Monday, November 30, 2009

In the casino market of stocks, a casino stock tanks

So much for risk appetite. Let's hear it for bond apetite.

UPDATE 3-Sands China falls, casino party looks to be over
The first-day drop of nearly 14 percent -- the third-worst Hong Kong debut this year after China South City Holdings and Glorious Property Holdings -- was more than analysts had predicted

Sands China's $2.5 billion IPO also came amid global market skittishness in the wake of last week's sell-off over a debt crisis in Dubai, with investors leery of risky bets.

Hard to believe it was passed over. Why just a year or so ago it would have been oversubscribed:
Sands China, the Macau unit of Las Vegas Sands, the world's most valuable casino firm, offers investors a company that is heavily debt ridden, but which boasts a strong growth outlook in Macau, the world's biggest and fastest-growing gambling market.



Dubai bonds sukuk

The Western financial full court press still does not get it. As Guambat has repeatedly pointed out in his last three posts, a sukuk is not a bond. There is an emerging world market of difference. And it is a difference with distinct implications for the Western order of capital, as a quick perusal of the prior posts would reveal.

Nakheel PJSC, the Dubai government- owned company that wants to defer payment of its $3.52 billion bond due in two weeks, asked Nasdaq Dubai to suspend the securities until it provides further information to the market.

Dubai World's real-estate unit Nakheel on Monday asked Nasdaq Dubai to suspend trading on all three of its listed sukuk, or Islamic bonds.

Dubai's Nakheel, developer of man made islands in the shape of palms, said on Monday it has asked for three of its listed Islamic bonds, or sukuk, on Nasdaq Dubai to be suspended until it is in a position to inform the market more fully.

Until the Western mind gets its head around the Islamic notions of debt (it doesn't exist as we know it), their mouths will continue to shoot off like a blind man at a shooting gallery.

Willem Buiter, Citibank's new Chief economist, is not one of those:

The intrinsic unimportance of Dubai World and the important wider message it conveys
It would make sense under normal circumstances for the creditors to put Nakheel into default and take control of and liquidate its assets to minimize their losses. However, Nakheel’s assets are mostly in Dubai - land and structures, finished and unfinished. We don’t know what creditor righs, especially foreign creditor rights are worth in Dubai. Will legal judgements reached in London be enforceable in the courts of Dubai? The jurisprudence of internationally traded sukuk (Islamic bonds), which comprise part of the debt involved, has not been fully tested before.

Meanwhile, back in Australia, the lot what told us the subprime events were a peculiarly American phenomenon from which Australians were immune are now telling us, again but this time about Islamic finance, no worries, mate.

Labels: ,

Hands at the pump

For decades now it has been the hands at the pump of retail petrol stations throughout the West that have pumped up the assets of the oil pumping countries, primarily located in the Middle East, and particularly Saudi Arabia and more importantly little UAE's Abu Dhabi.

With the prospect of another leg down in the global meltdown of credit intermediaries, Abu Dhabi has held out a helping hand to ostensibly pump up the region's debtors, but more particularly its creditors.

Such pumping has allayed the fears of those worried about jumping from the high ledges of finance, especially brokerage, houses. Market's are rebounding fearlessly today.

So, time, again, for a bit of perspective on the situation, which has been characterized in Guambat posts here and here over the last couple of days.

Here's the latest teaser/hook on the developing story:

U.A.E. Eases Credit After Dubai World Debt Delay (Update1)
Dubai, the second-biggest of seven states that make up the U.A.E., and its state-owned companies borrowed $80 billion to fund an economic boom and diversify its economy. The global credit crisis and a decline in property prices hurt companies like Dubai World as they struggled to raise loans and forced the emirate to turn for help to Abu Dhabi, the U.A.E. capital and holder of 8 percent of the world’s oil reserves.

U.A.E. banks are already facing rising loan losses stemming from the global recession as the economy slowed and two Saudi Arabian business groups defaulted on at least $15.7 billion of loans. Provisions for bad loans at U.A.E. banks rose to 2.76 percent of the total as of the end of October from 1.92 percent a year ago, according to central bank data.

The U.A.E.’s banking industry is already the biggest among the six Gulf Arab states including Saudi Arabia, Kuwait and Qatar, with 1.54 trillion dirhams ($418 billion) in assets, central bank data shows.

Now, what about that UAE support for faltering Dubai?

First of all, it is not the end all and be all of everything gone wrong.

Abu Dhabi Extends Cautious Helping Hand to Dubai
Abu Dhabi says it intends to "pick and choose" how to assist its debt-laden neighbor Dubai. "We will look at Dubai's commitments and approach them on a case-by-case basis," a high-ranking government official in Abu Dhabi told Reuters on Saturday. "It does not mean that Abu Dhabi will underwrite all of their debts."

Al Jazeera on Saturday reported that the "case-by-case" support "is likely to disappoint many investors who assumed the city would provide a safety net for its neighbor."

U.A.E. Bank Pledge No Comfort to Dubai
The United Arab Emirates central bank said Sunday it would make fresh funding available to local banks if needed, but didn't offer specific support to Dubai. The federal government in Abu Dhabi, which bailed out Dubai to the tune of $10 billion earlier this year, hasn't yet indicated fresh support.

The central bank said it "stands behind" U.A.E. banks and would make available funds to local institutions, including local subsidiaries of foreign banks.

But the statement pointedly didn't mention Dubai. The central bank could still issue a more explicit statement of support.

Secondly, it ain't free.

Liquidity prop for UAE banks
The United Arab Emirates’ central bank set up an emergency facility today to support bank liquidity.

The bank said it was making available to domestic and foreign banks a special additional liquidity facility linked to their current accounts at the central bank, at the rate of 50 basis points above the three months Emirates interbank offered rate.

Which may go a little ways towards helping things if this is simply a liquidity issue and not a solvency issue -- see AS THIS STORY GATHERS MOMENTUM....

Finally, and to Guambat most critically, none of this addresses the fundamental structural flaws in the whole concept of Islamic finance.

Dubai Illustrates That Sukuks May Be Junk Bonds
It seems as though shariah-compliant bonds issued to expand this Islamic Beverly Hills are deemed to have little asset quality behind them. One bond analyst stated on Friday "We are of the opinion that the underlying assets are worth very little."

In short, unless Dubai or their neighbor Abu Dhabi ponies up with government backing, sukuks as an investment may be in deep trouble throughout the Islamic investment community. So much for trying to do an endaround on a religious principle.

Dubai Debts Test Islamic Finance
CAIRO – As the world is still recovering from an economic meltdown, an unfolding debt crisis in the flashy lifestyle-Gulf state of Dubai is sending shockwaves around the world, putting the booming Islamic finance to a test.

Islamic finance is one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

The Asia Legal Business website has coverage on the subject of so-called Islamic bonds and finance from a perspective of the business of lawyers. One such article discusses the attempts to issue them in North Asia, such as Japan and Korea. It notes,
The Korean Ministry of Strategy and Finance announced earlier this month that it had submitted a tax revision to the National Assembly, which if approved would pave the way for local companies to start issuing sukuk (Islamic bonds). Yet even if the law is passed Islamic finance faces stormy times. Regulators and lawyers may benefit from looking at the troubles that Japan has had in kickstarting its own industry.

