http://blogs.telegraph.co.uk/go/tag/view/blog_post/Pre-Budget%20Report

From our perspective, we see this adding quite a bit of magnitude to the British's pound declines.

Chinese currency relative to Crude Oil

"One of the last key variables for world markets that responds to government control is the Chinese exchange rate.... oil could rise, and the dollar fall, once renminbi appreciation resumes." http://www.ft.com/cms/s/0/dd9ce634-b66b-11dd-89dd-0000779fd18c.html


"...As much as four million barrels of future oil production capacity could be jeopardized if prices remain below $60 a barrel, according to estimates by Cambridge Energy Research Associates, a consulting firm. This means that the sharper the drop in prices now, the steeper the rebound might be when the economy picks up again. “Sub-$50 oil means a lot of investments are not going to be made,” said Philip C. Adams, an energy and utilities analyst at Gimme Credit. “What you’re probably doing is setting the stage for the next price spike.”... the underlying factors that drove prices to their records in recent years have not really disappeared.... " http://www.nytimes.com/2008/11/21/business/economy/21oil.html?em

"...It’s odd really that the Fed is not giving much clarity on its actions. Odder yet that people aren’t looking to Ben Bernanke’s numerous papers on fighting deflation to see the germ of current policy. We reprise the below, from 2002: "Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation..." http://ftalphaville.ft.com/blog/2008/11/18/18355/if-all-else-fails-devalue-the-dollar/

"...Residents, fearing the change would reduce their property values and threaten their livelihoods, clashed with police and looted government offices, the Gansu Daily reported..." http://www.cnn.com/2008/WORLD/asiapcf/11/20/china.jobs/


Bank to Add to Chinese Investment Published: November 17, 2008 Bank of America said Monday it would nearly double its stake in one of China’s largest banks, China Construction Bank, in spite of the spreading global financial crisis. The decision should end speculation that Bank of America might sell some of its investment to bolster its own capital, as losses mount from deteriorating consumer credit. Bank of America will raise its stake in the bank to 19.1 percent, from 10.75 percent, by exercising the rest of an option to buy shares from China SAFE Investments, a state investment arm. After the purchase, Bank of America will own 44.7 billion shares..." http://www.nytimes.com/2008/11/18/business/worldbusiness/18bank.html

All for One and One for All

All for One and One for All
Posted by David Gaffen
If everything seems like it is moving in the same direction at the same time, it is. Bad times often find normally disparate assets trading in a similar way, as investors move into the safety of cash and away from the likes of stocks, emerging-market bonds, and other assets. That there has been an increase in the correlation of seemingly non-related assets is not a surprise.
What is notable, however, is just how tied together the markets have become. It reflects the inevitable reversal of trends that resulted from the massive surge in liquidity that caused flush asset managers to search outside of traditional places (like stocks) for returns. As stocks rose to higher-than-normal valuations, investors started to look elsewhere, such as in emerging markets, or in oil, wheat, gold and other commodities.
That excess leverage — and the subsequent unwinding — is resulting in every market getting tagged similarly. James Bianco, president of Bianco Research LLC, notes that the following seven assets currently sport at least an 85% correlation with the Standard & Poor’s 500-stock index: investment-grade spreads, the VIX, the Baltic Dry Index, the Reuters/Jefferies CRB Index, the euro, Brazil’s stocks, emerging-market bond spreads, and Merrill Lynch’s MOVE Index, which shows the range in which Treasury yields are anticipated to move in the next 12 months.
Over the last six months, the MOVE Index has the lowest correlation with the S&P — 85.36%, which means the index trades in the same direction with the S&P 85% of the time. “This is the highest reading in this analysis since our data began in 1998, and underscores the severity of the credit crunch,” writes Mr. Bianco. “This phenomenon is compounded by market dynamics such as the forced liquidation of positions by investors of all stripes.”
http://blogs.wsj.com/marketbeat/2008/11/17/all-for-one-and-one-for-all/

