WASHINGTON, April 20 (UPI) — From right to left, Washington’s think tank senior economic fellows agree the capitalist system is broken. But few agree on what comes next. Borrow-and-spend must now give way to save-and-invest. Clearly, the mammon of profits-before-people has been knocked off its pedestal. Borrowing $2 billion to $3 billion a day from other countries — mostly China — to maintain the world’s highest standard of living, based on conspicuous consumption, at a time of growing world shortages is no longer viable. New York’s Federal Reserve says the country borrowed $4.4 trillion in the first six years of this decade to finance its current account deficits — 85 percent of total net borrowing worldwide.
Obama administration palliatives, according to Bloomberg, now total a little more than $8.5 trillion — including $300 billion on Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), AIG and Bear Stearns (now part of JPMorgan Chase); $300 billion on Citigroup; $700 billion on the Troubled Assets Relief Program; $800 billion on Fed-directed asset-backed debt-purchase programs; $2.3 trillion on Fed commercial paper programs and $2.2 trillion on other Fed lending and government commitments.
WASHINGTON, April 21 (UPI) — For all except those on the extreme right and left of the political spectrum, the rhetoric of U.S.PresidentBarack Obamahas been impressive. The president has been painting a “kinder and gentler” view of American policy, in stark contrast to his predecessor. That said, actions dominate. Rhetoric is always trumped by reality and overtaken by surprise.
Beyond the missile and nuclear-science projects ofNorth Korea that could provoke another crisis in East Asia, what surprises might stress test the Obama rhetoric over the coming months? Consider three possibilities: the economic and financial collapse of Russia, an Israeli decision to strike Iran‘s nuclear facilities and a de facto partition of Pakistan should extremist plots gain traction.
WASHINGTON, April 23 (UPI) — AFPAK is U.S. President Obama’s most urgent foreign policy and national-security priority. Taliban insurgents with rocket-propelled grenades and AK-47s slung over their shoulders walk the streets of Peshawar, the capital of Pakistan’s North-West Frontier province, unchallenged by police or army. The pro-al-Qaida Taliban insurgency in Pakistan proper has spread to within 60 miles of Islamabad, the capital of one of the world’s eight nuclear powers.
In the panoply of urgent crises, Iran ranks second and could displace AFPAK before year’s end. Several diplomatic hurdles lie ahead — six-party talks with Iran and the United States at the same table for the first time in 30 years; then, if Tehran doesn’t abandon its nuclear ambitions, tougher sanctions that won’t be followed by either Russia or China — before Iran moves to the front burner.
But the Middle East remains Obama’s magnificent obsession. He believes a Palestinian state is something he can make happen in his first year in office. Jordan’s King Abdullah kicked off the list of visitors from the region as an official guest at Blair House across the street from the White House. But no sooner were they in the mansion that has no bed larger than queen-size than he and Queen Rania skipped over to the Four Seasons Hotel — and a king-size bed.
For the Jordanian monarch, a two-state solution for Palestinians and Israelis became increasingly urgent since Binyamin Netanyahu became prime minister of Israel on April 1. Abdullah has long known that Israel’s hardliners dream of turning Jordan, where the population is already 65 percent Palestinian, into a Palestinian state and keeping the West Bank as a buffer state with the Jordan River as the final frontier.
For Netanyahu, nothing is less urgent than a Palestinian state. He also knows that as long as Israel remains in Iran’s nuclear crosshairs, Obama is not about to make aid to Israel conditional on the acceptance of a Palestinian state in the West Bank.
Look out the expiry has past, the dollar is broke up through $1.30 to the euro this morning. If the Fed doesn’t jump on it with both feet – I would be very surprised. Seems that they all like the $1.33 peg.
Mishkin was on CNBC this morning saying the banks will need more money because we don’t want to end up like Japan but without the savings. I should say not!
I think it is more likely that global community is looking for a bailout. :-)
Funny how a bank will never take a loss.
Now, it is likely know that the deceleration of the velocity of money will cause credit contraction and some ‘good’ debt destruction as the corporations will pay off debt because they can’t roll the debt over. The down side is that they had built a ‘cash’ cushion back in 1999-2006 time frame and spent a lot of it in stock buyback schemes designed to support the corporations stock price (and not incidently, the value of compensation options).
So blame it on the housing bubble if you want to but the stock market merely reverting back to it’s mean because they stopped the decline in price by reducing the number of shares outstanding. Now, they can’t roll their debt, they have no cash for operational shocks and the shares are in the tank.
Don’t you just love it when a fancy suit cashs out just before the news hits the wire? The karmic b-slap is a real doozy though.
Posted April 21st, 2009 at 11.50am in Ongoing Priorities.
New York Times Columnist Paul Krugman reacts to President Barack Obama’s $100 million spending cut:
“pretty soon, even here in Washington, it adds up to real money,” says the president.
Except, you know, really it doesn’t. Let’s say the administration finds $100 million in efficiencies every working day for the rest of the Obama administration’s first term. That’s still around $80 billion, or around 2% of one year’s federal spending.
OK, politics is theater. But you could argue that the president shouldn’t feed the bogus claim that we can close fiscal gaps by eliminating a bit of waste.
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
BEIJING, PEOPLE’S REPUBLIC OF CHINA – From my vantage point here in Beijing this week, I find my mind drifting this morning closer to home and specifically back to Citigroup Inc. (C).
Shares are under pressure for reasons that most investors, particularly those who were looking for a repeat of Goldman Sachs Group Inc. (GS) – don’t understand – especially after a “favorable” conference call and results that were widely interpreted as positive. Others are taking it a step further and suggesting there’s a massive capitalist “conspiracy” at play in the financial sector – especially now that the government is so heavily involved.
