Sovereign debt is the new sub-prime.

April 28^th 2010

Just attended a Lecture at the London School of Economics the topic was the Greece Fiscal Crisis.

What’s happening in Greece? As the country teeters on the brink of default speculators and markets see Greece as to much of a risk. Greece at the moment cannot borrow money so need a bailout from the EU and the IMF, however the Germans are at the centre of the crisis in refusing to bail out Greece unless it reforms its markets and sticks to strict budgetary controls. Time is running out and the Greece government needs to show that it make the difficult choices. Devaluation is not a choice as Greece cannot print Euros, what the country needs is a huge external stimulus, but exports only account for 20% of GDP. The worry for the Euro zone is that like a virus this crisis is spreading already today Spain and Portugal were served notice as they found it expensive to borrow money as credit ratings take a beating, the concern now is the “No bail out” clause will be challenged as Greece waits for a handout but with Portugal and Spain to follow I see a managed dis-mantling of the euro zone. The Greeks have to be honest and take membership of the EU seriously that means balanced budgets, reforming the work force, slashing the sky high salaries and generally becoming more competitive, added into the mix is what role did Goldman Sachs play in 2001 in helping the Greeks meeting EU budget criteria for entry in the EU. Now you have possible IMF intervention and we all know about the IMF don’t we?

Sovereign debt is the new sub-prime so with the down grading and fiscal crisis in Greece expect this crisis to spread. The credit crunch back in 2007 has spread –from households, to banks to countries. Entire regions are at risk.

Now turning to Jamaica and the refusal of the Golding administration to hand over Mr Coke. The International press have now started to report on this matter not only US papers but the highly respected British Economist Magazine. In a nutshell it does not matter what Bruce Golding does now as he has lost all credibility in Washington. He is not alone but politicians from both parties have tarnished the reputation of the country, our reputation and credibility are in tatters and it will take some time to repair probably long after Golding and the rabble that call themselves members of parliament are long out of office.

Peace.

E-Money

Debt, debt and more debt

If like me you are fed up with the bits of useless information and excuses that permeate from Wall Street well you are in the right place. I won’t waffle on how life is hard and the derivatives sold are complex and that whatever happens I expect a bonus. The truth is this near collapse in our financial system is all about debt, Government debt, company debt and personal debt. We have all taken on huge amounts of obligations as easy credit was thrown around with no regard to when it would be paid back for after all let the good times role. We could always max out the credit cards and at some stage look at re-financing the house because it always goes up in value and the bank and finance houses are falling over themselves to lend, even if I don’t have a job I could always get one of those liar loans no job no income loans, interest rate may be a bit higher but some how I will get by. Then in summer 2007 the roof caved in the credit crunch began and the rest we know is history.

But let’s look at the fact in the United Kingdom we are more indebted than our American cousins mainly because we were fed the line that house prices never fall they always rise. So with no deposit some of us bought 110% mortgages because the lenders factored in that the house would rise in value, never mind if you can’t pay back the mortgage. So the fallout in credit lending in the UK shows we are in debt to the tune of £1.46 billion pounds that’s £32k owed by every adult in the UK no wonder that so many of us are filing for bankruptcy and IVA’s it’s a real worry and we should all be concerned for as unemployment rises so do the debts.