Ruble Devaluation Looms on Oil; Troika Sees 30% Drop (Update2)

http://www.bloomberg.com/apps/news?pid=20601109&sid=am14dsZf_19s&refer=home

Ruble Devaluation Looms on Oil; Troika Sees 30% Drop (Update2)
By Emma O'Brien and Ye Xie
Nov. 10 (Bloomberg) -- Russia's currency reserves, the third-biggest in the world, are no match for tumbling oil prices and an exodus of capital that may force the central bank to accept a devalued ruble.
Just 10 years ago, Russia let the ruble fall as much as 71 percent as the government defaulted on $40 billion of debt and world stock and bond markets collapsed. Now, the combination of a 60 percent drop in oil prices from their peak in July, slowing economic growth and increasing investor concern about emerging markets are draining Russia's foreign reserves, which fell 19 percent to $484.6 billion in the 12 weeks through Oct. 31

..there are now signs of slackening demand for the US currency...

"...there are now signs of slackening demand for the US currency, according to Bank of America’s Robert Sinche.
Specifically, one source of the the dollar’s recent rally has been the scarcity of USDs among G7 nations and emerging market countries. That’s now easing, according to BoA, with the provision of currency swaps, such as the $30bn for South Korea, Brazil, Mexico and Singapore announced last week. Intuitively, a mass of dollars coming into the system would ease upward pressure on the USD and that easing can be seen through recent declines in the Libor-OIS spread, BoA says:
"While there are many factors that influence the LIBOR-OIS spread, particularly the stability of prime money market fund balances, the spread does provide some measure of the offshore demand for USDs, as does the pricing behavior action in the NDF markets. There are signs that these pressures are beginning to moderate in recent weeks as USD funding liquidity has become available on a widespread basis, suggesting that the scarcity demand for USDs is lessening significantly."
The second factor affecting the USD in recent weeks, according to BoA, has been the repatriation by Americans of foreign assets. Data from the Treasury TIC report indicates that US residents had sold foreign equities for each of the three months ended August, with total net sales of $21.6bn. That, however, may be slowing:
"It appears that repatriation accelerated in September/early October, with weekly data (from AMG) showing the sharpest redemptions in international mutual funds during the first half of October. However, those redemptions slowed sharply during 2H October, falling to only an estimated -$0.2bn (2 weeks ended October 29) from -$6.4bn in the 2 weeks ended October 15. With global equity prices stabilizing in recent days, the pace of USD-supportive redemption/repatriation is likely to slow further in the weeks ahead."
The final factor, according to BoA, has been the recent appetite for risk aversion, which drove investors to the safe-haven status of USDs, as well as the Japanese yen. Using the VIX as a measure of risk appetite, BoA thinks the VIX’s recent fall means a “significant correction” in USD gains is likely. As goes the VIX, goes the dollar.
Finally:
"A strict reading of interest rate differentials would imply the potential for a further 10% fall in the USD Index during the weeks ahead, about three times the 3.5% correction in place from the October 28 recovery high. While that magnitude of correction appears unlikely in the immediate future, we do note the seasonal forces that often weaken the USD into yearend. Moreover, in a global financial system characterized by a scarcity of capital, it is rather ironic that the currency of the largest capital importer (largest current account deficit) has been so strong in recent months. In this context, the strength in the USD in recent weeks also appears unsustainable, with broad-based gains in both developed (ex-Japan) and select developing-country currencies expected during the final two months of the year."
While predicting a weaker dollar pits BoA against Deutsche Bank and a number of other investment houses (see for instance, this recent Bloomberg article on the dollar’s strength), the final nail in the USD coffin (at least in terms of short- to medium-future gains), may ironically be the election of Barack Obama as president on Monday night. From Forecast’s Ray Atrill, via Bloomberg:
The more people feel positive about the election outcome, ironically, the worse it may be for the dollar. An improvement in the stock market, for example, as a barometer of improved sentiment and perhaps improved risk appetite, given what we’ve been through in the last year, typically is associated with a weaker dollar..."http://ftalphaville.ft.com/blog/2008/11/05/17851/dollar-danger-ahead/

The global financial crisis has thrown foreign exchange markets into turmoil.

