The Capital Provisioning Infrastructure Is Burned Out And Bone Dry ... Lending Resources Went Into Commodity Futures
Monday, 2. June 2008, 05:37:29
The capital provisioning infrastructure is burned out and bone dry reports IBD's Reinhardt Krause in Raising Capital Is Getting Harder For Banks:
"For companies that have done the most (capital raising), we think they've used up much of their dry powder. If they did have to raise more capital over the next few quarters, it might be more difficult for them," says Brad Hintz, analyst at Bernstein Research, and a former chief financial officer at Lehman Brothers, LEH.
IBD's Chart shows banks raised $260B in capital
The most likely scenario, say observers, is that banks will have to take more painful steps to raise cash, mainly highly dilutive common-share offerings.
Early on in the credit crisis, banks went hat-in-hand soliciting foreign governments for capital. But, sovereign wealth funds have provided less money of late. In November, Citigroup, C, raised $7.5B from the Abu Dhabi Investment Authority of the United Arab Emirates. UBS took in $10 billion from the Government of Singapore Investment Corp. Merrill Lynch, MER, shored up its balance sheet selling $6.6 billion in convertible securities to the Kuwait Investment Authority, and $5 billion in common stock to Singapore's Temasek. While Citi has raised $44.1 billion, it still needs another $10 billion to $15 billion to shore up its balance sheet, says Oppenheimer analyst Meredith Whitney. Citi has said it wants to slash assets by more than $400B over the next three years, (which Richard says Citi will not, repeat definitely not be able to do).
Those deals were cut before banks began disclosing the full extent of their mortgage-related investments. Sovereign wealth funds are still losing money on some of their big bets, and are wary of doubling down until it is clear the housing market has bottomed, analysts say.
Falling share prices have increased the cost of raising new capital, analysts say.
One hurdle to raising more money from foreign government funds involves the terms of deals struck late last year as the credit crisis unfolded. Banks agreed to compensate the funds if the banks sold more stock at lower prices. (Richard this is a type of 'put option'; the first of which was where Citi, took back whole portfolios of loans sold off to hedge funds, at the price the funds originally bought them at). Usually a bank gets less capital from the foreign fund involved in the first deal, or gives the fund more convertible stock, further diluting common shareholders. "You're caught in a bit of a bind if you've signed one of those agreements," Hintz said. "You probably can't go back there too many times."
Some banks have raised capital via private equity. Buyout firm TPG led a $7 billion injection of capital into Washington Mutual. Corsair Capital was involved in National City's $7 billion common stock issuance. Despite rumblings that more banks are talking to private-equity firms, analysts say most aren't ready to accept buyout firms' steep price. In its TPG deal, WaMu roughly doubled shares outstanding, including preferred shares that will convert to common. Regulators are wary of private equity firms' involvement in the banking industry.
To raise cash, many banks have issued preferred equity, which gives investors dividends or interest payments. Many banks have raised capital via "perpetual" preferred stock, which does not mature like bonds. While issuing common stock dilutes existing shareholders, dividends and interest payments in preferred offerings dilute earnings".
Elaine Meinel Supkis in Benanke Will Hand Out $225 Billion In June provides the Jeannine Aversa Associated Press report that The Fed To Make Fresh Batch Of Bank Loans: "It will conduct three auctions in June, with each one making $75 billion available in short-term cash loans for a total of $225 Billion. Banks can bid for a slice of the available funds. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers".
Ms. Supkis provides the BORROW chart of 12/12/2007, and realtes: "The seventh anniversary of the Supreme Court refusing to count votes in the 2000 election. We can see that things are going very, very badly suddenly! The money feeding into the bankrupt banking system. The amount is now over 4X greater than on 9/11/1!"
It was at that time I reported that 'Gold Jumps To Over $900 On Fed's 0.75% Interest Rate Cut'; those knowledgeable that central bank rate cuts only serve to debase the currency and inflate the price of gold borrowed to either buy gold or go long the futures contract on gold.
And Ms. Supkis continutes: "Then we go to January 1, 2008. The Fed and the G7 have begun to crow that the whole thing was fixed and there was no emergency. Obviously, they were wrong. For by that date, a mere 19 days after 12/12, look at the BORROW chart again".