Our governments are bailing out the banks and allowing them to reward failure by paying out record bonuses, but the real problems we are seeing is sovereign debt by governments are not being paid as in the case of Greece the country is bankrupt it has lost its AAA credit rating and has asked the rest of Europe to bail it out. If you looked at the crisis as it unfolded we saw that Iceland had in fact become the first nation to be hit by bad debts and the subprime fallout but Iceland had been sold billions of dollars of worthless CDO’s by Wall Street banks, Greece on the other hand was advised by Goldman Sachs and others how to defer big state deficits for later years to satisfy EU rules, it was business as usual whilst the debts built up in the investment vehicle set up by the banks. However the advisors mis-read the markets and as the World’s economy soured so did the investment, the Euro came under pressure and Greece was forced to admit its debt but also had no money to govern and run the state. Civil disobedience is now the norm in Athens as millions of people see pay frozen, pensions not keeping pace with day to day life, also urgent government programs are now cancelled as the government is forced to austere plans for survival. Greece is not alone rumour has it that Spain and Portugal are next. But have we thought just how our governments would survive once credit ratings are reduced from AAA to junk? The US and UK would be in dire straits with no one to borrow from as the Chinese dump US and UK holdings it would be chaos. The US government has already drawn up plans how to deal with civil disobedience in the streets as they face up to grim reality it could be coming to a main street in America real soon.

The English Premier Soccer league the richest in the world? But how many of the teams are on borrowed time. Chelsea have announced that the hunt for a new home has been postponed as the recession hits fans and revenues. Portsmouth Football is in the process of being wound up for unpaid tax bills and perhaps the biggest name in world football Manchester United is £715 million pounds in debt. I find this hard to stomach with so many people trying to make a decent wage and a footballer can pick up £100k per a week for kicking a ball and yet they want more despite clubs being mortgaged to the hilt. Portsmouth has shown that not even the mighty premier league can continue paying huge salaries based on some flawed business model.

Figures for 2007-2008 show the total debt of premier league clubs as being £3.4bn – 56 % of the total across Europe. I believe the clubs are at a crossroads and simply cannot continue banking on TV and Champions League money, you cannot pay over 50 per cent of your turnover on player salaries something has to give and as in Portsmouth’s case its survival in the premier league. They have been docked nine points for going into administration and surely must start the 2010 season in the Coca –Cola Championship. The other clubs you have been warned.

And by the way did I say the Banks are still not lending!!!

Commercial Real Estate REALLY Is The Next Big Crisis

Banks are feeling quite cosy at the moment, record profits, bumper bonuses and it seems that the “Volcker Rule” may be some time off before sweeping regulation takes affect. The spoiler now and it’s a real threat is the $1.4 trillion dollars of commercial real estate loans that have to be refinanced now in 2010 -2014. The scary thing is that nearly half of these loans are “underwater” in other words the properties are worth less than the borrowers owe. But we have had major hiccup in 2010 and that was the Dubai property debt debacle what is probably going to be worse is that as the due dates for these loans near to be re-written banks should brace for major delinquencies and billions of dollars in losses.

This week we learned that Simon Property Group (One of the largest US shopping mall owners) has just offered $10 billion to buy rival General Growth Properties good news you think, wrong GGP are bankrupt last April they were forced to submit the biggest ever commercial real estate bankruptcy in American history a staggering $27.3 billion dollars. The cause of GGP seeking chapter 11, Mortgages they simply could not get the financing and missed a deadline to pay $900 million on some Vegas retail properties. So the proposed offer by the Simon Group really equates to a fire sale of assets and might bring in other players seeking to gain from GGP’s situation.

So the 192 page US congressional oversight panels’ February report makes grim reading the commercial real estate losses will pose a risk to financial stability. The largest losses are forecast for 2011 and being conservative could be between $200 billion - $300 billion. The worry is that 161 banks have failed in the US since 2009 so these types of losses could lead to more bank failures particularly among the mid sized and smaller banks, but the larger well known banks are not immune. Go back to early 2009 and Secretary Tim Geithner’s stress tests, you know the 19 major banks had to prove they had enough capital in the event of another financial crisis. Well the tests only looked as far forward as the end of 2010. So 2011 will be unknown territory, and it could be carnage. Check this scenario apartment blocks with families renting could be evicted if the property owners don’t pay mortgages on time or miss payments. And the lender of last resort The Federal Reserve simply won’t be able to bail out the banks next time around they simply won’t have the money. It’s a grim picture but it could happen the commercial real estate crunch would touch the lives of every American with the US economy still showing weakness and banks reluctant to lend there’s no easy answer or solution to the problems ahead. This financial crisis did not only impact the residential housing market it’s impacted our entire commercial system for years to come.