Under existing Korean legislation uncertainty surrounds whether a sukuk meets the definition of a bond.
And it quantifies and characterizes some of the impetus of these non-Arab/Islamic countries to run with the other financial bulls with these statistics and comments:
In the past fear may have been a deterrent to the success of the Islamic finance industry, yet worldwide this is something that Korean companies can no longer afford to be frightened of.

Latest estimates indicate that Islamic financial assets are expected to surpass US$1trn in 2010. Sukuk issuance grew five-fold over the past four years to reach US$120bn in 2008 and the mutual fund market is estimated to reach more than US$11bn.

Korea's chaebol have made no secret of their desire to tap into the Gulf region's ever-increasing pool of investors to feed their infrastructure activities in the region. But as the GFC dries up financing funds from traditional funding markets, this "want" is quickly transforming into a "need".

The sub-prime crisis “as well as the bankruptcy of Lehman Brothers“ has limited the sources of funding available for Korean companies: and while this has started to improve, Korean companies may still find it difficult to raise and obtain capital in traditional markets like the US and Europe, said Park Soo Man, a partner at Kim & Chang.

No doubt, to be continued.

Labels: , ,

Sunday, November 29, 2009

The encore of excess

The thing that impresses Guambat most about the Dubai situation is not its arguably small impact on the overall global economy, but its glorification of the excesses that brought down the first leg of the global credit meltdown.

The straw that broke the desert camel's back was yet just one more arrogant alphabet soup financial instrument, the sukuk. As noted in the prior post, a sukuk is a particularly Islamic arrangement, shaped by ideals hard for Westerners to fathom.

But, like the complex derivatives that sunk AIG, it is being passed off as something both benign and boring: a bond. In this case, it is every where referred to as an "Islamic Bond".

That's like calling something "genuine simulated". It's soy disguised as beef. In its theoretical, and theological, core, it is something quite unlike bonds as we know them.

It is not just the artful artifice of the financial instrument that marks this latest crisis as simply more of the same from the last one, it is the gaudiness of its trappings. As distasteful as a Goldman bonus is to the man on Main Street, Dubai is to the ordinary Arab on the sand dunes shaped to look like palm leaves in Dubai.

Guambat has previously posted on the curry-favoring of Dubai's bounty by American interests, and the dark side of Dubai itself.

Dubai's excesses are no less an abomination of its ideals than are Wall Street's, and raise similar fears and paranoia, as described in this Marla Singer ZeroHedge post.

What strikes Guambat about this current Dubai debt predicament is that, similar to the happy-days-are-here-again stupendous stock market rally of the last several months, in the very face of social and economic disruption to the vast numbers of everyday people, Dubai represents implicitly the vanity of excess.

It is a vanity that makes it perfectly rational for people to vote against their pocket book, to burn and tear down rather than put shoulder to the common good.

It is the stuff of social disruption, whatever rationale the economists might want to put on it. Just watch the pandering populist politicos and their imam counterparts feast on this one.

That is the worry that Wall Street must climb, since it prides itself so much on how well its bulls do that.

The spin doctors will try to play down this threat saying it doesn't amount to that much money.

But it's not the money that counts, here. It is the vanity of excess. It is as distasteful as Obama's gate crashers.

And that's what makes this encore performance as worrying as the first round.

And so the slings and arrows -- and apologies -- begin:

Dubai: Just deserts
Sheikh Mohammed’s plan worked brilliantly when money was cheap and the global economy booming. House prices quadruped in a decade. The value of Dubai’s investments grew.

There were so many well-upholstered bums on Emirates well-upholstered seats that the airline ordered 58 double-decker Airbus A380 jets at a cost of £10 billion.

By promoting Islamic finance and encouraging women to go into business, Dubai has also become a business mecca for hundreds of thousands of Palestinians, Syrians, Iranians, Lebanese and Indians who are unlikely to decamp to New York, London or Paris.

From the start, analysts warned of two big dangers: what locals dubbed “Dubai’s double jeopardy”. First, if there were a downturn, the emirate’s debts could leave it fatally weakened. Second, Dubai Inc was dependent on a handful of executives headed by Sheikh Mohammed, none of whom had proven his worth on a global business stage before. Certainly none had experience in the kind of “Lego for grown-ups” that Dubai was undertaking.

Unfortunately for Dubai, those two flaws have been cruelly exposed all at once.

Not only did Nakheel expand too far, too fast but the aggressive overseas expansion by Dubai World’s boss, Sultan Ahmed Bin Sulayem, has proved disastrous. He was behind the worst single property investment of the boom years when he bought half of a Las Vegas casino project for $3.6 billion. Two years on, the stake is worth $2.4 billion. [And what's it worth now, and does that have any knock-on effect on other Las Vegas prices?]

Sheikh Mohammed has other problems. Detractors accuse him of a lack of transparency and of weakness. They point out that only three weeks ago he made a speech saying that Dubai could meet all its obligations, dismissed its critics as ignorant and said they should “shut up”.

“He said everything was okay when we now know it was anything but. Was he lying or did he simply not know? I don’t know what’s worse,” said one local businessman.

“It’s like Alice in Wonderland here,” said one expat. “You never know what’s really going on until it hits you.”

“Western countries and companies are restructuring just as we are,” one Government official said yesterday. “And they are talking about much larger sums of money than we are but, somehow, outsiders can’t seem to resist doing us down. It’s real chicken shit.”

There is certainly an element of schadenfreude in the reaction to Dubai’s problems. As one westerner put it: “After insisting it would be the No 1 in absolutely everything, it’s good fun to ridicule Dubai for becoming No 1 in boom and bust.”

Dubai: Bling City is dead, but the desert dream lives on
Three years ago, when Dubai's debt-fuelled boom was at its height, the emirate launched its most ambitious project yet – a gigantic offshore replica of the planet Earth, made from sand dredged from the deserts and beaches of Arabia, with countries and continents carved out among a man-made archipelago of 300 islands. It was called simply The World.

Like most things in Dubai, it was for sale. Wealthy celebrities with $20m or so of loose change could buy Britain or France or Australia and erect their own secluded fun palace by the sea.

That project is unlikely ever to be completed. Work on it stopped earlier this year when the developer, Nakheel, ran out of money. Deprived of essential maintenance and reinforcement, the islands are slowly slipping back beneath the waves. "They're just blobs of dirty sand sinking back into the sea," said my sailing friend. "It must be the biggest shipping hazard in the Gulf."

The financial experts will pick over the bones of the "Dubai model" for years to explain what has happened, but the basics are simple: with minimal natural resources in an energy-rich region, Dubai decided to go for broke with an ambitious strategy of economic growth designed to turn the Arab fishing village into a global trading metropolis. [Sounds a bit like the tale of the Mexican fisherman and the vacationing merchant banker.]

It did it with borrowed money, vast quantities of it. The palm-shaped islands, the glamorous beach resorts, the seven-star hotels, a state-of-the-art metro system – all were built on borrowed money.

Neither I nor any of my friends and colleagues ever felt we were living on borrowed time. Life in the emirate is good – great weather most of the year, cheap cars and petrol, and a touch of high life in the swanky hotels. Affordable domestic help is the norm – armies of Filipina and Sri Lankan maids and Indian drivers and gardeners mean that life for expatriates is free from much of the drudgery of Europe or America.

Property prices were a worry. A three-bedroom villa in a nice part of town – close to the beach and near the arterial highway, Sheikh Zayed Road – would set you back more than £3,000 a month. But salaries were about 50% higher than in Europe – and tax free – so it was affordable. The things I liked best about Dubai were summed up in four words: no tax, valet parking.