These borrowings were used to go short the markets which I reported in my article, Wall Street Braces for More Volatility: That Means Its Going To Be Good For Short Sellers.
Yes, huge amounts were borrowed; stupendous amounts were borrowed.
So if it is like Reinhardt Krause reports, and Jeannie Aversa reports, and Elaine Meinel Supkis documents that the banks are capital exhaused, bone dry, and fully lent out, where did the huge recent amount of capital form capital raising and TAF borrowings go?
Banks of late have been super tight with business loans: the capital did not, repeat did not go into business lending, as documented by Vice Chairman of the Board of Governors of the Federal Reserve, Donald L. Kohn, sho said, in speech Money Markets and Financial Stability: "Many banks and other financial market participants obtain a significant portion of their funding in the money markets and rely on rolling over such short-term debt. Developments in global financial markets since last summer have underscored that if market participants become concerned about their access to money market funding, they can pull back from providing credit to other financial market participants and to businesses and households".
The recent generated and receive capital went into stocks resulting in what I call the TAF, TSLF, and PDCF rally, which lasted from March 18, to May 9, 2008; and also the capital went into speculating; driving both commodity futures, inflating oil and agricultural prices higher; and also into currencies, specifically the Euro, FXE, the Yen, FXY, the Aussie, FXA, and the Loonie, FXC, and gold futures to inflate gold higher, as can be seen in the charts of $CRB and $GOLD.
Referencing, Donald L. Kohn's 'Money Markets and Financial Stability' speech, I quote the Vice Chairman: "Furthermore, certain liquidity tools traditionally used by central banks may not be fully effective in restoring liquidity to the money markets and containing the threats such money market disturbances pose to financial stability." Yes that's correct, the banks, KBE, weekly chart shows these financial institutions are not liquid or stable.
As soon as the Fed provided liquidity to the banks it immeditely was lent out; a large part went to currency speculators: Bloomberg's Haris Anwar relates: “Trading volume in the global currency market surged 36% to $100 trillion in 2007, a report by Greenwich Associates said. Hedge fund investors were the biggest drivers of growth among the 1,780 accounts surveyed by Greenwich in North America, Europe and Asia… ‘For global foreign exchange users, we’ve entered into an era of something close to free liquidity,’ said Robert Statius- Muller, a London-based associate consultant of the firm… ‘Cheap access to liquidity from a broad and growing list of sources is drawing in new participants.’ Hedge funds’ foreign exchange transactions rose 180%, accounting for close to 20% of 2007 volume compared with 11% in 2006. Volume driven by investment managers increased 31%. Corporate client volume rose 12%.”
So where are we headed?
On May 19, 2008, the stock market rally ended and the bear market reasserted itself; and for five days the market sold off; and then for the last five days the market has been on an upswing; TraderZ reports that the Russell 2000, $RUT, weekly chart shows the strength of the bulls, as they managed to close this index near its highs; and the daily chart shows current resistance is right at the 200 day moving average.
Despite the $225 Billion that is coming; it's not all coming at once; and the weekly chart of the Banks, as well as the daily chart have been terrifically bearish since May, 1, 2008: it seems to me, that the banks and investment bankers are going to be falling lower in value. And Prieur du Plessis writes much the same in Safehaven.com article Banks to Indicate Direction for Stock Market saying: "Putting all this together, it would appear that the underperformance of US banking stocks relative to the S&P 500 Index could be on its last legs." And Dr. Duru writes the chart of XLF, a financial ETF, is back at April lows, and looks to be heading lower for a retest of the January and then March major lows.
Take another look at the weekly chart Banks, KBE, chart: it is one of the most bearish investment charts of all time. One on hand, banks are really oversold; so, they could rise, but I just don't think so.
The overall stock market to bank ratio, VTI:KBE, is at 3.73: I believe that stocks are going to fall in June; bonds will not be a lifeboat of safety, as a run on the US Treasuries is underway. Google Finance chart shows that bonds across the board are starting to fall lower: the so called "inflation protected bonds", TIP, the medium to long term Treasuries, TLT, the high yield corporate bonds, JNK, and the zero coupon bonds, BTTRX, TIP, TLT, JNK, and BTTRX are all down.