TORONTO, Nov. 3/08 - "The staggering rise in oil prices since 2002 may be playing a far more significant role in pushing the global economy into a recession than the sub-prime mortgage meltdown in the U.S., finds a new report from CIBC World Markets. The report, titled "Just how big is Cleveland?", challenges how falling property values in U.S. inner-cities like Cleveland could create a recession in Japan and the Euroland economies, before even causing a recession in the U.S. economy. "Four of the last five global recessions were caused by huge spikes in oil prices. And the world economy is coming off the mother of all spikes," says Jeff Rubin, chief economist at CIBC World Markets. "Over this cycle, real oil prices have risen over 500 per cent, twice the rise in real oil prices that produced the two biggest recessions in the post-war era..."... The report notes that both the Japanese and European economies are far more vulnerable to oil price spikes than the American economy. While the U.S. economy consumes 19 million barrels per day, 5 million of those are produced domestically - and that part of the American economy gets a boost from soaring oil prices. Japan, on the other hand, must import nearly all of its oil. With the exception of Russia and a few North Sea states, Europe is essentially the same. As a result, these economies are almost twice as sensitive to an oil shock as the American economy... however, the impact from the even larger decline in oil prices over the last two quarters should give its maximum boost to the economy over the next six months. "If triple-digit oil prices are what started the recession, then $60 oil prices are what will end it."" http://www.globeinvestor.com/servlet/story/CNW.20081103.C4093/GIStory/


"...Yet, rich as they are, analysts say Gulf Arab SWFs do not have unlimited income to continually come to the rescue and may only part with money if they see a benefit for their countries. Their cash is tied up in stocks, bonds or elsewhere and cannot be easily reallocated, analysts say. The less ready cash they have, the harder Gulf states will think about investments. 'Some of these Gulf sovereign wealth funds are estimated to have over half their portfolios invested in equities which have lost 30 percent or more... so naturally they are reluctant... Gulf funds have less fresh money available as their surplus is lower at the new lower oil price level. They cannot sell equities to give money to the IMF as the markets would fall further and they cannot sell the U.S. Treasury paper they hold as this would affect confidence in the U.S. economy. What they have is less and what they have coming in is less.'... Some Gulf Arab states have said they will continue to make long-term strategic investments abroad but, having lost billions through their existing stakes in top Wall Street firms, are now more likely to shop around or hold out for bargain buys... 'What you do in such a situation is have your money in less volatile assets. At the same time, owing to the very low prices there are extremely good opportunities on equity markets.' Analysts said it was important to distinguish between investments by Gulf Arab billionaires willing to take risks, and funds investing oil income on behalf of their nation, who may be tempted to reassess as the credit crunch hits home... Gulf states tend to assume conservative oil prices of around $50 a barrel in their budgets, not far off Thursday's price of just under $60. Kern said SWFs keep a close eye on oil price and use them as a key variable to forecast scenarios for investment. Yet the spending spree of recent years has not all come from windfall oil revenues. For instance, development in and by Dubai, the Gulf trade hub, is leveraged. Fitch estimates the United Arab Emirates external debt at $170 billion in mid-2008... 'The bill for this American bailout will be paid ultimately by Asian and Gulf funds through their investments in U.S. Treasury bills but will such bonds continue to perform well with so many new issues?' Woertz said. 'We are asking for money out of thin air. Is there really enough cash in the Gulf to pay for all this? I don't know.'" http://www.thomsonimnews.com/story.asp?storycode=47529


"...Mansoor Mohi-Uddin, of UBS, shows that the dollar index correlates almost perfectly with the proportion that US mutual funds hold in non-US equities. The dollar underwent its long weakening as this proportion rose to 26 per cent; and it has strengthened as that proportion has fallen back to 23.5 per cent. If the forex market really is worried about an Obama presidency, its apprehension is swamped by the tide of US investors' money coming home" http://www.ft.com/cms/s/0/6e019a8e-aa10-11dd-958b-000077b07658.html


i'm also wondering if the USD index is due for a major overhaul, along with the CRB
"The global financial crisis has thrown foreign exchange markets into turmoil." http://www.globeinvestor.com/servlet/story/RTGAM.20081104.wloon1104/GIStory/

Intervention?