There is no doubt that Dubai has had a bad year, image-wise. Virtually every couple of weeks some western correspondent would pop up in the emirate, announce he was "writing a piece on the dark side of Dubai" and leave after a few days in the sun at a five-star beach resort to launch another attack on the emirate and its residents.

There were interviews with exploited Asian workers in filthy labour camps, hilarious encounters with Ukrainian prostitutes in Dubai nightclubs, and heart-rending accounts of jailed expats or sacked foreigners having to sleep in their 4x4s. For those of us living and working in the country, it almost seemed like they were writing about somewhere else.

There is a "dark side" to Dubai, like there is to any big city anywhere in the world, in every era of history. Labour exploitation is probably the most obvious scandal. Construction workers from India, Pakistan and China are lured to Dubai with the promise of wages big enough for them to give their families a better life back home, only to have their passports confiscated on arrival as they are hit with huge "fees" for their travel and accommodation. The conditions they live in are primitive compared to the rest of the city and the west (though probably not those of their home countries).

The government blames it on unscrupulous middlemen, and promises to take action with each new report.

Prostitution is rife, too, mainly women from the former Soviet countries or China, but fairly self-contained in well-known bars and districts. It depends on your attitude to prostitution, I guess. Along with the ready availability of alcohol, it means Dubai will always have a unique marketing advantage compared with Riyadh, or Doha, or even Abu Dhabi.

If only the western correspondents who spent so many hours in desert labour camps or Russian cat-houses would take just a couple of hours on a Friday afternoon to visit Safa Park, Dubai's equivalent of Hyde Park or Hampstead Heath, sprawling between the beach villas of Jumeirah and the slums of Satwa, with the needle spire of Burj Dubai, the world's tallest building, in the background.

There, Arab families spread their picnic lunches on the lawn, ladies in abayas and men in dishdashas; Indian groups play football and light barbecues; Filipino couples stroll by the fountains, wheeling pushchairs; westerners lounge in the sun just chilling, maybe taking an occasional swig from a (theoretically) illicit can of beer.

It is a pastoral vision of social, cultural and racial integration that would surely soften the heart of even the most sceptical foreign correspondent.

Dubai leads the Arabian peninsula in this respect. Christian churches and Hindu temples lie a couple of blocks away from an imposing mosque. There is a synagogue discreetly hidden among the big villas of Jumeirah, built to accommodate an American Jewish banker who would only relocate to Dubai on condition that he could practise his religion.

Dubai is not just a social and cultural melting pot. It's also a major commercial hub at the heart of a strategically vital region. The US fleet loads up at Jebel Ali port – owned by Dubai World – before it moves its cargoes on to Iraq and Afghanistan. The Iranians, who have been cross-fertilising with this part of Arabia for centuries, use Dubai as a social and financial pressure valve. During the recent contested elections in Iran, the biggest demonstrations outside Tehran were in Dubai.

Saudi Arabia, the biggest economic power in the region, uses Dubai as its entrepôt to the wider financial world, and as an escape from the cloying Islamic orthodoxy of the kingdom. You can see young Saudis in bars and nightclubs most weekends, drinking bottles of Johnny Walker Blue Label ("Saudi Coke") and trying to chat up Uzbeki ladies in broken English.

Despite all its flaws, Dubai is as close as the Middle East gets to the Islamic concept of "harem" – a place of peace and reconciliation where conflicts and arguments can be forgotten, and disputes resolved in a spirit of mutual understanding.

Yes, it sounds a great deal like Beirut just a few decades ago.


Friday, November 27, 2009

On the inconvenience of principal

Or principle.


When staunchly held principles come face to face with real life, ingenuity and artifice are called upon to sustain the principle against overwhelming proof of expedience. In the end there is either blind faith passing as ignorance (or vice versa), or the rise of skepticism, the death knell of most other isms.

And that is what the financial world is up against as the Financial Wizards in the Middle East and South East of Asia together with their brethren in London and other financial circles try to keep their principles from destroying their principal.

In a word, it's called sukuk.

Ali Arsalan Tariq's Masters thesis describes the context and evolution of sukuk, with these brief excerpts doing no justice to his work, which should be read in full:
Debt markets are an integral part of the financial sector and effectively supplement the funds provided by the banking sector. Islamic law (Shari’ah) prohibits the charging and paying of interest.

In addition to prohibiting interest, the Islamic law also prohibits trading under conditions that exhibit excessive uncertainty and ambiguous outcomes (Gharar).

Therefore, in countries where Muslim population constitutes an important segment of the society, traditional debt markets cannot flourish. Hence there is a high demand and need for developing alternatives to traditional debt markets that can be acceptable to the Islamic law.

In Islamic capital markets, interest rate swaps and other conventional forms of derivative instruments such as credit derivatives and detachable options are not available as Islamic law also prohibits these.

As a result, there has recently been a rapid growth of a thriving multi billion dollar market in Shari’ah compliant sovereign and corporate Islamic structured financial instruments known as Sukuk.

Due to the very novelty of Sukuks themselves there is a relative dearth of comprehensive research studies.

Mathew Goldstein outlined some of the chief characteristics of sukuk:
Islamic finance has five 'pillars':

1. The ban on interest.

2. The ban on uncertainty or speculation.

3. The ban on financing sectors deemed haram, or forbidden
-- such as weapons, pork or gambling.

4. The profit and loss sharing principle -- parties share
risks and rewards.

5. The asset-backing principle -- each transaction must
include an identifiable underlying asset.

Current risks are focused on 'pillar number five' -- asset
securitisation -- and vary according to which of two general
types an investor chooses: 'asset-based' or 'asset-backed'


The difference lies in ownership and sale of assets.

Asset-based sukuk allow the inclusion of assets that may
not be legally recognised as being owned by the investors.

The assets fulfil sharia compliance in form. But they may
not ensure that investors can recover capital, through sale of
the asset, for example, in the case of originator bankruptcy.

Asset-backed sukuk stick more closely to the ideal of
granting the investor a share of a concrete asset or business
venture, and a share of the risk commensurate with such

In this case, sukuk securitisation is structured around
investors' rights, or legal ownership, of a plot of land,
building, or other asset.


The widespread loss of liquidity and lack of investor
confidence wrought by the post-September 2008 global financial
crisis sent ripples through the world of Islamic banking, due
to originator insolvency, defaults and debt restructurings.

The website with the unfortunate name "" is a financial news site dedicated to this corner of the finance world. It offers these insights/opinions:

Basics of Islamic finance
The conceptual difference between an Islamic finance and a conventional finance transaction lies in the fact that in conventional finance, the financial institution generally lends cash for a length of time, often direct to the client or borrower, of course based on a credit rating or evaluation, on the basis that the borrower would return the borrowed amount plus an interest amount. The interest amount and the original borrowed amount is required to be repaid to the lender over the loan period or by the end of the loan period. Thus the transaction in essence is the lending of cash against the return of a higher amount of cash, and not necessarily for a specific purpose. One of the basic ideas behind the interest rate is the time value of the money lent. The excess cash returned to the lender over and above the borrowed amount is considered "riba" in Islamic finance.