So, I believe that the all TAF lending will be either be kept in the banks this time to preserve their captial "as best as can" or it will lent out for speculation in the futures and currency markets; it could be used to go short oil, $WTIC, or short US Treasuries, $USB, or short stocks or it could be used to go long gold, $GOLD.
One might ask "short the Treasuries?", yes short the Treasuries, as all the primary dealers such as Goldman Sachs, have been short since at least spring 2007 -- that's right the agents, that is those acting as sellers of US Government Bonds, have been short in their own accounts and holdings for a long time; and as the run on the Treasury bonds picks up steam their positions will become more financially adavantageous to them.
And on the subject of primary dearlers, the Federal Reserve assisted buyout of JP Morgan buyout of Bear Stear, was a pivotal economic event: the political economic landscape is rapidly evoling into state corporate rule.
Hyperinflation and chaos lies directly ahead
Ana Campoy and Leslie Eaton report in the Wall Street Journal: "In a move that may fuel inflation in consumer goods ranging from plastic wrap to diapers to food, Dow Chemical Co. said it will boost prices of its products by as much as 20% because of soaring energy prices. Dow Chemical, one of the largest chemical manufacturers in the world, uses oil-based products and natural gas as raw materials and is also a heavy user of energy to power its manufacturing plants. The… company said its oil- and gas-related costs in the first quarter were up 42% from a year earlier."
Miss Supkis relates: "I added some lines to this graph in red to show us where we are going: TO THE MOON, MARS AND OUTER SPACE! Boom! This is ridiculous!"
And I look for Volatility, $VIX, to increase, so one could got short:
1) Go short with any some of these 45 ETFs that I've selected as having the greatest falling potential.
2) Go short with these 11 bear market ETFs and ETNs. One of these for example is EWV, 200% short of the Japanese stock market, which fell to almost a double bottom at 58.67 on Friday, making it an excellent short selling opportunity given the Toru Fujioka and Jason Clenfield Bloomberg report that: "Japan’s household spending fell the most in 19 months, factory production dropped and unemployment climbed, stoking concern the longest postwar expansion is coming to an end. Spending decreased 2.7% in April from a year earlier… The jobless rate rose to a seven-month high of 4% and industrial output fell for a second month."
3) go short with these stocks, or even these stocks as well; these seemed viable as short selling opportunties a week ago; but may have sold off in the last week to become less desireable options.
I do not recommend short selling as it involves having a dollar denominated portfolio. The TAF, TSLF and PDCF rally, sent the US Dollar, USD, relative to the Yen, FXY, zooming up as seen in the Andrew Sheldon chart and article The USD-JPY On A Knife Edge: gains coming from short selling will be quickly destroyed by a falling US Dollar.
I suggest that one dollar cost average an investment in gold at BullionVault.com over the next three weeks as I see a financial emergency likely coming the current "credit cruch" morphing into "credit gridlock" as the banks and commerical credit providers conditions further deteriorate.
For the next three week timeframe and beyond, I see the future much as Kurt Kasun: Inflation Leaves Investors Little Choice But to Invest in Commodities: "The peaceful co-existence between commodity-related investments and most sectors which comprise the broader US Stock indices, is drawing to a close. As inflation tightens its grip over the world economy, US treasuries and stocks (consumer-related, tech, and financials) will suffer while investments in tangible assets will see their gains accelerate higher. I consider the terms "inflation" and "currency debasement" to be largely synonymous. The bottom line is that purchasing power is going to drastically decline. Income and wealth is not going to keep up with rising prices for goods and services for the US consumer. Hard asset investments will emerge as the sole safe haven against the deleterious effects of inflation".
The Economist article "Inflation's Back" relates that: "Now that this bubble has burst, the cross-border monetary stimulus has changed direction. As the Fed has cut interest rates, emerging economies that link their currencies to the dollar have been forced to run a looser monetary policy, even though their economies are overheating. Emerging economies with currencies most closely aligned to the dollar, notably in Asia and the Gulf, have seen the biggest price rises."
How much further inflation will take the commodities higher, that is the CRB, $CRB, is anybody's guess.
