Oil Heads Back Toward $70 a BarrelFriday March 31, 3:05 pm ET By Brad Foss, AP Business Writer
Oil Heads Back Toward $70 a Barrel, With Potenially Grave Consequences for Global Economy
WASHINGTON (AP) -- Oil prices appear headed back toward $70 a barrel, a level not seen since Hurricane Katrina battered the Gulf Coast and sporadic shortages sent gasoline at the pump above $3 a gallon nationwide.
While last summer's price spike triggered outrage in Congress and hurt sport utility vehicle sales, it caused only a hiccup in motor-fuel consumption. And for now, with demand back on the rise, the economy seems capable of absorbing uncomfortably high prices.
Analysts warn, however, that consumers and businesses could be just one major supply disruption away from more serious financial consequences.
Sherry Cooper, chief economist at BMO Nesbitt Burns, said the ramifications of $70 oil and $3-a-gallon gasoline would be "more mild" the second time around "because we're getting kind of used to it."
But while the gas-price sticker shock may be wearing off, Nomura Securities chief economist David Resler fears a more subtle fuel-related angst settling in among consumers.
"There is the pessimistic notion that this is not going to go away and that's going to have a more lasting impact on driving habits and behavior, I suspect, than we've seen so far," Resler said.
In that context, a hypothetical supply disruption that jolts oil prices to $80 or higher and keeps them there for an extended period -- say, three months -- could result in "a substantial falloff in discretionary spending" that snowballs into a serious slowdown.
Perhaps the top threat for the oil market is the standoff between the United Nations and Iran, OPEC's No. 2 producer, over Tehran's nuclear energy ambitions. Iran's foreign minister said Friday his country would not use oil as an economic weapon, and that helped ease prices, but analysts say they remain concerned about supplies from Iraq, Russia, Venezuela and other places.
Unrest in Nigeria has taken more than 500,000 barrels per day of oil off the market, and more than 300,000 barrels per day of Gulf of Mexico output remains shut-in because of damage from last fall's hurricanes.
With global oil demand expected to average 85 million barrels per day in 2006, and excess production capacity limited to 2 million barrels per day, oil analyst Jamal Qureshi of PFC Energy in Washington said prices aren't likely to retreat anytime soon.
"The market is awakening to the scope of the risks," said Antoine Halff, director of global energy Fimat USA in New York.
Yet in spite of all the apprehension about oil supplies -- or maybe because of it -- U.S. inventories of crude are at a seven-year high of roughly 341 million barrels. That does not include the 685,700 barrels in the country's strategic reserve, available in an emergency.
Some analysts point to this buildup of inventories as evidence the market is divorced from reality. IFR Energy Services' Tim Evans sees a "dangerous complacency about the downside potential for prices" -- but many more say it is a reflection of unease about geopolitical uncertainties.
On Friday, light crude for May delivery traded at $65.80 a barrel, down $1.35 on the New York Mercantile Exchange. U.S. retail gasoline prices averaged $2.53 a gallon, or 37 cents higher than last year, according to Oil Price Information Service.
The potential exists for $3-a-gallon gasoline at some point this summer, analysts say, but that assumes out-of-the-ordinary disruptions to refining or distribution, or both. The Energy Department, meanwhile, is forecasting an average summertime price of $2.50.
Economists and oil-market experts say industry and homeowners may not like paying more for fuel but they are adapting, in large part because energy is a tiny piece of overall spending and, thanks to more efficient technology, an even smaller piece than it was during the energy crises of the 1970s.
The burden is most severe on low-income families and fuel-intensive businesses, though truckers, chemical manufacturers and, to a lesser extent, airlines have had success in passing along these costs.
Relatively low interest rates, which have made it easy to borrow money while helping to prop up the stock and housing markets, have reduced the impact of high oil prices on the economy.
Of course, the Federal Reserve has raised short-term rates 15 times since June 2004 to cool off the housing market and keep inflation in check, and this is likely to slow growth irrespective of energy prices.
BMO's Cooper said the Fed probably needs to raise interest rates again in May to slow economic growth because there are signs -- rising airfares among them -- that inflationary pressures are creeping up.
Brian Hicks, co-manager of US Global Investors' Global Resources Fund, a mutual fund heavily invested in energy, said a recession in the U.S. would likely reverberate across emerging-market economies and could quickly depress daily oil demand by 2 million barrels per day.
That dire scenario is not what Hicks or most other financial professionals are anticipating. Hicks forsees oil prices trading in a range of $55 to $65 through the end of the year, with consumption tapering off anywhere above $70 and the Organization of Petroleum Exporting Countries curtailing production at around $50.
