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.

Stay in touch
EMoney………

Banks don't have enough capital

Interesting article recently on Bloomberg TV, our banks don't have enough capital despite receiving more than $350billion dollars since September 2008. Now you have heard of the "Stress tests" secretary Geithner and the treasury are conducting? Well hold on to your seats the US Govt are preparing to inject a further $1 trillion dollars into the banks based on the results of the stress tests. The stress tests through complex models (TCE) simulate the banks in dire financial situations it looks the banks balance sheets, amount of deposits, cash, liabilities and ascertains if it can survive.

So why won't the Obama administration let a bank fail? Well the authorities have learnt a valuable lesson from the Lehman Bros collapse and although unpopular President Obama will do whatever it takes to get the economy on track hence the $180 billion bailout of AIG, you know that company like a guest who came to dinner and won't leave, put simply they are to big to fail, the collapse of AIG would be felt around the world. Trust me they are looking at ways to fix AIG but it will take time and cost the taxpayer billions of dollars. The area of AIG that has given all the problems lie in AIG FP (Financial Products) a giant hedge fund that exploited regulatory guidlines and ran up billions of dollars of debt. So back to the banks the major concern will be more writedowns in the coming months,with the most problematic being Citi out of all the major financial institutions.

Goldman Sach's role in the AIG saga will be a talking point in the days and weeks ahead, just exactly did Hank Paulson and Tim Geithner know about AIG's problems? And why are Goldman Sachs alumni in all the plum jobs they were just to cosy with AIG. Whatever was done in the dark, must come out in the day, just like the Merrill Lynch bonus saga, this AIG soap has some way to go, expect some major casualties.

In the UK Barclays bank will have to swallow pride and take government money. Whilst trying to be independent they have already sold 1/3 of the bank to Arab investors for £8bn pounds, and need a major cash infusion. So assets like iShare will be sold to buy them sometime, but if they think they can dump on the British tax payer £80bilion of toxic assets and not take government cash well they really are living in a fantasy world. I have never liked Barclays bank and whilst the times were good they pillaged customers and strutted around like Lord of the manor arrogance and pomp, now the shoe is on the other foot and its the poor tax payer who have to bail out these fools, banking will never be the same again.

The Time For Talking Is Over

The time has come to rethink how economics is taught our schools and universities. The reason for such thought is we are witnessing economic crises never witnessed before. All previous economic theories and thought are being discredited by this global phenomenon.

More realistically, economics today is where astronomy was in the 16th century, when Copernicus and Galileo had proved the heliocentric model, but religious orthodoxy and academic vested interests fought ruthlessly to defend the principle that the sun must revolve around the Earth.

Consider the following passage:
“Most economic theorists have been going down the wrong track. When economic models fail, they are seldom thrown away. Rather they are ‘fixed' - amended, qualified, particularized, expanded and complicated. So it comes as no surprise that behind this almighty collapse of our financial systems we learn of a complex mathematical algorithm called the Gaussian copula model this model developed by David X Li from China helped to price up collaterised debt obligations (CDO’s) and other asset backed mortgage securities.

So to introduce you to the complex quantitive world of investment banking just read a few snippets from people whose job it is to package and sell these derivatives.

The model Mr. Li devised helped estimate what return investors in certain credit derivatives should demand, how much they have at risk and what strategies they should employ to minimize that risk. Big investors started using the model to make trades that entailed giant bets with little or none of their money tied up. Now, hundreds of billions of dollars ride on variations of the model every day."David Li deserves recognition," says Darrell Duffie, a Stanford University professor who consults for banks. He "brought that innovation into the markets [and] it has facilitated dramatic growth of the credit-derivatives markets."The problem: The scale's calibration isn't foolproof. "The most dangerous part," Mr. Li himself says of the model, "is when people believe everything coming out of it." Investors who put too much trust in it or don't understand all its subtleties may think they've eliminated their risks when they haven't.