The Resourceful Bear says: "Inflation is a bond and stock killer and a gold thriller"; that's my quote so if you use it please give me credit.
Final comments have to do with the Yen Carry Trade
Mizuho Corporate Bank in Forex-DD says of the EUR/JPY, that is FXE:FXY, which is the proxy for the yen carry trade: "Retreating form the recent high at 164.48 but nothing terribly convincing as yet. While below April's high at 164.98 we shall continue to hope for topping activity. A sustained break below 162.90 lessens the chance of another upside test. Strategy: Attempt small shorts at 163.30, adding to 164.00; stop above 165.00. Short term target 163.00, eventually 161.50.": thus we are about to see an unwinding of the yen carry trade.
ChinaDaily in Fed's Rate Cuts Add To Inflationary Pressure relates: "The U.S. Federal Reserve's interest rate cuts have helped increase liquidity, but have also led to rising prices in commodities", Zhou Xiaochuan, governor of the People's Bank of China, said this last Friday. And Elaine Meinel Supkis in China Warns US To Stop Global Inflation remarks: "The Chinese, as I keep on saying, are very angry with the US now. The demands that China raise the value of the yuan have died down in the West only because Japan is demanding the US make the dollar strong. So it is rising against the yen and the carry trade is slowly resuming. All the bankers in the West know that the banking crisis didn't start because a few home owners in Stockton, California couldn't pay their monthly interest payments on their Mini McMansions. They know it started instantaneously with the sudden drop of the dollar against the yen. When the yen strengthened, the entire liquidity cycle in the West was disrupted. Suddenly there was no more 'liquidity'!"
And she continues: "Now that the status quo has been partially restored, we are back in the same box we fell out of last summer. The US is again flooding the world with Funny Money™. And when interest rates were artificially dropped below the rate of real inflation, a flood of this useless currency has poured over the planet causing inflation in all countries trading with the US including Japan. Basically, at this international forum, China is blaming the US for global inflation. And this means the US must change or else. Of course, the Fed will say, 'So what?' But this is dumb. The #1 sinkhole for excess US dollars is the FOREX reserves of China's central bank. They are weighing when to take some retaliatory actions."
Well the way I see it the Yen, FXY, is going to be going up in value this next week, relative to the US dollar, $USD.
"For companies that have done the most (capital raising), we think they've used up much of their dry powder. If they did have to raise more capital over the next few quarters, it might be more difficult for them," says Brad Hintz, analyst at Bernstein Research, and a former chief financial officer at Lehman Brothers, LEH.
IBD's Chart shows banks raised $260B in capital
The most likely scenario, say observers, is that banks will have to take more painful steps to raise cash, mainly highly dilutive common-share offerings.
Early on in the credit crisis, banks went hat-in-hand soliciting foreign governments for capital. But, sovereign wealth funds have provided less money of late. In November, Citigroup, C, raised $7.5B from the Abu Dhabi Investment Authority of the United Arab Emirates. UBS took in $10 billion from the Government of Singapore Investment Corp. Merrill Lynch, MER, shored up its balance sheet selling $6.6 billion in convertible securities to the Kuwait Investment Authority, and $5 billion in common stock to Singapore's Temasek. While Citi has raised $44.1 billion, it still needs another $10 billion to $15 billion to shore up its balance sheet, says Oppenheimer analyst Meredith Whitney. Citi has said it wants to slash assets by more than $400B over the next three years, (which Richard says Citi will not, repeat definitely not be able to do).
Those deals were cut before banks began disclosing the full extent of their mortgage-related investments. Sovereign wealth funds are still losing money on some of their big bets, and are wary of doubling down until it is clear the housing market has bottomed, analysts say.
Falling share prices have increased the cost of raising new capital, analysts say.
One hurdle to raising more money from foreign government funds involves the terms of deals struck late last year as the credit crisis unfolded. Banks agreed to compensate the funds if the banks sold more stock at lower prices. (Richard this is a type of 'put option'; the first of which was where Citi, took back whole portfolios of loans sold off to hedge funds, at the price the funds originally bought them at). Usually a bank gets less capital from the foreign fund involved in the first deal, or gives the fund more convertible stock, further diluting common shareholders. "You're caught in a bit of a bind if you've signed one of those agreements," Hintz said. "You probably can't go back there too many times."