"...Analysts pointed out the 6 percent collapse in the dollar/yen exchange rate towards 90 per dollar on Friday contributed to a near 10 percent fall in the Nikkei - which itself has set the tone for sharp losses on European bourses and indications of a Wall St slide too. 'The scale and pace of movements in major foreign exchange rates this week have been sufficiently disorderly to justify immediate currency intervention by the authorities,' said Joe Prendergast, currency strategist at Credit Suisse in Zurich. But Prendergast stressed the need to intervene should also go well beyond the desire for calmer trading and that central banks may need to cap further sharp gains in the dollar that would compound banking and economic stress. 'The most overwhelming immediate reason to intervene and provide FX liquidity for the cross-border deleveraging and currency-matching process is to stem the fear and uncertainty that this scale of seemingly counterintuitive currency movements creates,' he said. But he added that the balance sheets of banks and financial institutions in Europe and around the world were heavily short of dollars due to the currency mismatches created by the huge writedowns of distressed U.S. dollar mortgage assets. The rising dollar exchange rate exaggerates those losses. 'Without intervention, dollar gains may escalate, irrespective of fundamental considerations, compounding global financial and economic dislocations,' he added...

Turner at ING said how to execute intervention was a problem. 'Policy makers will always prefer strength in numbers, but in which currency pair should intervention take place?' he said. 'Should G7 central banks be selling dollars against Europe and Canada, or be buying dollars against yen.' Analysts said G7 central bankers may be waiting to co-ordinate some response with the International Monetary Fund. The IMF is hurrying to approve by early November a package that would allow certain emerging market economies exchange local currencies for U.S. dollars to ease short-term credit strains, officials familiar with the plans said late on Thursday. The so-called liquidity swap facility would be available to a group of pre-selected 'top tier' emerging market countries -- those that are well-run but may be having difficulties obtaining credit..."

http://www.thomsonimnews.com/story.asp?storycode=47330

Currency Options Strategist Performance Update

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102008%20BSCOS%20Track%20Record%20Closed.pdf

Forex and Currency Futures Performance Record

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102008BSCFCFtrackClosed.pdf

European Currencies Feel the Hurt

Credit indicators had been improving towards the end of last week and continued to do so as this week has opened up. Libor and various other swap rates and spreads have come down from extreme peaks, if not record highs.

What's behind this? Government guarantees, it seems. The fact that the State is backing bank debt across Europe and various other parts of the globe is helping to break-up risk-averse money flow.

What that did over the weekend was give currencies a chance to gain groud against the buck. After all, the dollar and stocks (risk indicator) have been inversely correlated. So with the potential for stocks to bounce a bit, currencies naturally moved higher against the greenback.

But that the across-the-board dollar move has been shaken up already. European currencies have charply reversed earlier gains. The euro, Swiss franc and British pound are deeply negative now.

With the exception of the Canadian dollar, the ComDols are holding up thus far. The Japanese yen is holding its own too.

But with gold, oil and stocks fairly stronger on the day, how might the dollar's renewed strength be explained?

Well, a dramatic shift in sentiment from only a few months ago has investors worried that bad bets made on currencies may continue if they don't change up their unilateral positioning. In other words, many who've lost big-time on betting against the dollar recently don't want to make that mistake again. There's a lot of dollar buying going on, even when the rest of the market is fairly calm.

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Our Members are Winning Big in this Market ...

Now’s the Time to Put Your
Speculative Capital to Work!

We’ve been on the profitable side of the substantial move down for the euro and the British pound ... and we’ve even ridden other currencies along the way. Our Members are raking in big gains with our Forex & Currency Futures advisory service.

