Exo 10:13 And Moses stretched forth his rod over the land of Egypt, and the LORD brought an east wind upon the land all that day, and all that night; and when it was morning, the east wind brought the locusts.
The Locusts have landed
In Australia, vital agricultural regions of NSW are under threat from a potentially uncontrollable locust plague. More than 300 verified locust reports had been made across pasture and cropping areas of NSW, Unfortunately many landholders have not reported the locust activity, even though they were obliged to do so by law or face heavy fines. "We have large bands of locusts which can move vast distances very quickly and consume massive quantities of pasture and crop in their path. We have a small window of opportunity now of just a few weeks to nip it in the bud, but we need the full co-operation of landholders in reporting locust activity." Locusts have been reported at various centers throughout central and southern NSW including Wagga Wagga, where I farmed at Borambola Station for many years, Forbes, Gundagai, Narrandera, Condobolin and Young. "It is clear that unfortunately in many cases this (reporting) has not been happening," Primary Industries Minister Ian Mr Macdonald said.
"If we don't stop the locusts they will soon take to the wing and become uncontrollable."
While there is still a chance for Australia to avoid the ravages of the latest locust threat, for international economies it is far too late. The metaphoric locusts of the finance world, the banks have swept across the western world and much of Asia destroying everything they touched in their rapacious greed for more, more, more.
More mortgages, more debt, more leverage, more chicanery, more bonuses, salaries and expenses, more subterfuge, concealment and blatant incompetence. Like the early warning locust reporting system in Australia, the regulations and regulators were there but they failed to regulate and failed to report. Shareholders, creditors, counterparties and those who played the game with these banks have been damaged. Many have been crippled and will not survive their joust with the big time.
Like Icarus, ambition overtook ability and they flew too high. Eventually, the sun melted their wax wings and they plummeted into the sea.
Some of the greats will remain as interesting studies in history for future generations of financial students to observe again the phenomenon of greed, ambition and avarice overcoming the most basic tenets of common sense. The other phenomenon present in the great credit bubble was a universal failure of regulators, including auditors to discharge their duties. Everyone from central banks down deliberately looked the other way.
Lack of Regulation? You’re kidding
To the extent that those who make the news control the news, the push is already on to rewrite history. Various splenetic leaders from an unlikely cadre including French President Nicholas Sarkozy, British PM Gordon Brown and an unwilling accessory US President George W Bush are trying to make the case that the great asset bubble and its subsequent collapse are a case of inadequate regulations. From NZ Herald 10/15:
French President Nicolas Sarkozy said all European Union nations now backed radical restructuring of international institutions like the International Monetary Fund and World Bank. He demanded that the summit take place in November, "preferably in New York, where everything started" and lead toward "a new capitalism."
Sarkozy said emerging economies such as China, India and others outside the G-8 - the United States, Japan, Germany, France, Britain, Italy, Canada and Russia - should also participate - EU leaders meeting in Brussels "all agreed that we don't want the same causes to produce the same effects in future," he said. "We don't want all this to start again; we want lessons to be learned."
British Prime Minister Gordon Brown said the meeting would require vision similar to the creation of the UN and the Bretton Woods conference that laid out an international financial and monetary
The G-8 leaders said in a joint statement released by the White House that they were united in their commitment to change the regulation of the world's financial sector to restore confidence and "remedy deficiencies exposed by the current crisis."
"We are confident that, working together, we will meet the present challenges and return our economies to stability and prosperity," they said.
Brown, a longtime former Treasury chief widely seen as a leader in crafting policies to combat the financial crisis, said he wants a group of supervisors from major nations to monitor the world's 30 largest financial institutions.
"We now have global financial markets but what we do not have is anything other than national and regional regulation and supervision," Brown said. "The IMF has got to be rebuilt as fit for purpose for the modern world. We need an early warning system for the world economy."