James Cordier, president of Liberty Trading in Tampa, Fla., believes oil prices will climb as long as the economies of the U.S., China and India continue to grow and that prices may need to hit $75 before there is any significant demand response.
"We are going to find out at what price level we start rationing demand," Cordier said. "That is what we have to do."
Friday, March 31, 2006
Saturday, March 25, 2006
PICTURE OF THE WEEK
http://www.prudentbear.com/archive_comm_article.asp?category=Credit+Bubble+Bulletin&content_idx=52858 Credit Bubble Report
Even as the Dow sits scant 4% below Jan 2000 bubble highs, the market advance is getting more selecive. when the Dow finally tops, the majority of stocks will already be in bear Markets with 20% losses or more, this is a good time IMHO to examine your holdings and their performance. and maybe a very good time to RAISE cash as MM funds yielding near 4% and 91 day Treasuries more, challenging gains in stock market without risk.
Share volume in CHEAP bulletin board stocks last week ran 2 X previous ever high, the so called lesson of previous Bear Market are all but forgotten. Share volume for little GNBT rose to 89 Million one day last week.
Be careful, be very selective......the top making process continues and the current Bull Cycle is VERY long in the tooth, IMHO in respect to historic means. If you have fallen asleep with your investments, NOW would be a good time to wake up.
My blog for now will only be updated each Sat morning, unless a stock market move of 100 points or more has occured.
Duratek
Tuesday, March 21, 2006
Monday, March 20, 2006
HEAD BLOODSUCKER SPEAKS
Bernanke: Fed must watch its step
Fed chief says flat yield curve not a sign of economic slowdown, says it isn't clear why long-term bond yields are so low.
March 20, 2006: 9:41 PM EST
NEW YORK, March 20 (Reuters) - Federal Reserve Chairman Ben Bernanke said on Monday it was hard to gauge why long-term interest rates were so low and said the U.S. central bank could not rely on them as its sole guide for policy-making.
"The implications for monetary policy of the recent behavior of long-term yields are not at all clear-cut," Bernanke told the Economic Club of New York.
In his first public foray onto Wall Street since taking over as Fed chairman on Feb. 1, Bernanke ran through several competing explanations for the unusually low level of U.S. bond yields despite a steady ratcheting up of short-term interest rates by the U.S. central bank.
Bernanke revisited a thesis he first laid out a year ago that a "global saving glut" - an excess of savings because of a dearth of enticing investments - could be depressing rates.
If this were the case, he said, then as long as the factors behind it persisted "global equilibrium interest rates - and, consequently, the neutral policy rate - would be lower than they otherwise would be" to keep the economy on an even keel.
But Bernanke laid out a number of other possibilities and concluded: "The bottom line for policy appears ambiguous."
Fed policy-makers have raised benchmark overnight rates to 4.5 percent in a string of 14 steps dating to June 2004 and are widely expected to bump them up another quarter-percentage point at a meeting next Monday and Tuesday.
While overnight rates have risen 3.5 percentage points since mid-2004, the market-set rate on 10-year U.S. government bonds has barely budged.
Bernanke said that if the low level of long-term rates reflected a decline in the compensation investors demanded to cover the risk of losses on long-term holdings, then it could signal stimulative financial conditions that would require higher short-term rates than otherwise to offset.
"But to the extent that long-term rates have been influenced by macroeconomic conditions, including such factors as trends in global saving and investment, the required policy rate will be lower," Bernanke said.
Little slowdown ahead
As he had in congressional testimony last month, Bernanke said he dd not consider the current flat yield curve - with yields on short-term debt close to yields on long-term bonds - as presaging "a significant economic slowdown" as has sometimes been the case in the past.
Indeed, he said other indicators showed markets with few worries on the future. "The fact that actual and implied volatilities of most financial prices remain subdued suggests that market participants do not harbor significant reservations about the economic outlook," he said.
He said, instead, long-term rates could suggest the level of short-term rates consistent with holding the economy at full employment had declined, perhaps reflecting a lasting drag on the economy from high energy costs, slower growth in house prices and the possibility consumers will begin to save more.
But he also noted long-term rates were low around the globe and said "an explanation less centered on the United States might be required."
One other factor that Bernanke raised, but downplayed, was that large official holdings of U.S. Treasury debt accumulated by countries intervening in currency markets was doing much to push U.S. long-term rates down.