In Islamic finance, there is no direct lending of cash against return of a higher amount of cash, unless the transaction is "asset backed" implying that the transaction has to involve the sale and purchase of an asset. In a typical financing transaction, the Islamic financial institution will purchase assets required to be financed by a borrower at a price and sell them to the borrower at an agreed (higher) price allowing the financial institution to make a profit. This purchase and sale of an asset basically renders the financing as "Shariah-compliant". Islamic Shariah laws allow cash to be lent, but generally only as "Qard Hassan" where only the same amount of cash is required to be returned, if returned at all.

The point to note is that in an Islamic finance transaction, the financier takes an element of risk, that of ownership of an asset and consequent non-payment by the client of the asset's sale price. Any default penalties imposed to encourage payment on time do not accrue for the benefit of the lender but get paid to charity. There are other inherent risks in the transaction but the idea is that this risk-taking is what allows the Islamic financial institution to make a profit on the financing transaction. Therefore, even though the payment terms in a conventional and Islamic financing contract may look alike, there are differences in the conceptual structure of the transaction. Usually the profit margins charged by Islamic financial institutions are about the same as interest rates of conventional financial institutions, but this is largely due to competition, the required profits of shareholders of such institutions, and also quite possibly driven by higher legal and administrative costs pertaining to the financing transactions.

Banking on sukuk in a crisis
Abu Dhabi, Dubai and Qatar all have issued billions of dollars worth of conventional bonds in recent months.

Bahrain went a step further and issued a $750 million sovereign sukuk that attracted an order book of about $4 billion with strong demand from the Middle East. (Islamic bonds, or sukuk, are underpinned by physical assets whose returns are used to pay bond-holders, to account for Islam's prohibition of interest.)

Are these isolated instances of Gulf governments trying to increase their liquidity?

They are not. Regional governments are co-coordinating efforts to develop secondary bond trading. In the past creditors tended to hold the few bonds that were issued to maturity. The new government issuance will help develop a yield curve, which will make for more efficient pricing and give corporate issuers a benchmark to price against.

Also, it is a push by the region to further develop their debt markets and shift the pressure of bank lending to fund the mega-projects that have come to characterise the region.

The high-cost and long-term nature of these ventures, which include new economic cities, refineries and airport expansions, requires longer-term financing that has been increasingly difficult to secure as the global recession has tightened credit markets and sapped liquidity.

Kuwait and Saudi Arabia would be next in line to issue sukuks. Saudi Electricity plans to issue sukuk that could be worth about 5 billion riyals ($1.33 billion). Saudi Arabia also launched its new market for both conventional bonds and sukuk to offer firms new sources of funding amid tight credit conditions.

But, despite all the euphoria the fact remains that sukuks are more often illiquid.

Which brings us to the dubious world of the ego investing of Dubai. You see, if one of these sukuks were to blow up, how is the fall out handled? In bankruptcy court?

Not if it's a western court because the very first order of business in bankruptcy courts is to separate the debt from the equity, and shift the balance of powers to the debt holders. But a strict application of shariah would, at first blush, mean there is no debt: all is equity. What then? Who has priorities, and over what?

That is likely one main reason the world's markets are in a bit of uncertainty and dither over the latest from Dubai World and its tentacles, particularly since this is not the first shoe to fall on the matter.

Fears rise over Islamic bonds
Dubai’s request for a debt standstill for one of its largest state-owned conglomerates has raised the possibility of the largest Islamic bond default on record and rattled the global Islamic debt markets.

Nakheel, the Dubai developer behind many of the emirate’s gaudiest projects, has to find $4bn to repay an Islamic bond, known as sukuk, by December 14.

The Nakheel sukuk has been seen as an important indicator of how Dubai will manage the liabilities of its multifarious government-related entities, but a failure to repay the bond fully and on time could impact the global sukuk market, estimated at over $100bn.

“There is a lot of shock and a little bit of anger,” said Nish Popat at ING Investment Management in Dubai. “This is a major blow to the sukuk market. If it defaults, it would be the third one in the Gulf, and the largest Islamic bond default ever, and we’re still waiting to see how sukuk-holders are treated in situations like this. There aren’t any precedents.”

Western investors watch nervously as worth of Islamic bond is tested
According to Neale Downes, a Bahrein-resident partner at Trowers & Hamlins, the law firm, it is not clear how creditors will rank in an insolvency.

Islamic bond problems herald due-diligence era
"If there are lessons to be learned here, it is that due diligence is all important. Compliance to sharia in its structuring does not ensure the success of a sukuk or of any product or business," said Yusuf Talal DeLorenzo, chief sharia officer at fund management company Shariah Capital
Dubai Government Shock May Not Be Last
With sovereign finances stretched, investors need to remember that governments can and will change the rules when necessary. Asset prices buoyed by a faith in policy support may need to adjust to that.

Dubai's decision may mark a watershed. Throughout the crisis, governments have so far looked to prop up key assets: after the global banking bailout, support was extended to key automakers in the U.S. and Europe. At a sovereign level, countries have banded together to provide support to peers in trouble, such as Latvia. Dubai itself set up a Financial Support Fund for its government-related companies.

But all of this support carries a cost. Governments are under increasing pressure to rein in their borrowing, particularly as central banks start to withdraw their extraordinary policy measures, thereby removing some of the support for government bond markets. As a result, they may no longer be able to provide such wide-ranging support. The result could be more nasty surprises as government cast other unviable investments adrift.


Dubai Debt Woes Raise Fear of Wider Problem
“Dubai shows us that what we are now facing is a solvency issue, not a liquidity issue,” said Jonathan Tepper, a partner at Variant Perception, a research house in London that has been outspoken on the debt problems facing European economies.

Labels: ,

Wednesday, November 25, 2009

The skinny on double dipping

The funny money sloshing around the credit markets, from subprimes to CPDOs and other such brought down the economy last year.

Then the phoney money printed and given away by the world's consensual bankers pumped it back up again. "It" being the stock markets, not the real economy.

U.S. GDP growth revised down to 2.8% rate for third quarter
Spurred by government stimulus programs, the economy expanded at a 2.8% annualized rate in the third quarter, the Commerce Department reported Tuesday.

Massive job cuts by businesses are paying off for them, according to the GDP report.

However, the 2.8% growth rate is below the government's initial estimate of 3.5%

Latest GDP numbers prove sobering
After all, growth under 3% won't do anything to restore the millions of jobs lost in the recession.

Corporate earnings have been improving this quarter, and the market's been happy about that. But the numbers reflect cost cutting, rather than revenue gains. And, as Tuesday's GDP numbers suggest, consumer spending isn't as robust as initially thought.

Anyone standing on the corner of Wall Street and Main would tell you there's an unsustainable disconnect, and the bonuses being paid by the brokers are simply hand writing on the Wall when the Main guys are broke.

It's beginning to look a lot like a "W."
The duration of unemployment as a percent of the labor force is the highest in at least a quarter of a century. More people are being forced to work part-time and/or beneath their skill level while the job openings rate is the lowest in recent memory.

Consumer spending is also being suppressed by the $13 trillion in wealth people have lost because of the decline in prices of homes and stocks, along with their high debt loads and depleted savings accounts.

And now it's the sober money that's drying up.

One in Four Borrowers Is Underwater notwithstanding that Home Prices Post Monthly Gains
U.S. home prices logged their fifth monthly increase in September, according to the S&P Case-Shiller home-price indexes, according to the S&P Case-Shiller home-price indexes. But, For the third quarter, the broader S&P Case-Shiller U.S. National Home Price Index posted an 8.9% decrease from a year earlier. For the 18th straight month, every region posted year-over-year declines.