What absolute rubbish! The core of these problems was trafficking in toxic mortgage securities. Other layers of unregulated derivatives are yet to explode but the rot starts with the banks, supposedly the most regulated entities in the world. Every country has a central bank that is required to supervise its banks. All have supposedly independent auditors who amongst other requirements must form a view of whether the business is a going concern which means meeting their commitments as they fell due, precisely the rock on which they foundered.
Most have other prudential regulators and at the end of the chain all have a Minister, Chancellor or Treasury Secretary whose ultimate obligation this is. What could be more basic to a country’s health than a sound banking system. Ultimately, the failure to impose reasonable restraint was a failure of political will. Politicians of all hues, everywhere loved the bubble and the feel good effects that it engendered. None had the intellect to understand that unrestrained avarice leads to tears.
To add to the pique of the pantomime being played out on bourses everywhere, the firefighters are the arsonists in disguise. Gordon Brown, now the Prime Minister of UK, was from 1997 to 2007 the Chancellor of the Exchequer (Chief financial Minister) and the man who presided over the excesses of UK banks. He now seeks to present himself as the leader of fiscal reform.
In US the present Fed Governor Ben Bernanke took office from the hapless Alan Greenspan in February 2006 and has inherited the damage from Greenspan’s lax oversight and inadequate policy settings. Bernanke came to prominence as an academic with a particular interest in the economic and political causes of the Great Depression, on which he has written extensively. On Milton Friedman's ninetieth birthday, November 8, 2002, he stated: "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation. In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money.
Hubris always comes back to haunt us. In future years Bernanke will have plenty of time to ruminate upon the vagaries of time. The theory may be ultimately correct but it is of little consolation if the banks have all gone bust before the mechanism works. The theories behind the investment strategies of Long Term Capital Management in 1998 ultimately proved to be correct but an insolvency implosion forced a bailout and loss of control before the rewards came. Time is no respecter of theories, a lesson that Gordon Brown too, failed to master in his PhD studies in history.
There has been and is, regulation at every level, but like the early warning system for locusts in Australia it just won’t work if those charged with the duty of reporting are determined to look away.
And it continues
You remember the US Treasury bailout of AIG last month. Here’s what you didn’t know from UK Telegraph:
We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for "regulatory capital relief rather than risk mitigation". In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level. The drama has exposed Europe's dark secret for all to see. EU banks took on even more debt leverage than their US counterparts, despite the tirades against ''le capitalisme sauvage'' of the Anglo-Saxons.
Now you know that the $85 billion AIG bailout was followed within days by a further injection of $123 billion of government funds, thinly disguised by a round robin loan transaction, and within Treasury’s ample bosom, sensible and prudent steps are being taken to de-lever AIG and presumably eventually to pay off the taxpayers largess. If you believe in that prudent and sensible oversight that Paulson promised you, then the reality will be quite a revelation. This neat summary from Robert Gottliebsen’s Business Spectator in Australia:
The searchlight of post-bust outrage is settling on the top executives of insurance giant, American International Group. But it’s not the fact that AIG led a massive fraud using credit defaults swaps to subvert the rules on bank gearing ratios that’s causing the outrage.
It’s the partridge shooting party that four of the executives, and four guests, went on in rural England two weeks ago that cost more than $100,000, and the $650,000 week-long retreat for the sales team at St Regis Monarch Beach resort near Los Angeles a week after the US Government bailed the company out.
The News of the World newspaper sent some undercover operatives to spy on the AIG “bigwigs” and reported some fabulous details of their tweeded excess (the capital letters are the newspaper’s):
“During their luxury stay at the 17th Century Plumber Manor in Dorset, the four AIG big shots and their four guests blew US taxpayers’ cash on:
* FOUR aristocratic-style shooting parties costing a whopping £25,000 in total.
* A PRIVATE JET for two of them from Germany costing £10,000.
* FLIGHTS to and from Madrid and a fleet of CHAUFFEUR DRIVEN cars at £5,000.