Things to think about:

$750 billion to $2.2 trillion in cheap financing will come due within the next three years in the US commercial market.

Analysts are warning that the commercial real estate sector in the US seems to be in ‘free fall’.

Values are down about 40% from a year ago, recent market studies show.Real estate deals aren’t happening because banks aren’t making commercial real estate loans because they’re under pressure from regulators to reduce their loan exposure.

During the boom, everything doubled in value when it shouldn’t have, and all of that was facilitated by credit, not by an increase in real value,’

The real worry is the fallout could be Global.

Check these links:

http://www.youtube.com/watch?v=kq3rH1ZJnrc

http://www.youtube.com/watch?v=BSA7xVNVJa4&feature=related

http://www.youtube.com/watch?v=o4IfeXLl2TU&feature=related

http://www.youtube.com/watch?v=3NMgckkZMQs&feature=related

The demise of the dollar

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
- Ludwig Von Mises. 1949

UK Financial markets woke up to the news on October 6th that Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading. Moving instead to a basket of currencies including the Japanese Yen, Chinese Yuan, the euro, gold and a new unified currency planned for nations in the Gulf Co-operation council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Nine years into this new century we are witnessing the erosion of financial power that is the United States as the balance of power shifts to the East. For those of us fast asleep and not paying attention this shift of power began sometime ago but built up momentum under the Bush administration. So what does this mean? Oil will no longer be priced in US dollars within nine years. Also I expect more tension between Beijing and Washington over influence and oil in the Middle East. China has warned of a economic war with the US as they battle for power in the region. They (the Chinese) consume more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to the Chinese banking sources, may well be gold. To have some idea of the wealth in the Middle East the countries signed up hold an estimated $2.1 trillion in dollar reserves. Such is America’s economic weakness brought on by the banking crisis and recession they have recognised the shift in economic power. The current US deficit stands at $1.6 trillion and is expected to hit $9 trillion in the next decade. Where as China’s economy will grow at 10% per year compared to America’s 2% China will soon be the world’s largest economy, and largest creditor nation a position enjoyed by a pre-eminent America in the 1950’s. So how will we get this basket of currencies to pay for oil? China will become the largest consumer of oil, which will help push trading in it and other commodities towards a “basket of currencies”.

America on the other hand is the world’s largest debtor and can no longer look at the dollar being the world’s only reserve currency. To put it into context China has helped bailout some of America’s and Europe’s banks and the West should avoid spats and arguments as the Chinese hold some $3 Trillion dollars in foreign assets whilst not wanting to see the collapse of the dollar they themselves have to tread very carefully as they unload some of these holdings. Europe and US are calling for China to devalue the Yuan and this is something they (China) will not rush into.

Bear in mind as I mentioned Beijing needs to reduce its dollar holdings, but if it does so too quickly it will bring about the very devaluation it fears. This explains why Chinese officials appear to want this transition to take place gradually over the next decade.


As investors took note of the dollar’s weakness they rushed to the safe haven of gold. As I write we have seen two days of record gold prices, Gold futures hit a new peak of $1,049.70 an ounce Wednesday, while the spot price of gold also hit a record high of $1,048 an ounce.
The days of paper money are numbered take heed and move into gold, silver where you can. Australia has signaled a move away from low interest rates with the central bank raising rates by 0.25%. The US and Europe will probably hold low rates for a further 6 months but investors and the markets concerned about the US’s crippling debt pile and potential inflation worries expect the gold price to edge higher over the coming months.