Some banks have raised capital via private equity. Buyout firm TPG led a $7 billion injection of capital into Washington Mutual. Corsair Capital was involved in National City's $7 billion common stock issuance. Despite rumblings that more banks are talking to private-equity firms, analysts say most aren't ready to accept buyout firms' steep price. In its TPG deal, WaMu roughly doubled shares outstanding, including preferred shares that will convert to common. Regulators are wary of private equity firms' involvement in the banking industry.
To raise cash, many banks have issued preferred equity, which gives investors dividends or interest payments. Many banks have raised capital via "perpetual" preferred stock, which does not mature like bonds. While issuing common stock dilutes existing shareholders, dividends and interest payments in preferred offerings dilute earnings".
Elaine Meinel Supkis in Benanke Will Hand Out $225 Billion In June provides the Jeannine Aversa Associated Press report that The Fed To Make Fresh Batch Of Bank Loans: "It will conduct three auctions in June, with each one making $75 billion available in short-term cash loans for a total of $225 Billion. Banks can bid for a slice of the available funds. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers".
Ms. Supkis provides the BORROW chart of 12/12/2007, and realtes: "The seventh anniversary of the Supreme Court refusing to count votes in the 2000 election. We can see that things are going very, very badly suddenly! The money feeding into the bankrupt banking system. The amount is now over 4X greater than on 9/11/1!"
It was at that time I reported that 'Gold Jumps To Over $900 On Fed's 0.75% Interest Rate Cut'; those knowledgeable that central bank rate cuts only serve to debase the currency and inflate the price of gold borrowed to either buy gold or go long the futures contract on gold.
And Ms. Supkis continutes: "Then we go to January 1, 2008. The Fed and the G7 have begun to crow that the whole thing was fixed and there was no emergency. Obviously, they were wrong. For by that date, a mere 19 days after 12/12, look at the BORROW chart again".
These borrowings were used to go short the markets which I reported in my article, Wall Street Braces for More Volatility: That Means Its Going To Be Good For Short Sellers.
Yes, huge amounts were borrowed; stupendous amounts were borrowed.
So if it is like Reinhardt Krause reports, and Jeannie Aversa reports, and Elaine Meinel Supkis documents that the banks are capital exhaused, bone dry, and fully lent out, where did the huge recent amount of capital form capital raising and TAF borrowings go?
Banks of late have been super tight with business loans: the capital did not, repeat did not go into business lending, as documented by Vice Chairman of the Board of Governors of the Federal Reserve, Donald L. Kohn, sho said, in speech Money Markets and Financial Stability: "Many banks and other financial market participants obtain a significant portion of their funding in the money markets and rely on rolling over such short-term debt. Developments in global financial markets since last summer have underscored that if market participants become concerned about their access to money market funding, they can pull back from providing credit to other financial market participants and to businesses and households".
The recent generated and receive capital went into stocks resulting in what I call the TAF, TSLF, and PDCF rally, which lasted from March 18, to May 9, 2008; and also the capital went into speculating; driving both commodity futures, inflating oil and agricultural prices higher; and also into currencies, specifically the Euro, FXE, the Yen, FXY, the Aussie, FXA, and the Loonie, FXC, and gold futures to inflate gold higher, as can be seen in the charts of $CRB and $GOLD.
Referencing, Donald L. Kohn's 'Money Markets and Financial Stability' speech, I quote the Vice Chairman: "Furthermore, certain liquidity tools traditionally used by central banks may not be fully effective in restoring liquidity to the money markets and containing the threats such money market disturbances pose to financial stability." Yes that's correct, the banks, KBE, weekly chart shows these financial institutions are not liquid or stable.
As soon as the Fed provided liquidity to the banks it immeditely was lent out; a large part went to currency speculators: Bloomberg's Haris Anwar relates: “Trading volume in the global currency market surged 36% to $100 trillion in 2007, a report by Greenwich Associates said. Hedge fund investors were the biggest drivers of growth among the 1,780 accounts surveyed by Greenwich in North America, Europe and Asia… ‘For global foreign exchange users, we’ve entered into an era of something close to free liquidity,’ said Robert Statius- Muller, a London-based associate consultant of the firm… ‘Cheap access to liquidity from a broad and growing list of sources is drawing in new participants.’ Hedge funds’ foreign exchange transactions rose 180%, accounting for close to 20% of 2007 volume compared with 11% in 2006. Volume driven by investment managers increased 31%. Corporate client volume rose 12%.”