While I’m not ruling out the fact that there’s some backroom-government maneuvering at work, my experience as a veteran trader suggests there’s a much more logical explanation – not unlike the infamous “Bin Laden Trade” rumor that I dispelled in the past, or the “Dark Pools” that I brought to light. Unfortunately – as was true of the Bin Laden and Dark Pools examples – the Citigroup case is shaping up as yet another example of a situation in which the proverbial “little guy” could get caught short once again as the Big Money crowd has its way and runs roughshod all over Wall Street…
It all comes down to Economics 101 – basic supply and demand. Here’s why.
When Simple Supply and Demand Isn’t so Simple After All
Most retail investors purchase shares in a company such as Citi on the assumption that it’s going rise in price over time. And that’s good for stock prices. Supply and demand tells us so.
Back in early March, for instance, when Citigroup Chief Executive Officer Vikram S. Pandit’s “we’ve made money” memo leaked into the mainstream press, the good news stoked investor demand for Citi’s shares – causing them to shoot up 38% in one day.
But as we all learned in Econ 101, there’s another part of this formula – supply. Even as investor demand was increasing, there’s also an incredible incentive to short the stock – in no small part due to Citi’s Feb. 27 announcement that it would exchange as much as $52.5 billion in preferred stock for common stock beginning in April at an approximate price of $3.25 per share. This all has to do with a type of trading known as “stock arbitrage,” meaning that sophisticated investors can play one value off another and profit from the difference.
In this case, the difference was between the value of Citi’s preferred shares – those that were part of the deal announced in February – and Citi’s common shares. Because there is enough money at work, the pressure from the arbitrageurs actually creates something of a reverse incentive for the banking giant’s common shares, to the effect that that the lower the price of the common shares when the conversion happens, the greater the profit traders who are in on the deal can make.
The bottom line: No matter how much the investing masses would like to see Citi’s share price increase, big money has been wagered that the bank’s stock price would fall first.
One Short Sale That’s in Short Supply
An investor who wanted to participate would have to buy Citigroup’s convertible preferred stock Series T, which closed Friday at $34.25. [Editor’s Note: We prepared this piece and ran through these calculations using Friday’s closing prices; however, Citi’s shares fell a steep 19.45% yesterday (Monday) due to rising
Under the terms of the deal announced in February, each $34.25 preferred share would convert to approximately 13.08 shares of common stock, which, at Friday’s price, was worth $47.73. This meant you could buy $47.73 worth of stock for $34.25 and lock in a 39.35% gain – again if the deal is not shelved or modified in any way, and assuming the $3.25 per share specified in February’s announcement remains set.
The risk is that the deal could be delayed or go away entirely depending on what the government’s so-called “stress tests” reveal, or if Citi simply decides it doesn’t want to play ball. Traders in on the deal are already dancing in the aisles. Those still on the outside are understandably drooling because the spread between Citi’s preferred shares and the common stock continues to widen. Adding fuel to the fire is the fact that repo desks all over Wall Street are calling in Citi’s shares, inducing bursts of forced short covering – which is making it even more difficult to put on new shorts.
To that end, when asked on a recent conference call whether the terms will change or the deal could go away, Citigroup Chief Financial Officer Edward J. “Ned” Kelly III said that he doesn’t think that will happen but still assigned a “5% chance the sun doesn’t come up,” Reuters said last week.
Gold price could hit $1,500
The aggressive monetary policy of central banks around the world is playing havoc with the structure of the bullion market, creating a chronic shortage of gold that may soon push the metal to fresh records above $1,500 an ounce.
Charles Gibson, a gold expert at Edison Investment Research, argues in a new report that negative real interest rates (below inflation) in the US and beyond has upset the “leasing” machinery in the gold industry and led to a sustained market squeeze.
This is what occurred in the late 1970s, driving gold prices to $850 and ounce – roughly $1,560 in today’s terms. Gold finished last week at $870.
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Gold falls for a third dayMr Gibson said the powerful dynamic could lead to a second leg of this gold bull market, even though the metal has already enjoyed a torrid run over the last eight years.
In normal times, gold mining companies sell – or “hedge” – a chunk of their output in advance through bullion banks. These banks cover their positions by leasing gold from central banks. This bread-and-butter trade created excess supply of 500 tonnes each year until the start of this decade.
Low real interest rates have caused the process to reverse, creating a shortfall of about 500 tonnes. The process accelerates as rates turn negative, leading to a scramble by market players to find physical gold.
There are already reports that gold bars are becoming scarce, partly due to fears that futures contracts and other forms of paper gold may not prove reliable if there is a serious break-down in the global financial system. Pure metal — whether Krugerrands, Maple Leaf coins, or the “five tael biscuit” favoured by the Chinese – entail no counterparty risk.
Mr Gibson says the Fed’s monetary blitz will end in another burst of inflation akin to the late 1970s. That is a disputed claim as deflationary forces tighten on the global economy. Some of the big global banks are already calling the start of a bear market. Rarely has the gold fraternity been so schizophrenic. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5184036/Gold-price-could-hit-1500.html
In a move that would effectively nationalize the country’s largest automaker, the U.S. government is considering taking an equity stake in General Motors Corp. (GM) in exchange for part of the $13.4 billion it has already lent the company, Bloomberg News reported, citing people familiar with the matter.
Such a move would likely mean bondholders would get a smaller piece of a new company that would emerge in bankruptcy with most of GM’s saleable assets. The bondholders, who own $27.5 billion in GM debt, had been offered 90% of the new entity’s equity in an earlier settlement proposal. That debt is now trading for as little as 8 cents on the dollar.