Monday, the Commerce Department said purchases of used homes surged in October to the highest level in two years, as a big tax credit and low prices and mortgage rates emboldened buyers. But the previous week, the department reported a surprise drop in October home building, which erased months of gains.

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said.

More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.

Distressed Homeowners Ponder Whether to Stay or Go

Number of Troubled Banks Rises to 552; FDIC Fund Sinks Into the Red
Fifty U.S. banks failed in the third quarter, the largest quarterly total since 55 banks went bust during the second quarter of 1990. The FDIC's list of "problem" banks swelled to 552 at the end of September, its highest level in 16 years and up from 416 in June.

Despite the turmoil in the industry, banks posted a modest $2.8 billion profit in the third quarter of 2009, as their securities portfolios recovered and banks with less than $10 billion in assets saw margins improve.

[As John Mauldin pointed out, what with all the Sinful Bank bailouts, Banks are essentially getting free money. If you are a banker and can't make money in this environment, you need to quit and find meaningful employment.]

The FDIC has already called on the industry to prepay $45 billion in assessments at the end of the year that will be set aside to cover the cost of bank failures in 2010.

Banks Scramble as Debt Comes Due
Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years.

The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt -- but with much shorter maturities.

[There you go again -- it's the government's fault, as Ronald Reagan might have said.]

The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner rather than later. Globally, the average maturity of new debt rated by Moody's fell from 7.2 years to 4.7 years in the past five years. In the U.S., banks have seen maturities drop to 3.2 years from 7.8 years in the past five years. In the U.K., the average maturity for new debt fell to 4.3 years from 8.2 years, Moody's said.

Large banks such as Citigroup Inc. and Bank of America Corp. said they expect no problem refinancing at affordable rates and that they have historically high levels of cash to cover maturing debt. Their funding needs are likely to be lower anyway because of sluggish lending and sales of assets or business that require debt funding. [Read that over to yourself again. Slowly.]

Concern remains about how banks will deal with souring assets, such as loans they made to borrowers to fund purchases of homes, offices and land. But attention turning to the other side of the bank balance sheet is significant.

A key government lifeline, the Temporary Liquidity Guarantee Program, which provides federal banking for bank bonds, expired last month. Debt issued under that program, which guaranteed the debt, had relatively short maturities. Banks will have to pay back debt back before 2012, putting their refinancing on a collision course with five-year debt that was sold in 2007, as markets were soaring.

It doesn't help that buyers of that government-backed debt tended to be investors attracted to safe government debt, Barclays Capital analysts said. Those investors may not be willing buyers when the banks need to refinance without government backing.

The government debt also was sold at markedly cheaper costs. A Baa-rated bank that sold government-backed three-year debt would have paid a coupon of about 1.3%. That same bank would have to pay 7.75% to sell 10-year debt, according to Moody's.

Rising borrowing costs for banks could spill into the broader economy at a time when consumer and corporate borrowers already are under stress. Banks could pass on the costs in the form of higher interest rates.

Oh, and then there's this:

In addition to the difficulties affecting home mortgage debt and bank debt, the profligate Uncle is facing his own debt Waterloo. And, of course, we're all shareholders in that one.

Wave of Debt Payments Facing U.S. Government
Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.


Tuesday, November 24, 2009

Grand Old Tea Party, bloody oath

Republicans Move Towards Right-Wing Loyalty Oath
THEREFORE BE IT RESOLVED, that the Republican National Committee identifies ten (10) key public policy positions for the 2010 election cycle, which the Republican National Committee expects its public officials and candidates to support:

(1) We support smaller government, smaller national debt, lower deficits and lower taxes by opposing bills like Obama’s “stimulus” bill;

(2) We support market-based health care reform and oppose Obama-style government run healthcare;

(3) We support market-based energy reforms by opposing cap and trade legislation;

(4) We support workers’ right to secret ballot by opposing card check;

(5) We support legal immigration and assimilation into American society by opposing amnesty for illegal immigrants;

(6) We support victory in Iraq and Afghanistan by supporting military-recommended troop surges;

(7) We support containment of Iran and North Korea, particularly effective action to eliminate their nuclear weapons threat;

(8) We support retention of the Defense of Marriage Act;

(9) We support protecting the lives of vulnerable persons by opposing health care rationing and denial of health care and government funding of abortion; and

(10) We support the right to keep and bear arms by opposing government restrictions on gun ownership; and be further

RESOLVED, that a candidate who disagrees with three or more of the above stated public policy position of the Republican National Committee, as identified by the voting record, public statements and/or signed questionnaire of the candidate, shall not be eligible for financial support and endorsement by the Republican National Committee.

RNC Revives "Socialist" Debate, To Vote On Principles


Monday, November 23, 2009

India call centre, ver 2.0 (beta)

Cellphone Entertainment Takes Off In Rural India
"A villager waiting for a bus has nothing to do. When he wants to kill some time, this is the only entertainment media available." "I call it the poor man's iTunes," says Mahesh Prasad, president of Reliance Communications Ltd., one of India's largest cellular companies.

Despite its rapid modernization, many of India's 750,000 villages remain isolated except for the cellphone reception that now blankets almost the entire country after a decade of rapid expansion by operators. So in villages that don't receive any FM radio stations, people have begun calling a number that has a recording of Bollywood tunes and listening to it on their headsets.

The cricket fan without a television or radio can dial up and listen to the latest match live on his phone. Bharti Airtel Ltd., India's largest cell company by subscribers, has a special service that calls hundreds of thousands of farmers every day with recorded messages of weather reports and advice about crops.

In the town of Behror in the state of Rajasthan, there is no regular radio music broadcast, so 60-year-old farmer and music lover Balwant Singh Yadav says dialing up his favorite music has been a "lifeline."

"I used to walk 10 to 15 kilometers just to listen to Hindi songs being played at marriage parties and other local functions," he said. "With the cellphone, the latest hits come handy. I can tune in any time I'm free." He said he spends about $1.50 a month on the music service.

Tata Teleservices has a service which lets farmers use their cellphones to control the pumps that water their crops. For the religiously devout, Bharti Airtel is starting a service where users can hear live prayers and chants from popular temples, mosques and shrines.

"Our religious offerings work the best," says Raghunath Mandava, chief marketing officer at Bharti Airtel. "There is nothing like getting the original prayer from the place of worship."

And, so, India becomes more and more like America, and is the call centre of the Universe, as we know it. The medium is certainly the massage.


Cutting out the middle Guambat

Cutting to the chase, each of these is worth the read, as is, where is:

Further reading

And nothing much above the neck

Two people

The cancer that is unemployment

Latoya Egwuekwe has produced a video graphic on unemployment that is interesting enough in its own right, but Guambat couldn't help but envision the graphic was pulled off some medical journal, rather than the American Observer websit, it just looks that cancerous.

Click here for the graphic, then click on the "play" logo.


Saturday, November 21, 2009

No mea culpa in Maricopa

Court Deputy Ordered to Apologize or Face Jail After Taking Lawyer’s Paperwork

In a brazen act of theft of attorney work product and executive branch intrusion on attorney privilege, for which the Court only sought an apology, the Sheriff of Maricopa County, Arizona said, “My officer was doing his job, and I will not stand by and allow him to be thrown to the wolves by the courts because they feel pressure from the media on this situation.”