House of cards still falling

Looking back at the current causes of this financial meltdown (as we need to look back to understand the problems) could our regulatory agencies have acted quicker in ascertaining the problems of the financial system?
One criticism of Ben Bernanke and the Federal Reserve is that they reacted too late, however in Bernanke’s defence the problems really were in house and the antiquated systems the Fed and others were using. Example being that most people when paid normally paid their mortgage first and on time, however as the financial sector unravelled mortgage payments were late and in many cases as we now know payments were not made as many of the borrowers could not pay. The Fed however did not have the systems in place to gather this crucial information in a timely manner and as Meredith Whitney analyst, who recently started Meredith Whitney Advisory Group LLC stated “If you’re leading regulatory reform, you have to have the technology as well, and they have not embraced technology,” Whitney said. The U.S. regulatory structure still relies on a “pencil-ledger system.”
You can see Meredith Whitney on “No Visibility Ahead – Predicting what next” on Bloomberg TV

US Dollar under pressure:
Look for more weakness in the US dollar on growing fears America's Triple-A credit status could be threatened if the US fails to address its budget deficit.
The dollar's fall came despite Mr Geithner promising he wants to bring down the US's budget deficit to a "sustainable level over the medium term."
Responding to claims by PIMCO co-chief investment officer Bill Gross that the US would lose its cherished Triple-A credit status over the next 3-4 years, if not sooner, Mr Geithner said the US would not let its debt get out of hand.
Concern over the status of the US's finances also hit government-issued Treasuries, with the 10-year note suffering its biggest weekly loss since January, pushing yields above 3.4pc for the first time since last November.
Equity investors failed to get excited about the prospect of upcoming regulatory reforms for the banking sector, aimed at preventing further financial crises.

Gold should reach £2,000 an ounce -

but not just yet We will not reach $5,000 an ounce without some sort of mania. But in the last decade both dotcom and housing, and, to a lesser extent, base metals, uranium and oil, have all shown how easily manias can happen. Manias need a convincing underlying argument - ‘internet is a new era’, ‘there’s a shortage of housing’, ‘the growth of China’s middle-class’. And gold's status as a store of value, whether we see inflation or continued deflation, make it an extremely likely candidate in this post-credit-bubble environment. What’s more, a great deal of myth and legend follows gold which can only add fuel to the eventual fire. This rally in gold since mid-April has largely been a result of dollar weakness, not increased buying. If you look at the price of gold measured in other currencies - picking the pound and the euro at random, as shown below - you can see it has barely rallied against them at all. If this move were anything more than fluctuating currencies, you would see gold rising against all currencies on higher volume. So don’t get too excited just yet. The dollar meanwhile is at an inflection point, as are stock markets. It’s as though they can’t decide which way to turn. If stock markets turn down, money will move out of equities, back to cash and the dollar could rally. If they turn up, the dollar could plummet. Anyone interested in technical analysis, and in particular Elliot Waves, will note that the dollar has traced a 5-wave up and 3-wave down pattern. We are at an obvious point for it to turn up. If it does, gold will most likely pull back. Gold miners are making more moneyOn the other hand, the action in gold stocks, which often lead the metal, has been very bullish and very exciting. I said back in November that gold shares, as opposed to gold itself, would be the best performing asset class of the next few years. This next chart shows the HUI, the index of US-listed gold stocks, over the last three years. There was a lot of resistance between the 300 and 375 levels and the HUI has broken decisively through. Even without a higher gold price, gold miners are making more money. The cost of labour, energy and equipment are down, which brings their production costs down. If the dollar is strong that further increases their margin. Costs are in local currencies such as the South African rand, the Mexican peso or even the Canadian dollar, while profits are in US dollars. Even explorers will eventually do well as a greater value will be placed on unmined ore bodies. Another 25% and the HUI will be challenging the all-time highs made in March last year around 500. But I would expect some consolidation first, perhaps between 350 and 400. In summary, a likely scenario over the next month or three, is for the dollar to rally. That will mean a mild, but healthy pullback for gold, gold stocks and the general stock indices. We can then look for a seasonal summer low in gold some time in the late-June to August timeframe. Then we can look for if not ‘The Big One’, ‘A Big One’. But, being well positioned on the long side, I’ll be only too delighted to be wrong and to see Gold’s Big Move come sooner.

