Tag Archives: financial crisis

Iceland’s President Explains Why The World Needs To Rethink Its Addiction To Finance

Just read an article with Iceland’s president discussing the banking crisis and his handling of the crisis. Of the most insightful and profound things he has discussed in his interview, I really enjoyed the following:

As everybody knows now, we did not pump public money into the failed banks. We treated them like private companies that went bankrupt, and we let them fail. Some people say we did it because we didn’t have any other option, there is clearly something in that argument, but it does not change the fact that it turned out to be a wise move or whatever reason. Whereas in many other countries, the prevailing orthodoxy is you pump public money into banks and you make taxpayers responsible for the banks in the long run, and somehow treat the banks as if they are holier institutions in the economy than manufacturing companies, commercial companies, IT companies, or whatever. And I have never really understood the argument: why a private bank or financial fund is somehow holier for the well being and future of the economy than the industrial sector, the IT sector, the creative sector, or the manufacturing sector.

But there were other issues at stake as well. What the British and the Dutch were arguing was that somehow the European banking system was such that a private bank would operate anywhere in Europe, and if it succeeded, the bankers got extraordinary benefits, the shareholders got big profits. But if it failed, the bill would simply be sent to ordinary people back home: farmers and fishermen, nurses and teachers, young people and old. And that, I maintain, is a very unhealthy formula for the future of the European banking system. If you sent a signal to the bankers that you can be as irresponsible and daring as you want to be, and if you are lucky, you become very rich, but if you fail, other people will pay.

It is surprising that the country that prides itself on the capitalist nature of itself is the one that is not capitalist at all in its nature (talking about U.S over here!). And Iceland, which is more socialist than the U.S was able to take such step, such as letting the banks fail. Along with the failure, the government should also stand the people responsible for such gross negligence that caused the entire housing mess (i.e sellign MBS, CMOs as AAA when they should have been rated junk).  One of the reasons that might be is the lobbying of these financial institutions, and the immense power such institutions have on the lawmakers.

Now it is your time to think.

Iceland’s President Explains Why The World Needs To Rethink Its Addiction To Finance (BI)



Gold Wheres it Going? How the World’s Safehaven has lately turned into Just another Risk Asset

Gold has been one of the hottest investments on the planet the last few years. However only a few people understand that there is a lot of money to be made on the daily, weekly, and monthly, fluctuations of gold. “Gold bugs” will tell you and they are correct its an ultimate store of wealth, hedge against hyperinflation, hedge against US fiscal problems with US dollar, and so on.

I am here to give you a different perspective. All of those are correct, but lets get down to the core of why gold moves and how it does move.

In August, the US got downgraded from AAA to AA from S an P ratings. This caused a huge move in Gold based on Safe haven demand.  There are two reasons gold moves, either it moves as a safe haven asset when the stock market is crashing, US political gridlock damages economy, Fed Cuts Interest Rates, Fed prints more money via quantitative easing etc.  The move that has taken Gold from 1000 to where is it now is the QE1 and QE2 Programs enacted by our federal reserve.

When you look at the Financial Crisis of 2008,  Gold hit a high of 1000, and during the crisis sold off to below 800.

The same thing has happened with the European Debt Crisis, even though gold is still a winning safe haven trade, when big Hedge Funds, are loosing a lot of money they have to sell their winners to cover losses. John Paulson , of Paulson and Co, was the largest shareholder in the Spider Gold ETF GLD.  His 13f Filing shows he recently cut a big position in gold. His fund is down 44% this year, and this is from a guy that made billions betting on sub prime mortgages to fail, which means his investors made money while everyone else in 2008 lost.  His other trades were doing so poorly that many in the market feared he would have to sell his only big winner gold, in order to help his fund. All other hedge funds followed.  This is why we have seen a change in Gold lately.

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Bernanke’s invisible stimulus

So what happened Thursday?

In a recap, the Federal Reserve Chairman Ben Bernanke said that the economy has not deterioated “enough” to need immediate additional stimulus. (Italics by the author). However he believes that if necessary, there could be more stimulus.