There it all is, for you to see on video, at the link. No matter what you think about defending "criminals", whether actually found guilty (this seems to be a penalty phase hearing) or merely charged, unless we choose to throw out our Constitution, this is plainly unacceptable conduct.

The comments to that ABA Journal blog post must be read. Unusual for the ABA blog, they are in unanimous disapproval of the Deputy's conduct.


A Phoenix-area courtroom officer who inexplicably took paperwork from a defense lawyer's files mid-hearing in October has reported to jail rather than apologize.

And then, Nearly 20 Court Deputies Call in Sick in Wake of Fellow Officer’s Jailing
On Wednesday, the morning after a sheriff's detention officer reported to jail to serve a contempt of court sentence, 20 of his colleagues called in sick for work at the Maricopa County Superior Court Buildings in Phoenix.

Those same buildings were evacuated for three hours Wednesday morning when a bomb threat was called in targeting public defenders, the Arizona Republic reported.

Arpaio said neither the absentee rate nor the bomb threat were related to Stoddard's sentence, but said he does "have a political prisoner in jail who happens to be my detention officer."


Friday, November 20, 2009


T-bill terror
The yield on some short-term Treasuries, T-bills, turned negative on Thursday. That means that investors are piling into Treasuries to such an extent that they’re now willing to effectively pay the government for the benefit of owning them. The last time we saw this happening was in 2008, in the depths of the financial crisis.

[End of year] window dressing or a herald of cataclysmic financial failure?

You'll have to read the link to get FT Alphaville's take.


Tobin or not Tobin, that is the question

Brown seeks support for "Tobin tax"

Sarkozy to press for 'Tobin Tax'

Brazil has imposed what may be the first Tobin Tax on foreign portfolio investment inflows.

Russia Weighs Cross-Border 'Tobin' Tax

The Tobin Tax Lives Again

Geithner Throws Tobin Tax under the bus

The Tobin tax explained
The “Tobin tax” was originally proposed in the early 1970s by James Tobin, an influential American macroeconomist and recipient of the Nobel prize for economics.

His idea was prompted by the collapse of the Bretton Woods system in 1971, which replaced an arrangement of fixed exchange rates ultimately based on the US dollar’s peg to gold with a period of volatile floating exchange rates.

Tobin proposed to reduce this volatility with a small tax – for instance 0.1 per cent – levied on every amount exchanged from one currency into another.

He wanted to discourage short-term currency speculation, which makes it difficult for countries to implement independent monetary policies by moving money quickly back and forth between countries with different interest rates.

Tobin’s goal was to “throw sand in the wheels” of global finance with a simple tax that would be small enough to make short-term purely financial movements uneconomical – without being a burden on trade.

The proposal never caught on in the 1970s but received renewed attention during the Asian financial crisis in the late 1990s when it became a cause celèbre for the anti-globalisation movement.

The original purpose of putting the brakes on currency speculation has been somewhat eclipsed among activists who have increasingly seen the Tobin tax as a good way of raising revenue for economic and social development.

Some have suggested that a Tobin tax should be introduced to finance the money needed to meet the UN’s Millennium Development Goals of reducing poverty and ill health. Governments have been at best lukewarm to the idea, although former French president Jacques Chirac expressed interest in it.

Tobin himself disowned activists’ adoption of his proposal for revenue-raising purposes, which he thought missed the point of the proposal: which was to reduce the socially harmful effects of finance while keeping its benefits.


Paul Krugman says (NYT Nov 26), "a financial transactions tax is an idea whose time has come."

Labels: , ,

Much indebted to ya

Obama: Too much debt could fuel double-dip recession
With the U.S. unemployment rate at 10.2 percent, Obama told Fox News his administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction.

"It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession," he said.

Foreclosure, delinquency rates spike amid growing unemployment
About 9.6 percent of borrowers were delinquent on their mortgage during the third quarter, according to the survey by the Mortgage Bankers Association, and 4.5 percent more were somewhere in the foreclosure process. Overall, about 14 percent of mortgage loans were delinquent or in the foreclosure process during the quarter, according to the group.

That is the highest level ever recorded by the survey, which has been conducted since 1972.

Also, the challenge is also continuing to shift from the subprime loans that sparked the housing downturn to prime loans, which are traditionally considered safer and make up the bulk of the mortgages outstanding in the country. Of the loans in foreclosure during the quarter, about 55 percent were made to prime borrowers, compared with 37 percent that were subprime.

UPDATE 1-U.S. mortgage rates sink to or near all-time lows
Despite the rock-bottom borrowing costs, applications to buy homes sank last week to a 12-year low, the Mortgage Bankers Association said on Wednesday.

Baloise chief warns low rates could topple insurers
Continued low interest rates could cause some insurers to collapse, the chief executive of Baloise (BALN.VX) warned on Thursday, using Japan in the 1990s as an example.

The collapse of insurers in Japan under such circumstances in the 1990s should be a warning to insurers now, at a time of unprecedentedly low interest rates, he said.

The present Zero Interest Rate policy (ZIRP) is helping to inflate a 3rd stock market bubble in the last decade.

Société Générale tells clients how to prepare for potential 'global collapse'
In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.

Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said.

Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.


Tuesday, November 17, 2009

China hogging commodities?

Guambat is in his second read of John Mauldin's Outside the Box report for this week, and reckons he'll need another read or two to have it soak in to the dry sponge which is Guambat's brain. This week it is an eclectic piece from Eclectica November Fund Commentary by Hugh Hendry.

It covers a lot of ground, as does Guambat's not insignificant ruminative midsection.

The bits that stuck out to Guambat concern China, the US dollar and the Australian market's stock in trade, commodities. Some of those bits:
Ten years ago it was unthinkable that the dollar would prove so fragile. Recall that back then, when the euro was first launched in 1999, it promptly lost 31% of its value against the greenback. The subsequent reconstruction of modern China, though, intervened. In order to finance the emergence of a new economic superpower, an abundance of dollars was needed. Have no doubt that had we not had the dollar as a reserve currency, the rise of China would not have been as swift nor as decisive.

America's trading partners have come to rely upon the bounty of dollars necessary to recycle their trade surpluses and thus finance their growing prosperity. This was done even at the expense of domestic American job losses.

Do not forget that the Chinese could replicate equivalent currency baskets to SDRs at any moment. Instead, they continue to recycle almost three quarters of their trade surplus back into dollars. This is not coercion but simple commercial pragmatism. They know full well that neither Europe nor Japan nor Britain nor Switzerland nor the rest of Asia are willing to sacrifice the implicit loss of manufacturing jobs. They understand that it is only the US that is willing to embrace the benefits of comparative advantage that arise from international trade.

Another popular argument is that the emerging economies have to urgently diversify their immense dollar reserves. And so the Chinese are colonising the African continent in the pursuit of commodities and the Indian government has just agreed to buy 200 tons of the IMF's gold hoard.

Is this not a reincarnation of the 1980 trade of the brothers Hunt? It is hardly an exaggeration to suggest that China, for all intents and purposes, is already the commodity market. For despite providing less than 8% of global GDP, China accounts for more than half of the world's steel production and more than half of global seaborne iron ore freight.

Accordingly, China shares the same risk as the world's largest pension schemes. An over- leveraged American consumer does not return to his/her manic buying of old. As William White, former chief economist of the BIS, has argued:
Many countries that relied heavily on exports as a growth strategy are now geared up to provide goods and services to heavily indebted countries that no longer have the will or the means to buy them.