R.H. Donnelley, Yellow Pages Publisher, Files for Bankruptcy:
By Dawn McCarty
May 29 (Bloomberg) -- R.H. Donnelley Corp., the publisher of more than 600 print directories, sought bankruptcy protection from creditors after missing a $55 million interest payment on its senior unsecured notes due April 15.
The company, based in Cary, North Carolina, had assets of $11.9 billion and debt of $12.4 billion as of Dec. 31, according to Chapter 11 documents filed last night in U.S. Bankruptcy Court in Wilmington, Delaware. Nineteen affiliates also sought court protection.
R.H. Donnelley, whose publications included telephone Yellow Pages, said May 14 that its lenders and bondholders had agreed to forbear until May 28 and wouldn’t take any action on the company’s missed payment. The company had revenue of $602 million in the March quarter, resulting in $164 million operating income and a $401 million net loss.
The company blamed the filing in part on “a significant decline in advertising sales due to the recent economic downturn and increased competition in the local business advertising industry” in 2008, according to court papers.
In March, the publisher hired Lazard Ltd. for advice on restructuring or refinancing debt while the recession cut into its revenue. The company has seen sales fall as small businesses moved their print ads online or cut back on spending amid the economic slowdown.

Moody’s Investors Service downgraded R.H. Donnelley’s probability of default rating on May 18 to Ca/LD from Ca, signaling a limited default after the lapse of the 30-day grace period. The company has a Caa2 corporate family rating, eight steps below investment grade.
‘Best Alternative’
Moody’s also said in February that a “complete debt restructuring represents the best alternative of addressing its currently challenged capital structure.”
Standard & Poor’s said in February that R.H. Donnelley would face “challenges” in refinancing $1.2 billion of debt that matures in 2010.
The company and its units’ 30 largest creditors without collateral backing their claims are owed about $6 billion, according to court documents. The biggest unsecured creditors are The Bank of New York, as agent for holders of certain R.H. Donnelley’s senior notes, with a claim of $3.6 billion; U.S. Bank NA, as agent for holders of certain senior notes, with a claim of $2.4 billion; and Google Inc., with a claim of $2.4 million.
R.H. Donnelley through its units publish more than 600 print directories, with a combined circulation of about 80 million, and provide advertising services to about 600,000 businesses in 28 states and the District of Columbia, according to court papers.
The case is In re. R.H. Donnelley Corp., 09-11833, U.S. Bankruptcy Court, District of Delaware (Wilmington).
To contact the reporter on this story: Dawn McCarty in Wilmington at dmccarty@bloomberg.net.
Last Updated: May 29, 2009 00:02 EDT

Economics at West Indies College

It was during my time at West Indies College in the late 1970’s I fell in love with economics, especially macroeconomics. My tutor was Miss Edna Parchment (affectionately known as Miss P.)

She had a way with the subject that I connected with straight away and one book that she recommended changed my viewpoint on the subject, Economics by P. Samuelson.

How many of us really pay attention to the financial and economic news around us? This current economic crisis is being played out right in front of us; it’s like being at the front seat of a boxing fight. What makes this crisis so different from others is that we have no “play book” to refer to we are in unchartered waters. Who could believe last September we witnessed the near collapse of the world’s banking system, Lehman Brothers, the fall out of AIG and the trillions of dollars being pumped into the system to keep our way of life alive. It was my grounding in Miss P’s classes that I could understand and comment as to the events around me. We have a duty to understand finances and not just bury our heads and hope for the best. Many people have lost fortunes and through desperation have killed themselves rather than face up to financial ruin.

Jamaica in the 1970’s and 1980’s had a rollercoaster of a ride with Balance of payments deficits, currency devaluations, IMF agreements added to this a brain drain as some of the best minds took refuge abroad. Put simply that period of time was my economics lessons the real world Jamaica style.

