Saturday, October 24, 2009
Friday, October 23, 2009
As my readers know, I am a fan of economics and of history, as well as politics, a combination that forms some very interesting cycles to research, discuss and argue on. None is so interesting than the death of great nations, for here there is always the self destruction that comes before the final breakups and invasions. As they say: Rome did not fall to the barbarians, all they did was kick in the rotting gates.
Wednesday, October 21, 2009
Tuesday, October 20, 2009
"From the point of view of a foreign investor... there has been no stock market rally. The stock market rally is a money illusion rally because the dollar depreciation has negated all the appreciation of the S&P 500 since March."
"It's clear where we're headed. Ten years from now there will be more than one international reserve currency,"
Despite the gloom about the Dollar, today it has risen significantly, probably on stock market and commodity weakness.
The weakening dollar is dying a slow death.
"It's clear where we're headed," says Niall Ferguson, author of The Ascent of Money. "Ten years from now there will be more than one international reserve currency," he tells Tech Ticker.
Ferguson dismisses the dollar loyalists, citing the British pound – the last international reserve currency - as his example. "These things don't last forever" but don't expect it to happen overnight. "It's a long multi-decade process," he states. Even with the dollar near a 14-month low against the Euro, he claims it's not without historical precedence for the greenback to lose "another 20%" this year.
For international investors the loss is enough to offset this year's stock market gains. Not exactly great motivation for foreigners to keep buying the almighty dollar.
The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.
"People have predicted the end of America in the past and been wrong," Ferguson concedes. "But let's face it: If you're trying to borrow $9 trillion to save your financial system...and already half your public debt held by foreigners, it's not really the conduct of rising empires, is it?"
Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain's in the 20th, he says. "Excessive debt is usually a predictor of subsequent trouble."
Putting a finer point on it, Ferguson says America today is comparable to Britain circa 1900: a dominant empire underestimating the rise of a new power. In Britain's case back then it was Germany; in America's case today, it's China.
"When China's economy is equal in size to that of the U.S., which could come as early as 2027...it means China becomes not only a major economic competitor - it's that already, it then becomes a diplomatic competitor and a military competitor," the history professor declares.
The most obvious sign of this is China's major naval construction program, featuring next generation submarines and up to three aircraft carriers, Ferguson says. "There's no other way of interpreting this than as a challenge to the hegemony of the U.S. in the Asia-Pacific region."
As to analysts like Stratfor's George Friedman, who downplay China's naval ambitions, Ferguson notes British experts - including Winston Churchill - were similarly complacent about Germany at the dawn of the 20th century.
"I'm not predicting World War III but we have to recognize...China is becoming more assertive, a rival not a partner," he says, adding that China's navy doesn't have to be as large as America's to pose a problem. "They don't have to have an equally large navy, just big enough to pose a strategic threat [and] cause trouble" for the U.S. Navy.
Just as U.S. policymakers are too sanguine about China's military power, Harvard Professor Niall Ferguson says Washington D.C. is too complacent about China's ability to wean itself off the dollar.
With about 1.7 trillion of dollar-denominated assets (mainly Treasuries) in its foreign currency reserves, conventional wisdom goes something like this: If China were to diversify away from the dollar or merely allow the renminbi to float, much less dump its greenbacks wholesale, they would be shooting themselves in the proverbial foot. That's both as investors and because further dollar weakness would put a damper on their biggest export market. (A weaker dollar makes foreign goods more expensive for Americans, meaning Chinese imports would become less "cheap.")
This view is "slightly naive," according to Ferguson, author of The Ascent of Money.
"The idea they don't have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency reassures many people in Washington ‘we can relax'," he says. "An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own," most notably the commodity assets they have been buying all over the world.
China's "current strategy is to diversify out of dollars and into commodities," Ferguson says. Furthermore, China's recent pact with Brazil to conduct trade in their local currencies is a "sign of the times."
Perhaps most importantly, China's massive stimulus program is helping to generate internal consumption in the People's Republic, meaning local manufacturers are less dependent on exports. Because of the "rapid growth" of Chinese domestic consumption, Ferguson predicts China's international trade surplus could be gone by next year.