We invite you to give us a try! But if you want a look at our performance numbers first, the following tracking figures tell the story ...

Black Swan Forex & Currency Futures
Hypothetical Results Based on Varying Account Sizes
25 March 2008 thru 6 October 2008



*Assumptions: All trades taken in sizes recommended, i.e. 1 or 2 lot trades; no slippage; standard size contracts; 100:1 leverage; closed trades only.

[Note: The Black Swan Forex & Currency Futures advisory newsletter’s first closed trade for 2008 was on March 25th – precisely when this service began, That is, all the trades for the year are listed in the following track record and reflected in the previous table of Hypothetical Results. We are not cherry-picking a period that most glamorizes our trading performance.]

Below is a link to a detailed track record of each and every closed trade, since inception in March of 2008:

Forex & Currency Futures 2008 Performance Record

There is no guarantee the next six months will be as profitable as the last. But if you're struggling to turn even a small profit on your speculative capital everywhere else, we urge you to give us a try.

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Disclaimer: There is a substantial risk of loss when trading in forex and currency futures markets.

Jack Talks Currencies at Howestreet.com

Jack spoke with Tom Jefferies at Howestreet.com earlier today. He discussed ...

• The idea of money flowing into US capital markets,
• The potential for central bank interest rate cuts in Europe, UK, New Zealand and Australia,
• Capital returning to Japan,
• Our general outlook for stocks, and
• What to make of the bailout plan and all the other confidence-boosting attempts being made by US Congress.

Click here to listen.

Liquidity, Liquidity ... Everywhere ...

The bailout bug is going global. We saw that efforts were made to shore up key banks and real estate lenders in Europe and the UK recently. And the ECB also promised additional funds through its auctions this morning. At this point, it's hard to imagine banks aren't swimming in money.

But the ongoing efforts among central banks highlight the seriousness of the crunch. The Fed announced this morning extended efforts to provide liquidity in the US and throughout the globe. It's further coordinating with its major central bank counterparts. You can read their statement here.

The liquidity freeze isn't yet thawing out in the US. But most of the surprising and most worrisome news could be behind us -- especially if the "bailout plan" restores some confidence in US markets. However, the pressures have been building up in Europe for some time now, but we're only beginning to see the impact of postponing such financial problems. The ball has begun rolling downhill for the euro. It could have a long way to go.

European Banks Feel the Pain Too

In a post earlier last week we showed that major banks in Europe and the UNited Kingdom are in as bad a predicament as US banks, if not worse. Here's a Bloomberg piece explaining new bailout efforts to shore up key banks...

European Lenders Get Bailouts as U.S. Crisis Spreads (Update2)

By Simon Kennedy

Sept. 29 (Bloomberg) -- European governments stepped in to rescue Fortis, Bradford & Bingley Plc, and Hypo Real Estate Holding AG as tremors from the U.S. credit crisis reverberated around the world.

The U.K. Treasury seized Bradford & Bingley, Britain's biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg threw an 11.2 billion-euro ($16.3 billion) lifeline to Fortis. Germany guaranteed a loan to Hypo...

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=an37HatMCc4s

The euro and the pound are down big versus the dollar this morning. We know how bad things are in the US, but as we learn just how bad things are in Europe, the dollar could rally find some time to shine.

Fingers Crossed that We Follow Sweden's Path

We found this article yesterday. It briefly explains two government bailouts, each from the 1990s and each stemming from a credit crisis. Read more about how Japan and Sweden made out from respectuve government interaction. Maybe there's some hope that we at least get out of this mess fairly soon.

http://biz.yahoo.com/ap/080927/bailout_fallout_elsewhere.html?.v=2

A tale of 2 bailouts: Sweden, Japan had different outcomes in the 1990s

"Loans turn sour after years of excessive lending. Big financial institutions collapse. Fears grow about an economic meltdown. The government announces a massive bailout.

"The story of the current U.S. financial crisis is in many ways similar to what happened in Sweden and Japan in the 1990s. In both cases, the governments intervened -- with very different results ..."