* SUMPTUOUS feasts washed down with bottles of fine wines and liqueurs costing £5,000 – plus giant PICNIC HAMPERS to guzzle in between slaughtering birds.
* LUXURY rooms totalling £5,000.”
Separately, according to The Times, the junket for the sales team at St Regis cost $US442,000, including $139,000 on hotel rooms, $147,000 on banquets, $23,400 on spa treatments and $6,950 on the golf course. Room service and bar tabs topped $10,000. This was all on September 22, a week after AIG collapsed and the government had to bail the company out.
AIG issued a statement: “This type of gathering is standard practice in the industry and was planned a year in advance of the Federal Reserve’s loan to AIG. We recognise, however, that even activities that have long been considered standard practice may be perceived negatively. As a result, we are re-evaluating various aspects of our operations in light of the new times in which we operate.”
Standard practice indeed. Nice work if you can get it and business as usual at all costs!
You can be sure that there will be no substantive change in the behaviour of these worthies. Like the debt addicts they are, they will not stop a day before change is forced upon them and clearly, despite their earnest protestations, Paulson et al are not in the business of changing this culture. So for those of you struggling with falling revenues and ever rising costs either in your businesses or personal life, or both, or finding credit more difficult to access, I guess you are happy that your government’s generosity can keep the party going.
For the insolvent businesses and Wall Street at least, but not for you.
In a sure sign that our leaders have no concept of what is really happening, and in any event cannot face the pain of allowing commercial consequences to unfold, Bernanke’s testimony to the House committee yesterday called for yet another bailout, increased infrastructure spending for job creation and lower taxes. The time honored economic mantra of “Guns or Butter” is gone. In the new paradigm those that matter believe that you can have it all.
They are as usual, wrong.
Peter Brookes cartoon for the Times shows again that a picture is worth a thousand words!
Does it matter?
For the executives and staff of the mega banks and businesses who have been anointed for survival by US, UK and European governments, obviously not.
For those not in the game it will matter a great deal as the excesses and failures of the big end of town start to bite on the real economy. Already we are seeing that most devastating of economic diseases, unemployment, raising its ugly head. In the capitalist world in which we live there are few things as soul destroying and degrading as loosing your job, especially if there is no alternative employment, a feature common to rural and smaller towns. In New Zealand (officially in a recession, but shhh, it’s a secret) we are seeing job losses particularly in small country towns. Usually it’s a factory that closes and the largely unskilled workforce are left stranded. It will happen in a small town near you.
International trade has taken a hit. The collapse in the Baltic Dry Index continues. Charles Dow used the transport stocks as confirming indicators for his Dow Theory of markets on the basis that if businesses were only building up inventory, a bullish move in his general index of stocks would not be confirmed by the transports, but if real economic activity were occurring, then the goods must be shipped and hence create confirming signals in the transports. With globalisation, the Baltic Dry Index or the cost of chartering bulk shipping has become a proxy for international transport and is now a leading indicator of economic activity. FT paints the issue as another credit problem whereas it is really a debt problem. If you have the cash in the bank, any bank will issue a letter of credit against it. It’s when the LCs are part of your borrowing facility that they can get testy. From the Financial Times:
The cost of shipping bulk commodities such as iron ore, coal or grains yesterday tumbled to its lowest level in almost six years as recession fears intensified and the difficulty of obtaining trade finance left many ships without any cargo. The Baltic Dry Index, a benchmark for global freight costs, plunged 10.7 per cent on the day, to 1,615 points, its lowest level since February 2003. The index has fallen 49.8 per cent since the end of September amid weakening demand.