The Chinese have opted, like the Hunt brothers did, to double up.

Much is made of the comparison between today's balance sheet recession and Japan's demise back in 1989. Despite their bubble never coming close to matching China's prominence in industrial commodities, the loss of Japanese economic growth in the 1990s was nevertheless a major factor in the waterfall crash in commodities. This plunge ultimately saw oil trade for as little as $10 per barrel in the next decade. Just consider how much more devastating the experience would have been had they gone very long the commodity market in 1989 rather than golf courses.

Over the last decade, each marginal dollar of debt has generated less and less marginal income. We knew that there would be a "zero-hour" for the economy when the creation of new debt would not contribute to GDP growth. The government's reaction to last year's demand shock has been to increase its own leverage. But, with the economy operating at its zero-hour, we believe this incremental leverage will actually have a negative impact. That is to say, the public sector will fail in its attempt to bring the economy back to its previous level of nominal GDP. In this scenario, the outcome will disappoint the market's expectations, which are rampantly bullish as evidenced by this year's dramatic re-pricing of risk assets.

Japan has championed both Friedman and Keynes. They have built bridges to nowhere and dropped Yen notes from helicopters for twenty years and still they have nothing to show for it. Clearly the additional return from Yen debt in Japan is close to zero and it exposes the nightmare of interventionists everywhere.

It all really comes down to your take on the ratio of total debt-to-GDP. If you believe, like I do, that it peaked in 2007 then the repercussions are enormous. The leverage does not necessarily have to come down (after peaking in 1932 at 300% it troughed 20 years later at 150%). Rather, it may well be that low interest rates allow the mountain of debt to continue to be serviced. This has been the Japanese experience to date. However, everything in our economic life exists at the margin, and the consequences of just maintaining the leverage constant would be a very low delta in nominal GDP growth. Consider that the Japanese, under these very circumstances, have managed to grow nominal GDP at just 1% compound since 1990.

This is why China's mad dash for commodities and its investment splurge this year is so worrying. The Chinese are building capacity to meet a world where US nominal GDP is $25trn in ten years time from its $14trn today. I fear they could be in for a nasty shock.

Consider the steel market. Now with China having been on such an expansionary tear, it may not surprise you to hear that finished Chinese steel prices today trade below their production cost. It is quite chilling to note that steel production in America is on a par with output back in 1938, when GDP was a mere 7% of its current size.

However, with an active steel futures market in China turning over $15bn a day (consult the Bloomberg page ), speculative fears concerning the dollar have overcome the paucity of industrial demand in the west.

Of course, it is not just steel. Consider the aluminium market. the aluminium situation mimics that of steel, but with an even mightier inventory overhang. Four and a half million tons reside at the London Metal Exchange, perhaps 20% of world ex-China annual capacity. It is probable that 75% of this surplus stock is accounted for by financial players exploiting a contango.

To make matters even worse, the Chinese have stopped importing and are eager to ramp up domestic aluminium production. They have the capacity to produce another 13mt annually, which is equivalent to 52% of global production.

Now remember I have been describing a positive macro scenario: a world in which low interest rates make the debt load manageable and that we muddle through with lower growth rates in nominal GDP. But clearly the consequences for corporate profitability are very poor. The alarming thing is that my opponents (see Ferguson et al.) believe that government bond yields are going much higher. Effectively, the world's bond vigilantes are going to punish the Fed and tighten monetary policy. It is almost as if the world's greatest speculators are agitating for their own demise. It is my contention that the leverage of the economy is only tenable if interest rates stay low and yet, whilst I believe some of them agree, they still fervently expect a rise.

The anecdotal evidence of the doubling up of US Treasuries with hard commodities assets has been reported around the web, but without any traction in MSM.

China’s Pig Farmers Amass Copper, Nickel, Sucden Says (Update1
Private investors in China, the world’s largest metals user, have stockpiled “substantial” quantities of copper as the government ramps up stimulus spending to spur the economy, according to Sucden Financial Ltd.

Pig farmers and other speculators may have amassed more than 50,000 metric tons, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, wrote in an e- mailed report after a visit to China. That’s about half the level of inventories tallied by the Shanghai Futures Exchange, which stood last week at a two-year high of 97,396 tons.

Sucden’s estimate underscores the difficulty analysts face in gauging metals demand in China amid increased speculation by retail investors, whose holdings remain outside the reporting framework undertaken by exchanges. Private investors in China also had as much as 20,000 tons of nickel, Goldwyn wrote.

“People who have nothing at all to do with the copper trade have been buying copper as a store of value, much like they would with gold,” said Jiang Mingjun, an analyst at Shanghai Oriental Futures Co.

The metals holdings by pig-farmer investors and other private speculators give “the impression that there is strong demand in China,” said Jiang at Shanghai Oriental. “But it is actually those who take a pessimistic view of the economy and are looking to preserve their wealth who are buying.

For more specific anecdotes, have a look at this post: Pig Farmers and China Monetary Inflation Are Making Brent Nervous. It includes pictures and anecdotes "excerpted from a China Central Television Channel (CCTV) program documenting private speculation and hoarding of metals throughout the country," together with a link to a Chinese version of the text. The blog post concludes,
I do not know how or when the base metal prices will re-equilibrate to the reality of end demand—whatever that is. What is obvious is that gold and now base metals have become speculative investments that in addition to being bought as hedges against inflation and a falling US dollar are the latest get rich quick scheme. The end result is that absent the faith that metals and markets are all headed higher, we here at Exploration Insights are finding it difficult, although not impossible, to find value in junior mining and exploration companies.

Hot money on the other hand is not.

Michael Pettis, in Asia EconoMonitor, looks at China's railroads as well as its pig farmers and comes away unimpressed with the state of the bally-hoed Chinese economic recovery.
This is a large part why many analysts are not impressed by China’s investment-driven growth. Not only is much of it explicitly aimed at increasing production, much of the rest of it is implicitly likely to reduce consumption.

Although not as particularly analyzed, some of the nagging doubts about the China-led global recovery are being expressed.

Doubts emerge on China's domestic growth
The emerging giant's demand for Australian iron ore and other commodities has been crucial to keeping Australia’s economic expansion on track through the financial crisis.

“They’ll continue to consume commodities at a higher than normal rate and that will be good for commodities,” said ANZ head of commodity research Mark Pervan. “But at some stage, there has to be someone using these commodities. And that is a risk.”

Looking at official statistics, a sudden drop-off in demand would seem to be the last thing for Australian resource companies to worry about.

Chinese industrial production grew 16.1 per cent in the year to October, according to the National Bureau of Statistics of China, in data released this month. The official data also showed heavy industrial output rose 18.1 per cent year on year.

But even these numbers have caused analysts to question the sustainability of China’s growth.

At this pace, heavy industrial output would be doubling every four years, said Fat Prophets commodities analysts Nick Raffan.

“If it held at that level for a decade, you'd be looking at four times the current level of imports in eight years time, and I don't think any country is ready for that in terms of infrastructure."

Ah, yes. Those inscrutable official Chinese statistics.

Meanwhile, the US and China are playing a game of pot and kettle. The US wants China to devalue its yuan, which would lead to some unpopular labor issues as its exports become less competitive, and China wants the US to raise its interest rates to strengthen the dollar, which would implode whatever there is in the way of green shoots in the US housing and other credit markets, not to mention the strung out commercial real property sector and the overleveraged private equity guys.