President Obama advised the American people whilst in California he would be making some tough economic choices, however he encouraged them to attend town hall meetings, engage him through the internet and challenge his policies, we should therefore not be surprised when unpopular choices are made if we have not at least raised concern to these choices.

I don’t have a gift where I can see the future but at some stage paper money (Fiat Money) will basically have little value as inflation erodes the value of our currencies be it Dollars, Pounds, Yen, or Euro. Try and move some cash into precious metals such as Gold, and silver for these my friends cannot be replicated by man, they can’t be printed like Dollars and pounds. Look back in history and remember where we have an expansion of the money supply we have inflation. However what is being stored up for the future will probably be like no other inflationary period we have witnessed. The UK government through the Bank of England are prepared to print £150 billion pounds of which £75 billion is about to go into circulation via the banks. The US has also been using the printing press creating in excess of $1,500 billion dollars as of Jan 2009. So you see once the Gold Standard was abolished in 1971 paper money creation has to kept under tight control, its not if but when will this almighty inflationary bubble burst.

Because the banks are not lending the idea by central banks is to create enough money for banks to recapitalize and any excess to loan to the wider economic community, however as I mentioned before the banks are in denial some are in very bad shape. Fix the banks and you go some way in fixing the problems in the economy.

Growing up as a teenager in Jamaica in the late 1970’s taught me a valuable lesson. I was a student at the then called West Indies College and having come from England saw things different. Having grown up in a society where I was spoilt for choice as to what I could eat, access to technology and a very good transportation system lets say I was not ready for life in the Caribbean or as the Western world called it the 3rd world. Jamaica was going through a painful time both politically and economically but what grabbed me most was the resourcefulness and ingenuity of Jamaicans, led by the popular phase “Tun your hand mek fashion” So you may be saying Eric get to the point, ok the point is in today’s terrible economic downturn more and more Americans are discovering the inner resourcefulness within. It’s called the Do It Yourself (DIY) economy; cars are kept longer and not being replaced in fact the car parts industry has been reporting record sales as more and more owners now repair their own cars. Michelle Obama has started “the grow your own food” trend, and we hear of countless other stories as we face the harsh realties of this recession. One area Jamaica needs to look at is Honey production, with entire bee colonies being wiped out in America and around the world this has never been a better time to become in the industry. The US FDA dumped 200 million tons of tainted honey from China into the pacific ocean so you can see the potential for the honey export market.

With the gains in the financial sector being lost due to Bank of America’s $25 billion dollar provision for bad debt we need to understand just how fragile the banks are. The IMF just reported in its Global Financial Stability report that banks globally have lost in excess of $4,100billion dollars they are urging governments to take “bolder steps” to shore up institutions – including nationalizing them where necessary. This could be a problem for President Obama who has come under a bit of pressure lately for the bailout policy he is overseeing. Business journalism is a tough area but we should do more to understand the financial markets and trends.

One sector in denial is the banking sector; yes Bank of America made a provision for $25billion but why? Well unemployment is still rising and people will default on mortgages, car loans and credit cards. What they won’t admit is that the whole sector is being held together by TARP and tax payers’ money the banks in reality are insolvent we won’t be seeing any major recovery for years. They need trillions of dollars of Recapitalization money and are still sitting on trillions of dollars of “Toxic assets” however if Tim Geithner gets his way soon the banks will be dumping them on the poor tax payer in return for more government and private money. The only loser is the tax payer hoping that these bad assets will one day make some kind of profit.

The UK has its budget tomorrow April 22nd and already Chancellor Darling has a provision for £50 billion pounds due to government involvement in 5 failed banking institutions. The worry is that this will rise to £200 billion by 2011 a staggering 13.7% of UK GDP it just goes to show how heavily leveraged the UK is with debt. The debt covers consumer, company and government debt; sorry my friends’ things seem to be getting worse.

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EMoney………