U.S. Dollar and the Flying Bankers
Currencies / US Dollar Oct 25, 2008 - 03:11 PM GMTBy: Joe_Gelet
The heart of the crisis is very simple: banks won't lend. Why they won't lend is irrelevant, the solution is so simple it seems too good to be true: force banks to lend. The modern economy functions on credit; exporters sell to foreign buyers using complex Letters of Credit packed with shipping insurance, small businesses depend on rotating credit lines to purchase inventory they sell to the consumer. Mostly working on small margins, these businesses depend heavily on credit to stay afloat; even a short disruption in their lending activities would literally bankrupt them. This has already started happening, and the banks are sitting on the sidelines. The simple, clear solution is to force banks to lend, by any means. Giving banks more money is not helping, they already have plenty of money, the problem is not that banks are undercapitalized it is that they will not lend.
Therefore in many respects the crisis is artificial; this is not a ‘credit crisis' or a ‘market crash', it is more like a hostage crisis. Bankers may have many reasons for not lending, but the fact of the matter is that if banks started lending the crisis would be over. How many bankers need to fly out of the windows before they realize this simple fact?
Head of State
In 2004 Chris Rock acted in an eerie comedy where a local black leader is selected by a major political party to serve as a message that the party cares about minorities. In a strange twist of fate, he becomes so popular he actually has a shot at winning the election. He says:
“My credit's so bad; the bank won't even take my cash”
Certain banks are declining Secured credit cards. For those who don't know, that is a card secured 100% by cash. For all practical purposes, a secured card is not really credit, it is a credit card with a limit set by the amount of cash held in a special secured CD or other account, usually interest bearing. If the user doesn't pay the bill, funds can be immediately withdrawn from the account. If the bank isn't approving secured cards, what are they approving ?
Rumors
95% of the people were against the Congressional bailout package, yet congress voted for it. Rumor has it they were blackmailed, they were threatened by a possible breakdown of the financial system, martial law and an overall social crisis much deeper than a paper Wall St. meltdown. Whether that is true or not, we can see after the fact that the bail out was correctly described by Sir Alan Greenspan as ‘chickenfeed'.
Capitalism
For all practical purposes we no longer live in a capitalist free market economy. There are very eloquent sounding idioms and phrases such as ‘conservatorship' which spin the reality: America is no longer a capitalist country. Without getting into the technical details of what is capitalism and what system America is using, we should all agree that government ownership of banks is not in line with the original philosophy of American free market capitalism. Is that a good or bad thing, it is for history and philosophers to decide, not traders. It is crucial now that we only sober up and realize that we now live in a new socialist USA where the government controls the markets.
Obviously, the US Government does not directly control the entire economy. But what has effectively happened through the recapitalization of 9 major banks (much to the chagrin of smaller regional banks) the Government has subsidized the banking industry, and imposed regulation.
Clients have asked what EES thinks about the stock market, and that is why we mention ‘capitalism' and ‘socialism' here. Clearly, over the past 3 weeks Government announcements, NOT earnings or other corporate news, have been driving the market. With government controls of private banks, stock traders and investors are now betting on the US government and their policies NOT private companies.
Grain and Letters of Credit
There are rumors grain is rotting in transportation hubs because buyers don't have the cash to purchase. Letters of Credit are being declined and ships are sitting in port with goods waiting to be sold because banks aren't issuing common LOC they were 1 month ago. This has more severe ramifications for the economy than any market collapse. A shock to the LOC market could shut down the physical global economy, as almost 100% of international shipping (import/export) in between all countries relies on the LOC market to deliver goods. If that happens, even if only for a few weeks, we can expect to see shortages of anything not produced within the borders of the country you live.
Unlimited USD Swaps: Dow 100,000
With unlimited swap lines now available for USD, it wouldn't be impossible to see rampant hyperinflation in all aspects of the economy. Of course, if this happens, investing in stocks will not be the only exploding investment; money will be poured into any and everything. Of course it will cost $1,000 to buy a loaf of bread. This does NOT mean that the stock market will reach nose bleed levels, it means it has the capacity to, but if that does happen, hyperinflation may cause other problems for the economy far worse than an increasing DOW.
From the real world
Last month, the rent tripled on our office space in Las Vegas. 300% increase without notice. Of course we decided to leave instead of paying the outrageous rates. Probably the landlord was squeezed by his bank, and he decides to pass the cost on to the customer, who decided to terminate his business completely. So instead of having a partial loss (due to increased financing cost and unchanged rent) he has 100% loss. Getting new tenants in this economy, in a city with dwindling profits from tourism and casinos, is not likely. In any analysis, a 300% rent increase without notice is not normal, is frightening, and is almost unethical.
Forex is a solution
During this turmoil, EES strategies have been winning. EES trades automated FX strategies which have performed very well in the past 3 weeks, some are up over 12% and others are up 20%. Volatility is opportunity, for the prepared. FX is by no means a solution for investors as the situation is more complex than finding above alpha returns. However it is a powerful fact that in this turmoil, automated FX strategies are performing well. Some stock investors have lost 20% in the past 3 weeks, while some automated FX systems have made 20%.