So where are we headed?
On May 19, 2008, the stock market rally ended and the bear market reasserted itself; and for five days the market sold off; and then for the last five days the market has been on an upswing; TraderZ reports that the Russell 2000, $RUT, weekly chart shows the strength of the bulls, as they managed to close this index near its highs; and the daily chart shows current resistance is right at the 200 day moving average.
Despite the $225 Billion that is coming; it's not all coming at once; and the weekly chart of the Banks, as well as the daily chart have been terrifically bearish since May, 1, 2008: it seems to me, that the banks and investment bankers are going to be falling lower in value. And Prieur du Plessis writes much the same in Safehaven.com article Banks to Indicate Direction for Stock Market saying: "Putting all this together, it would appear that the underperformance of US banking stocks relative to the S&P 500 Index could be on its last legs." And Dr. Duru writes the chart of XLF, a financial ETF, is back at April lows, and looks to be heading lower for a retest of the January and then March major lows.
Take another look at the weekly chart Banks, KBE, chart: it is one of the most bearish investment charts of all time. One on hand, banks are really oversold; so, they could rise, but I just don't think so.
The overall stock market to bank ratio, VTI:KBE, is at 3.73: I believe that stocks are going to fall in June; bonds will not be a lifeboat of safety, as a run on the US Treasuries is underway. Google Finance chart shows that bonds across the board are starting to fall lower: the so called "inflation protected bonds", TIP, the medium to long term Treasuries, TLT, the high yield corporate bonds, JNK, and the zero coupon bonds, BTTRX, TIP, TLT, JNK, and BTTRX are all down.
So, I believe that the all TAF lending will be either be kept in the banks this time to preserve their captial "as best as can" or it will lent out for speculation in the futures and currency markets; it could be used to go short oil, $WTIC, or short US Treasuries, $USB, or short stocks or it could be used to go long gold, $GOLD.
One might ask "short the Treasuries?", yes short the Treasuries, as all the primary dealers such as Goldman Sachs, have been short since at least spring 2007 -- that's right the agents, that is those acting as sellers of US Government Bonds, have been short in their own accounts and holdings for a long time; and as the run on the Treasury bonds picks up steam their positions will become more financially adavantageous to them.
And on the subject of primary dearlers, the Federal Reserve assisted buyout of JP Morgan buyout of Bear Stear, was a pivotal economic event: the political economic landscape is rapidly evoling into state corporate rule.
Hyperinflation and chaos lies directly ahead
Ana Campoy and Leslie Eaton report in the Wall Street Journal: "In a move that may fuel inflation in consumer goods ranging from plastic wrap to diapers to food, Dow Chemical Co. said it will boost prices of its products by as much as 20% because of soaring energy prices. Dow Chemical, one of the largest chemical manufacturers in the world, uses oil-based products and natural gas as raw materials and is also a heavy user of energy to power its manufacturing plants. The… company said its oil- and gas-related costs in the first quarter were up 42% from a year earlier."
Miss Supkis relates: "I added some lines to this graph in red to show us where we are going: TO THE MOON, MARS AND OUTER SPACE! Boom! This is ridiculous!"
And I look for Volatility, $VIX, to increase, so one could got short:
1) Go short with any some of these 45 ETFs that I've selected as having the greatest falling potential.
2) Go short with these 11 bear market ETFs and ETNs. One of these for example is EWV, 200% short of the Japanese stock market, which fell to almost a double bottom at 58.67 on Friday, making it an excellent short selling opportunity given the Toru Fujioka and Jason Clenfield Bloomberg report that: "Japan’s household spending fell the most in 19 months, factory production dropped and unemployment climbed, stoking concern the longest postwar expansion is coming to an end. Spending decreased 2.7% in April from a year earlier… The jobless rate rose to a seven-month high of 4% and industrial output fell for a second month."