“The whole shipping market has crashed,” Mr Rodley said. “But the biggest ships are suffering particularly,” he added. The average daily cost for the largest dry bulk vessels – known as Capesize and used mostly to ship iron ore from Brazil and Australia to China – yesterday sunk 28.9 per cent, its largest daily fall in a decade, to just $13,070 a day. The rate has collapsed 94.4 per cent since it hit an all-time high of $233,988 a day in early June. Ship owners are suffering from banks’ reluctance to issue letters of credit, normally straightforward instruments used to assure a shipper of payment for a cargo after it is loaded on to a ship, but before the buyer receives it.
But the strength and stoicism of consumers is immense. Despite the damage wrought on the financial sector, there is no feeling of worry or despair in the air. Whether pigs do or should wear lipstick seems of greater concern than the plague of locusts and the damage they have wrought..
Quo Vadis (whither goest thou)
In previous articles for Financial Sense we had forecast a drop in SPX to at least 971 or thereabouts. We got that number and more as the final level of Danielcode support for the major swing at 857 was broken but not on a closing basis on the weekly chart and so far not on the monthly chart. The DC black line is a common final support for markets as we have seen lately. Likely we will hold around 900-1100 while the market comes to grips with the various central banks and Treasuries’ innovative largess.
One of the signs that there is more turmoil to come is politician’s reluctance to tell their citizens the truth. With elections imminent in both US and New Zealand I have yet to see or hear a pollie talking about the recession that NZ is officially in and US fast approaching. Instead the spin and no doubt the real hope is for restoration and normalisation of markets. “Restore” is the only “R” word to be seen. Markets will indeed be restored and normalized over time but not in the way our present cheer leaders imagine. Instead markets will normalize at their longer term settings. Those that are capable of maintaining pre-bubble activity. For those in the financial services sector including property spruikers that means about a 40% cut from present cost structures.
For governments of every ilk, the step beyond normalisation which they have yet to address is; what is the new model for the inevitable return to lower gearing and for a short time at least some attempts at regulation. The next global leaders meeting is going to be a fascinating blend as US representatives steeped in the minimalist regulatory touch are confronted by the socialists of Europe and even Australia has been invited to the party. As a country that maintains a non-competitive banking structure where the four monopoly players are protected from competition by government policy, it is difficult to imagine what Australia’s contribution to global regulation could be.
Steely Determination not to let Markets be Free
I am rapidly losing count of the number of bailout packages, government guarantees and jack up jobs. Just yesterday Bernanke in his House testimony was promoting yet another bailout package. Already US Treasury is guaranteeing Money Market Funds, creating a government guaranteed short term Commercial Paper Market and replacing capital in damaged financial institutions while GSEs are instructed to mop up the still flowing rivers of seriously impaired mortgage securities . Anything it seems other than letting markets take their course. Paulson and Bernanke are on record as saying they will do “whatever it takes” to stabilise, ie support, credit and equity markets.
The consequences of Lehman’s demise are still rippling. At last week’s CDO auction the value of Lehman’s bonds was finally set at about 9c in the dollar. We know that their UK pension plan was underfunded to the tune of about $200 million and in the past 10 days there have been demonstrations in Singapore and Hong Kong where Lehman, abetted by the local banks managed to foist $570 million and $2 billion respectively, of their now worthless bonds onto the local punters. The lesson from Lehman’s collapse is that these businesses were so badly run and the true value of their products so impaired that governments simply cannot allow the populace to see the breathtaking incompetence of what they have allowed.
So it’s about politics. For us the punters, and the non players who will be called upon to bear the brunt of the governments’ largess it means that rather than having a brutal shock which cleanses the financial system, we are doomed to years of turmoil as markets take years rather than months to work through the effects of the government interventions.
And where does it all end. At what stage and how are governments to wean these market failures from the taxpayers’ breast?