Message to Regulators: Give money to the people
Aside from lending and complex economic factors, one stark reality stands out that makes the solution to this crisis unique and simple. Consumers have dwindling cash and dwindling credit. The resilient American consumer, who has bailed out Wall St. from other crisis, the driver of the physical economy through purchasing, is mostly bankrupt, underwater in their mortgage by having negative equity, fired from their job, or otherwise broke. A bad economy will mean fewer jobs and more difficult to earn money by any means, and due to a lack of willingness on the part of banks to give credit, we have a situation where consumers cannot spend even if they want to. What easier way to stimulate the economy than to give money to the people?
Who suggested a $20 minimum wage? If blue collar workers earn 50% more than they do now, what will they do with it other than spend it? If we give $5,000 to every consumer directly instead of to the banks who may or may not give it to the consumer, they will definitely spend it, or save it (thus shoring up deposits in commercial banks). They will not, for sure, purchase CDOs or other toxic instruments, and they won't sink the funds into a diamond ring thus removing money from circulation. The problem is the rich are destroying capital which is out of circulation forever.
The wealthy are typically against social programs as they feel it is unfair to pay for someone else's good fortune. They own the businesses that are sinking, however, and putting money directly into Joe Plumber's pocket guarantees they will spend it thus increasing revenue for the wealthy. This has been documented as the Trickle Up Effect [i] and while the elite are debating economic theory, their portfolios are being wiped out and we are on the verge of a new dark age because of a major meltdown in the physical economy. It's not a difficult concept to understand, it is also the basis for massive social programs such as Roosevelt's New Deal [ii] .
Bill Gates cannot buy 10,000 pairs of shoes, he can however; purchase a very expensive diamond ring for over $1,000,000. The question is, is the ring good for the economy, or have the wealthy in essence extracted capital (energy) from the real economy, hoarding resources, and not recycling them; by creating their own artificial economies based on inflated prices of useless items (such as $250,000 watches whereas you can get a good Seiko for $50), thus stifling the real economy, which is based on trade and manufacturing? If this isn't a proof that this type of economic thinking is fallacious, what is? Again, do not confuse the economic issue with the ethical one. Someone who has rightfully made a profit should have the right to spend it on whatever he chooses, however ridiculous it may seem to many others. However, from a systemic, economic perspective, what economic good does an airplane with a fireplace in it (as seen on CNBC's “High Net Worth”) have? It's the same airplane, remember. A laptop, encrusted with diamonds worth $1,000,000 is the same laptop calculated in FLOPS (processing power).
Gold Up, Dollar Down
Many are shocked by a USD increase and collapse of emerging economies – this is a short term anomaly and cannot last. In fact, inflationary monetary policies will make the dollar crash even harder. There are also rumors that the exchanges cannot physically cover paper gold contracts. If this is true, Gold could be headed for a short term explosion as paper demand for the physical could overwhelm the supply. Already there is a discrepancy in physical purchase price, in some cases 20% over the paper gold price. Purchasing some gold options or long spot gold and holding for 6 months may be a safe trade, although until it spikes up, it could be volatile and even decrease due to short selling in the paper market.
De-leveraging
EES opinion is that the deleveraging of banks will spill over to FX. This can happen through regulation, broker policy, and the actual lack of credit by banks and brokers. A few signals:
Dear Hotspot FX Customer,
Due to the increased volatility in the FX markets and the potential for large gaps in market prices between the close of markets this evening at New York 5 pm and the opening of FX markets on Sunday 6 pm New York time Hotspot FX we have taken the following actions in our client accounts:
Increased the Margin requirements to 5% of available capital
Dear Client,
Due to extreme turbulence in the spot and forward markets, Saxo Bank will cease trading in the below listed Eastern European currencies on Monday 27 October at 1200 CET.
EEK (Estonian Kroon)
HRK (Croatian Kuna)
LTL ( Lithuanian Litas)
LVL (Latvian Lats)
RON (Romanian Leu)
Saxo Bank is experiencing severe difficulty in sourcing reliable prices for these currencies and the spreads on the available prices are very wide. There is a danger that rolls in these currencies may trigger accounts into close out. For these reasons, we believe it is in the best interest of Saxo Bank and our clients to take this action.
Intelligence crisis
Based on obvious solutions such as banks lending, and giving money directly to the consumer, EES position is we are in an intelligence crisis. There isn't a problem with ‘confidence' or ‘credit' or any other abstractions. This is just an excuse for the failed policies and dysfunctional approach offered by the current establishment. What worked 100 years ago, does not necessarily work today (in fact they are proving that it doesn't work). Already, foreign creditors and investors are discussion other systems of trade and development non-USD denominated, such as a Gold Dinar backed by Gold, traded in Dubai and exchangeable for Crude.
Oil contracts of the future may be written using a Gold backed currency as an alternative to the USD. This could easily be prevented, but would be antithetical to the so called ideology of the current and future administration (including Wall St., the White House, the Fed). This decoupling will produce investment opportunities the world has never seen. Already the Euro is down 20% in a short period of time, the Yen is up 20% and 30% against some other currencies, and the DOW is fluctuating several % per day. Many investors will be wiped out, of course. But those who position themselves properly, stand to improve their financial position greatly and can even profit greatly
[i] http://en.wikipedia.org/wiki/ Trickle_up_effect The trickle up effect is an economic theory used to describe the flow of wealth from the poor to the affluent; it is opposite to the trickle down effect .
[ii] http://en.wikipedia.org/wiki/ New_deal
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