The key word being “risk” gone are days when due diligence and pain staking analysis was required per complex deals you just have to take a look at the deals of BoA taking over Merrill Lynch colossal losses and write downs followed in England by Royal Bank of Scotland (RBS) and the ill fated takeover of ABN Amro, not only did RBS lose money on this deal it led to the collapse of the bank only being saved by government intervention. RBS’s executives were ousted by the government who at a treasury committee meeting (Feb 10th 2009) admitted to the ABN Amro deal being worthless. Risk taking, poor due diligence added to this lax regulatory controls and you have a recipe for disaster.

But we already know what caused this meltdown in our financial systems and now the wider economy and this blog will now focus on solutions the time for talking is over as President Obama stated Tuesday February 10th in Fort Myers. The road to recovery will be long and some unpleasant decisions will have to be made. The markets reacted coolly to secretary Geithner’s bank bailout plan, in reality it did lack transparency and direction this over time will be tweaked, my concern is how to value these toxic assets, and just how much money will be needed. $350bn does not seem enough with banks already reporting $1.2 trillion in non performing assets. I don’t know if the bad bank option will work as stated before we are in uncharted waters but a way must be found to get the banks lending, foreclosures stopped, and the creation of jobs. President Obama’s stimulus package is not a magic wand but a blueprint for the future; it will change and will need to be flexible to meet the demands of this crisis. What we need now is solutions and the drive and courage to face the unknown, 2009 will throw up challenges, surprises and casualties we need to be ready, alert and flexible to meet the future.

Obama sworn in and takes aim at ailing economy

So here I am in a cold Atlanta marking the swearing in of President Barack Obama a historical day that I will cherish forever. Where else could I be if not in Washington DC but the home of the civil rights movement led and driven by Dr King and hundreds like him finally a dream has come true a black president leading the most powerful nation on earth. The challenges for President Obama and his administration are huge but Americans have the knack of resilience and will overtime bounce back. Expect large intervention by the Washington administration to kick start this ailing economy but things are about to change it will take time; President Obama has made the economy the central theme and won’t tolerate failure.

Now back to the Banks who have brought us back to square one just when they are sapping the bailout cash, Bank Of America (BoA) announces last Friday Jan 16th a $15.1 billion write down of Merrill Lynch assets, say what !! Yes $15.1 billion when will Merrill Lynch stop seeping losses? Two things to bear in mind the take over by ML was a shotgun wedding plotted by secretary Paulson, the Federal Reserve, Ken Lewis boss of BoA and John Thain of ML. Once Lehman Bros had gone into bankruptcy a hasty arrangement by the above led to no due-diligence of ML’s books a transaction that should have taken months took days. ML’s executives must have known about the toxic monster sitting off balance sheet but blame must also go BoA and its execs. What angers me about this whole mess is that in mid-December 2008 Ken Lewis told Ben Bernanke the Fed chief that BoA was struggling to digest ML’s “monstrous losses” so guess what you guessed it Paulson and Bernanke cooked up the massive bailout of $138 billion last Friday. The bank was handed $118 billion in guarantees to underwrite toxic assets of ML plus a $20billion cash injection. Added to all this Citigroup announce a $8billion write down before splitting the business into two “Bad bank, Good bank” Citi will now keep its core healthy business in a new entity “Citicorp” and all non core toxic assets will be moved to “Citi Holdings” Citi need cash and off loaded Smith Barney its brokerage arm to rival Morgan Stanley.

My prediction is this how much longer will government pour tax payers money into these banks? At some point enough will be enough just as we are seeing in the UK with Royal Bank of Scotland (RBS) announcing they will probably post losses of 20 billion pounds some $41billion dollars. As the shares fell to 10.3pence on the news of the colossal losses. On closing my prediction before June 2009 will see at least 3 banks nationalized in the UK and the US. The British government already has a 70% percent stake in RBS; government at some point will draw the line into pumping more taxpayer’s money into these banks. The Obama administration will make some swift and dramatic announcements on Jan 21st that will affect us all and the markets whatever happens things will get worse before they get better.