"People in Washington rather assume because the U.S. consumer was so dominant there really isn't a substitute," Ferguson says. But China's trade surplus stood at $12.9 billion in September, down about 56% from a year earlier, according to MarketWatch.com.
From 1998-2007, China engaged in a form of vendor financing, lending money to the U.S. so the U.S. would buy Chinese goods, Ferguson explains. "I think that model has basically broken. They know it and have a new one in which we play a much less important role."
Monday, October 19, 2009
David Einhorn is a giant. He warned of the collapse of Lehman Bros well in advance. He even shorted it heavily.
Greenlight has been buying physical gold this year because Einhorn is concerned that efforts to save the financial system and fuel economic recovery are undermining the value of such currencies as the U.S. dollar.
On Monday, he said Greenlight has added new trades to this investment theme, buying long-dated options on much higher interest rates in Japan and other developed regions -- effectively giving the firm the chance to make big profits from a jump in rates. The options, bought from major banks, are tied to interest rates four to five years out, Einhorn noted.
"Japan may already be past the point of no return," he said during a presentation at the Value Investing Congress in New York.
Japan's debt is equal to 190% of the country's gross domestic product and its government deficit will be 10% of GDP this year, according to Einhorn.
Japan has been able to borrow money at roughly 2% a year to finance these deficits, partly because the country has many savers willing to buy low-yielding government bonds. However, some of these savers may begin spending instead as they enter retirement, Einhorn argued.
"When the market refuses to refinance at cheap rates, problems emerge," he said, adding that this could trigger a "currency death spiral."
Interest rates have been very stable in Japan for years, so the options on higher rates that Greenlight bought were relatively cheap. Einhorn said the "asymmetry" of that trade was interesting: If rates were to jump suddenly in Japan, Greenlight stands to make "multiples" on its positions.
"There remains a possibility that I'm wrong, and I hope I am," he commented. But earlier in the speech he remarked: "Just because something hasn't happened before, that doesn't mean it won't."
Remedy to shore up systemEinhorn also compared potential problems in sovereign-debt markets to the financial crisis that engulfed markets last year.
When Lehman collapsed, investors reacted by dramatically increasing the cost of borrowing for rival Wall Street firms to the point where their business models were threatened, he Einhorn. The collapse of any major currency could have same impact of rerating the cost of financing governments in deficit.
Unlike Japan, the United States isn't past the point of no return, the fund manager stressed. However, he criticized financial-reform proposals pushed by Treasury Secretary Timothy Geithner, arguing they provide a government backstop for the largest institutions, entrenching them further.
No institution should be too big to fail, Einhorn contended. "The real solution is to break up anything that fails that test. Lehman shouldn't have existed in any size to threaten the financial system."
The same applies to Citigroup and Bear Stearns, which J.P. Mortgage Chase & Co. /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 46.06, +0.08, +0.17%) acquired, as well as American International Group Inc. /quotes/comstock/13*!aig/quotes/nls/aig (AIG 41.37, +0.20, +0.49%) and "dozens" of other firms, he said.
NEW YORK (CNNMoney.com) -- The government insurance fund designed to protect consumer bank deposits will likely stay in the red through 2012, Federal Deposit Insurance Corp. chief Sheila Bair said Wednesday.
Testifying before members of the Senate Banking Committee, the nation's top commercial bank regulator stressed that her agency was taking immediate steps to replenish the dwindling fund. But she said those efforts would not put the rescue fund in the black until a little more than two years from now at the earliest.
The fund has come under severe strain in recent months amid the recent surge in bank failures. Ninety-eight banks have failed so far this year, which has reduced the fund's value to $10 billion from $45 billion a year ago.
Last month, the agency painted an even more dire picture, estimating that the fund is currently in the red after taking into account future bank failures it anticipates will happen.
That would not be the first time the fund has had a negative balance. During the S&L crisis of the late 1980s and early 1990s, it slipped into the red.
"The problem we are facing is one of timing," Bair said, according to a copy of her prepared remarks.
One proposal currently under consideration would have banks prepay their deposit insurance premiums for the next three years. Under FDIC guidelines, bankers and others have until the end of October to comment on the proposal before it becomes a rule.