The Greenspan and now Paulson-Bernanke put may be of comfort to the “anointed to be saved” brigade but it is horrendous for markets. Shareholders now know that corporates’ books are rigged; that auditors do not enforce the publication of true and fair accounts and that the show is being run for the benefit of executives rather than in the interests of shareholders. The determination not to let markets administer their own justice to executives, bondholders and shareholders via the bankruptcy courts ensures only that we have more of the same. The basis of capitalism and free markets is that markets are required to shame and punish the incompetents in the same vein that they praise and exalt the achievers. Present insistence to have the highs and only the highs strikes at the fabric of free markets, as the failures of the corporate world are maintained on corporate welfare.
There are few lessons learned by bailouts. Only that management and usually bondholders are saved. It is the essential nature of markets that they overshoot at the highs and at the lows. And not just in stock or market prices but in laxity of regulation and indeed corruption. Only free markets can heap sufficient opprobrium and damage on the bad players to ensure the cycle of excesses does not repeat and the next generation learns the lessons from the failure of others. Bailouts, by pulling the fangs of a vengeful market take away the trophy heads that market discipline demands. And that means more than just corporate bosses. Left to do their work unfettered, markets demand penance and revenge on those regulators who failed. The very ones who are still in control. Large institutions beget cronyism. Cronyism determines who are saved and whom abandoned. Not a good corporate model sport!
Grubby bankers and perpetual locusts. The consequences of failing to learn the lessons inflicted by the eighth plague means that the ninth is sure to follow.
Global commodity markets are leaking air slowly but continuously. Crude Oil is bouncing off its Danielcode target at 68.61, whilst the grains are returning to more normal prices after their blowoff tops.
Wheat has returned to its long term regression channel and trading range. This is the quarterly chart.
The telltales for the stress levels being induced for US markets are US Dollar Index, T Bonds and Gold.
DX has had a marvellous rally since it bottomed in March at its forecast Daniel price level near 70.40 and is up 19.3% from the lows. DX is now correcting the 2005 swing.
International Dollar demand appears insatiable and the US Fed has been required to establish very large new Dollar facilities with a number of foreign central banks.
Comex Gold has held on much better than its usual associates and is down only 23% from its March highs, forecast to within 2 ticks by the Danielcode in March. It has bounced off its DC retracement at 741.10 and is still holding that low. Every turn this year, bar 1, has been made at the daily DC numbers and members have had some sensational trades in Gold and Silver, as all time record bars have been repeatedly made in the Gold and Silver markets. The DC T.03 signals for members has got them all!
By contrast to Gold, the Comex Silver chart is down 55% from its March highs. As I said in this week’s free Weekly Gold Bulletin video, “If all your financial advisor knows is buy and hold, tell him to keep his advice to himself.” Losses for investors and traders in this market, who took no notice of my warnings of what happens after a blowoff in these markets, are huge. What is to be, has continually been published by Financial Sense in my regular articles. You had but to read.
As many of my readers know I was nominated as GATAs “Moron of the Year” by the Gold, Silver and HUI “buy and hold” crowd in March when I had the temerity to suggest that Precious metals and HUI were not a one way bet. I haven’t heard from them lately. I await redemption.
Here is the monthly HUI chart which is ticking off its Daniel sequence numbers with precision. Note the now famous DC black line at 88.59. That will be strong support if there isn’t a government intervention in the meantime!!.
T Bonds are happily camped near the top of their trading range where they have been since 2003. No sign of panic here. The Fed and Treasury have covered their bases and appear firmly in control. The law of unintended consequences now awaits.
I invite you to visit the Danielcode Online where we have a new Weekly Gold Bulletin, free for Financial Sense readers as well at the Gold and HUI binomial trend charts which dominate the longer term trading signals and a number of trading videos covering Gold and Silver, Equities and Forex that you may find interesting.
Exo 10:21 And the LORD said unto Moses, Stretch out thine hand toward heaven, that there may be darkness over the land of Egypt, even darkness which may be felt.
Exo 10:22 And Moses stretched forth his hand toward heaven; and there was a thick darkness in all the land of Egypt three days
This was the ninth plague.
Copyright © 2008 John Needham