Obama Prods China on Yuan But Hu Silent on Issue

China Trade Ministry Says Yuan Gains Call ‘Not Fair’ (Update1)

A Dollar Warning From Asia
Federal Reserve officials sometimes sound as if their only worry is the domestic U.S. economy, but their gusher of dollars is starting to have serious consequences for the rest of the world. Nowhere is this more evident than in Asia, where President Obama is getting an earful from leaders this week about what all those greenbacks are doing to their economies.

Many of these nations peg their currencies, formally or informally, to the greenback. So they are getting a huge dollar liquidity kick from the carry trade, in which people borrow U.S. dollars at exceptionally low U.S. interest rates and invest them for higher returns elsewhere.

As a result, Asia's stock markets are outstripping U.S. and European bourses by a country mile. Shanghai alone is up nearly 80% this year-to-date. Hong Kong property is climbing through the roof, with one recent apartment sale mooted at $57 million. Foreign investors are even getting enthusiastic again about one of the most corrupt emerging markets around—Indonesia—and dubbing it the "new China."

Lest we forget, it was the use of the cheap-ass yen as the beast of burden for the carry trade that was instrumental in propelling the West's markets to bubble bursting proportions, just a very few years ago.


John Mauldin has also revisited the world's experience with the Yen carry trade in his Thoughts from the Frontline, Nov 20th. His conclusion is that the dollar has been down so long it looks like up to him, maybe, perhaps, sometime or other or not:
Whenever sentiment gets too strong in one way or the other, it is usually setting up the markets for a rally in the despised asset. Mr. Market like to do whatever he can to cause the most pain to the largest number of people.

I am not predicting a near-term crash or imminent precipitous bear, although in this environment anything can happen. I am merely noting that there is an imbalance in the system. The longer this imbalance goes on, the more likely it is that it will end in tears.

Labels: ,

But that was so yesterday

One of the news items yesterday driving the markets onward (so we were told in headline) was the story of Japan's remarkable GDP growth, up over 4% and signaling the Recession King is dead, at least in that important economy. E.g., "Japan, the world's second largest economy, on Monday posted an unexpectedly strong report about third-quarter GDP expansion."

But that was so yesterday. Today we're being regaled with the other shoe:

Japan’s Deflation Concern Mounts Even as Growth Accelerates
The acceleration of Japan’s economy to the fastest growth pace in more than two years masked a slide in prices of goods and services that threatens to temper the nation’s recovery.

The domestic demand deflator, a measure of price levels that excludes the cost of imports, fell 2.6 percent in the third quarter from a year earlier, the most since 1958
Guambat reckons a 50 year statistic beats a 2 year statistic, which is why he barely scraped through in his statistics classes.
The yen’s 6 percent gain against the dollar in the past three months has exacerbated the price slump by making imports cheaper.

“The biggest worry to us is that consumption growth has been too strong relative to incomes,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work at the central bank.

“It might be a decade before the job market returns to the level of health we had a year or two ago,” he said. “The number of jobs may recover but not wages. It’s very fragile.”

“Japanese domestic demand is still dependent on price declines to grow,” said Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd.

“This isn’t sustainable growth and the government knows it,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo.

“Deflation is great if you don’t have debt,” Nishioka said. “But debt drives most economic activity. Companies take out a loan to build factories or you get a mortgage to buy a house. Those burdens get heavier when incomes start to fall.”

Guambat wonders where he heard similar worries about the US economy. Aren't government stimulus checks the functional equivalent of price declines?

A double dip for Japan's economy?
Third-quarter gross domestic product figures show that stimulus measures had their desired effect, luring shoppers into car dealerships and electronics stores. Capital investment rebounded after last year's demand shock, and exports to Asia were strong. Growth also was more balanced than in the prior quarter.

All told, GDP expanded 1.2% in the July-September period from the prior quarter, twice what economists expected and the second consecutive period of growth for the world's second-largest economy. With that, though, the caveats begin.

Government incentives were a key driver of growth, and as they fade, household spending on fuel-efficient autos and energy-saving electronics are likely to slump.

Meanwhile, another large contributor to GDP growth in the latest period, a sharp inventory increase, is part a recovery from plunging rates earlier, and part a reflection of hopes that things will pick up at home and abroad. Either way, inventory building isn't a sustainable driver of economic growth.

And chiming in, to complete the story with a "on the other hand" perspective, decorated with a belated Halloween theme is The Times Online, with this:

Japan heads for financial horror story
In the bloodcurdling programme notes, the Japanese bond market has a plot, a setting and a cast of characters that should logically guarantee a great horror show.

There is the monstrous spectre of public debt –— a bogeyman that has swollen to nearly 200 per cent of GDP and which the IMF predicts could burgeon to 246 per cent within five years. There are the hapless Japanese villagers, too old and weak to fight the debt beast and no longer able to sate its hunger from their gold stashes. There is the spooky old castle of Japan itself — a rickety shadow of its former glory with crumbling walls and dark secrets.

But, like so many mediocre horror films, much of the impact is lost in the detail and the plot is actually rather hackneyed. Nothing has changed substantially over the past few weeks, and there is no real reason to suspect that the Bank of Japan will not buy JGBs as disaster looms. With the scary music turned down low, you can see how a lot of the effects were done.

To start with, there is the question of whether gross debt to GDP ratio is deadly or even the right number to be looking at. Britain in the 1950s amassed gross debt above the 250 per cent mark and still managed to found the National Health Service. Looked at in terms of debt servicing costs, Japan is not especially more endangered than the US, UK, France or Germany. [Now that's a relief.]

Secondly, Japan’s debt is almost entirely held by Japanese. [Is that meant to differentiate Japan's debt from the US debt?]

Meanwhile, back in the Land of the Setting Sun,

Inventory clearance stalls in September
U.S. businesses reduced their inventories for the 13th consecutive month in September, but business sales also declined, stalling the progress that companies had made toward normalizing their stockpiles, data showed Monday.

The inventories report typically receives little attention from investors, but the pace of inventory reduction will be at the heart of any economic recovery this year. Most economists believe inventories will continue to be cut for several quarters before general restocking is needed.

One bright spot: Auto retailers rebuild stocks in wake of 'clunkers' sales
And why wouldn't they? The housing credit was extended, wasn't it?

Ahead of the late-trading session, retail stocks rose following the Commerce Department's report Monday that sales in October rose a seasonally adjusted 1.4%, better than economists' average 1% estimate.

On Wall Street, major stock indexes rose more than 1 percent to new 13-month highs after the retail sales figures were released.

“Consumers are looking relatively resilient,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who projected sales would increase 1.3 percent. “They are spending a little more freely, which bodes well for the holiday season."

More Americans face the specter of hunger
Last year the number of households uncertain of having or unable to afford enough food ballooned 31% to more than 17 million, up from 13 million in 2007, the U.S. Department of Agriculture said Monday.

Single parents with children were disproportionately affected, as were black and Hispanic households and those with income below the poverty line ($21,834 for a family of four).

Regionally, rates were lowest in the Northeast at an average 12.8%, and highest in the South, which averaged 15.9%, the report said.

One in seven Americans short of food
Agriculture Secretary Tom Vilsack said, "the survey suggested that things could be much worse but for the fact that we have extensive food assistance programs. This is a great opportunity to put a spotlight on this problem."

Labels: ,