3) go short with these stocks, or even these stocks as well; these seemed viable as short selling opportunties a week ago; but may have sold off in the last week to become less desireable options.
I do not recommend short selling as it involves having a dollar denominated portfolio. The TAF, TSLF and PDCF rally, sent the US Dollar, USD, relative to the Yen, FXY, zooming up as seen in the Andrew Sheldon chart and article The USD-JPY On A Knife Edge: gains coming from short selling will be quickly destroyed by a falling US Dollar.
I suggest that one dollar cost average an investment in gold at BullionVault.com over the next three weeks as I see a financial emergency likely coming the current "credit cruch" morphing into "credit gridlock" as the banks and commerical credit providers conditions further deteriorate.
For the next three week timeframe and beyond, I see the future much as Kurt Kasun: Inflation Leaves Investors Little Choice But to Invest in Commodities: "The peaceful co-existence between commodity-related investments and most sectors which comprise the broader US Stock indices, is drawing to a close. As inflation tightens its grip over the world economy, US treasuries and stocks (consumer-related, tech, and financials) will suffer while investments in tangible assets will see their gains accelerate higher. I consider the terms "inflation" and "currency debasement" to be largely synonymous. The bottom line is that purchasing power is going to drastically decline. Income and wealth is not going to keep up with rising prices for goods and services for the US consumer. Hard asset investments will emerge as the sole safe haven against the deleterious effects of inflation".
The Economist article "Inflation's Back" relates that: "Now that this bubble has burst, the cross-border monetary stimulus has changed direction. As the Fed has cut interest rates, emerging economies that link their currencies to the dollar have been forced to run a looser monetary policy, even though their economies are overheating. Emerging economies with currencies most closely aligned to the dollar, notably in Asia and the Gulf, have seen the biggest price rises."
How much further inflation will take the commodities higher, that is the CRB, $CRB, is anybody's guess.
The Resourceful Bear says: "Inflation is a bond and stock killer and a gold thriller"; that's my quote so if you use it please give me credit.
Final comments have to do with the Yen Carry Trade
Mizuho Corporate Bank in Forex-DD says of the EUR/JPY, that is FXE:FXY, which is the proxy for the yen carry trade: "Retreating form the recent high at 164.48 but nothing terribly convincing as yet. While below April's high at 164.98 we shall continue to hope for topping activity. A sustained break below 162.90 lessens the chance of another upside test. Strategy: Attempt small shorts at 163.30, adding to 164.00; stop above 165.00. Short term target 163.00, eventually 161.50.": thus we are about to see an unwinding of the yen carry trade.
ChinaDaily in Fed's Rate Cuts Add To Inflationary Pressure relates: "The U.S. Federal Reserve's interest rate cuts have helped increase liquidity, but have also led to rising prices in commodities", Zhou Xiaochuan, governor of the People's Bank of China, said this last Friday. And Elaine Meinel Supkis in China Warns US To Stop Global Inflation remarks: "The Chinese, as I keep on saying, are very angry with the US now. The demands that China raise the value of the yuan have died down in the West only because Japan is demanding the US make the dollar strong. So it is rising against the yen and the carry trade is slowly resuming. All the bankers in the West know that the banking crisis didn't start because a few home owners in Stockton, California couldn't pay their monthly interest payments on their Mini McMansions. They know it started instantaneously with the sudden drop of the dollar against the yen. When the yen strengthened, the entire liquidity cycle in the West was disrupted. Suddenly there was no more 'liquidity'!"
And she continues: "Now that the status quo has been partially restored, we are back in the same box we fell out of last summer. The US is again flooding the world with Funny Money™. And when interest rates were artificially dropped below the rate of real inflation, a flood of this useless currency has poured over the planet causing inflation in all countries trading with the US including Japan. Basically, at this international forum, China is blaming the US for global inflation. And this means the US must change or else. Of course, the Fed will say, 'So what?' But this is dumb. The #1 sinkhole for excess US dollars is the FOREX reserves of China's central bank. They are weighing when to take some retaliatory actions."
Well the way I see it the Yen, FXY, is going to be going up in value this next week, relative to the US dollar, $USD.
WIDGETIZE