The inaction by the Feds is the invisible stimulus all the financial industry has been hoping for. The invisible stimulus is the lack of the increase in interest rates. With the decreased interest rates there is increased appetite for higher-risk assets, and possibly more return. However this is fueling another bubble by itself. Equities have been mispriced for the last two years, fueled mostly by speculation, and not the underlying business. Companies see great volatility in their stock price for an event that may have no connection to the stock. The low interest rates are a terrible incentive since it invites more “investors” ( I use this word loosely, since traders are not really investors) to enter the market and gamble away their money in the hopes of making a quick buck.

However if there is another “major” correction, which is quite possible within the next year (possibly 20% correction), then we will be seeing another round(s) of stimulus. The correction is derived based on the hypothesis that the stock market has reached  pre-2007 crisis level, however the earnings have been consistent or decreasing over the last three years. There is disconnect between the underlying stock and the business. Another assumption is that there is yet another housing bubble that is yet to take place due to high unemployment for the people in the middle trench for CDO’s, the guys who could previously afford the mortgages when they signed their contracts. The 2007 crisis was due to default on mortgages who could not afford their mortgages at all! Their sole reason for getting a property was to sell it back within six months, pocketing the difference, or they were suckered into the mortgage due to the temporary low rates. This next housing bubble is going to hit the whitecollar households where one of the person(s) in the household is unemployed and can barely afford the mortgages.

Once companies see their earnings decreasing (due to consistent high unemployment), they will be forced to layoff more people to save their stock prices, thus starting the vicious cycle where the economy is going to shed more jobs than it will create. (Do you remember the 18K jobs created in June vs expectation of 132K?)


War in the horizon?

Before we start on this topic, you must read the full article by Stratfor (a leading geopolitical economic, political intelligence agency).

The article hints that there may be another conflict or “war” on the horizon between Israel and Palestinians (Hamas).  The trigger could possibly be the vote on the Palestinian statehood which is due to take place in September. Also the fact that the neighbouring countries, such as Syria and Egypt are going through internal strife, which is creating great political and economic instability in the region.

The main trigger in Palestine would be the divide between the Palestinian people, the two political groups; Fatah and Hamas. Fatah is favoured by the western governments due to its secular ideas, whereas Hamas uses religion (Islam) to lure people into its agendas, and has become the dominant political force in the recent years. It will be in the interest of both of the political parties to force their agendas and form the government if the Palestinian statehood formalizes. “Whoever controls the state, defines what Palestinians are” sums it up very well.

Historically, Egypt has played an active role in the politics of the Middle East, and it was one of the first nations to announce truce with Israel. If the radical movements begin in the region, it will be difficult for Egypt to not intervene in the region, given that majority of the Egyptians do not see Egypt’s relations with Israel favourably. And we may have another major conflict in the region that will spread from intra-country to inter country.

Now this is where the twist happens. The global political situation is not looking any rosy either. China came out last month to scold the U.S as “addicted to debt”, and Russia called U.S as a “parasite”, and the ongoing Euro debt crisis, with Germany the lone soldier trying to calm everything down. We are seeing governments playing the blame game, consequently increasing tensions between the already stiff relations.

Per the analysis by Todd Harrison (Marketwatch), the “% decline in the S&P before the September 11 attack is precisely is the same as what we have witnessed in the last three months”. And I could not agree more.  The concern for a terrorist attack is more tangible than ever before and if that were to happen, we would see the global economies “tank”, and with that we will see a worsening recession, even depression. This may force another war.

I have come to similar conclusions myself over the last six months. The financial and social situation right now much resembles the pre-world war I and world war II scenarios (minus the trigger points).  The economy was battered before World War II. I remember reading about the wars during my high school years and looking at the pictures of people, battered and exhausted, waiting in line to get food and water, since they did not have enough money to survive. The situation is similar in the U.S, however the idea is not main stream yet. (It took the market almost 6 months to figure out that there was a possibility for the U.S to default on its sovereign debt, it will take even longer for the market to realize the increasing social problems in the U.S). There are 45.7 million people in the U.S that currently (May 2011) rely on food stamps. For comparison purposes, the numbers increased by a whopping 4.9 million from compared with May 2010, and increase of 1.105 million people from April 2011. This represents almost 14.5% of the total population succumbing to equivalent of soup kitchens of pre-world war times.

Do you see a trend?



Israeli-Arab Crisis Approaching (Startfor)

Is the market forecasting war? (Marketwatch)

Food research and action centre (FRAC)