"A reasonable conclusion is that the accumulation of dollar reserves abroad has influenced U.S. yields, but reserve accumulation abroad is not the only, or even the dominant, explanation for their recent behavior," he said.
In the end, Bernanke said the Fed would need to monitor bond yields carefully, but also had to take into account a wide array of other signals on the economy's health.
"Policy-makers are well advised to follow two principles familiar to navigators throughout the ages: First, determine your position frequently. Second, use as many guides or landmarks as possible," he said.
"By not tying policy to a small set of forecast indicators, we may sacrifice some degree of simplicity, but we are less likely to be misled when a favored variable behaves in an unusual manner," Bernanke added.
Fed chief says flat yield curve not a sign of economic slowdown, says it isn't clear why long-term bond yields are so low.
March 20, 2006: 9:41 PM EST
NEW YORK, March 20 (Reuters) - Federal Reserve Chairman Ben Bernanke said on Monday it was hard to gauge why long-term interest rates were so low and said the U.S. central bank could not rely on them as its sole guide for policy-making.
"The implications for monetary policy of the recent behavior of long-term yields are not at all clear-cut," Bernanke told the Economic Club of New York.
In his first public foray onto Wall Street since taking over as Fed chairman on Feb. 1, Bernanke ran through several competing explanations for the unusually low level of U.S. bond yields despite a steady ratcheting up of short-term interest rates by the U.S. central bank.
Bernanke revisited a thesis he first laid out a year ago that a "global saving glut" - an excess of savings because of a dearth of enticing investments - could be depressing rates.
If this were the case, he said, then as long as the factors behind it persisted "global equilibrium interest rates - and, consequently, the neutral policy rate - would be lower than they otherwise would be" to keep the economy on an even keel.
But Bernanke laid out a number of other possibilities and concluded: "The bottom line for policy appears ambiguous."
Fed policy-makers have raised benchmark overnight rates to 4.5 percent in a string of 14 steps dating to June 2004 and are widely expected to bump them up another quarter-percentage point at a meeting next Monday and Tuesday.
While overnight rates have risen 3.5 percentage points since mid-2004, the market-set rate on 10-year U.S. government bonds has barely budged.
Bernanke said that if the low level of long-term rates reflected a decline in the compensation investors demanded to cover the risk of losses on long-term holdings, then it could signal stimulative financial conditions that would require higher short-term rates than otherwise to offset.
"But to the extent that long-term rates have been influenced by macroeconomic conditions, including such factors as trends in global saving and investment, the required policy rate will be lower," Bernanke said.
Little slowdown ahead
As he had in congressional testimony last month, Bernanke said he dd not consider the current flat yield curve - with yields on short-term debt close to yields on long-term bonds - as presaging "a significant economic slowdown" as has sometimes been the case in the past.
Indeed, he said other indicators showed markets with few worries on the future. "The fact that actual and implied volatilities of most financial prices remain subdued suggests that market participants do not harbor significant reservations about the economic outlook," he said.
He said, instead, long-term rates could suggest the level of short-term rates consistent with holding the economy at full employment had declined, perhaps reflecting a lasting drag on the economy from high energy costs, slower growth in house prices and the possibility consumers will begin to save more.
But he also noted long-term rates were low around the globe and said "an explanation less centered on the United States might be required."
One other factor that Bernanke raised, but downplayed, was that large official holdings of U.S. Treasury debt accumulated by countries intervening in currency markets was doing much to push U.S. long-term rates down.
"A reasonable conclusion is that the accumulation of dollar reserves abroad has influenced U.S. yields, but reserve accumulation abroad is not the only, or even the dominant, explanation for their recent behavior," he said.
In the end, Bernanke said the Fed would need to monitor bond yields carefully, but also had to take into account a wide array of other signals on the economy's health.
"Policy-makers are well advised to follow two principles familiar to navigators throughout the ages: First, determine your position frequently. Second, use as many guides or landmarks as possible," he said.
"By not tying policy to a small set of forecast indicators, we may sacrifice some degree of simplicity, but we are less likely to be misled when a favored variable behaves in an unusual manner," Bernanke added.
FED RESERVE IS UNCONSTITUTIONAL
http://www.honestmoneyreport.com/archives/2006/0305.php
Article I, Section 8, Clause 5 of the Constitution states: “The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”
BUT>>>>>>The United States monetary system currently creates, emits, and circulates paper bills of credit known as Federal Reserve Notes. Such acts are not authorized by the Constitution – they are literally prohibited by the Constitution, and should be repealed forthwith.
D...we are losing it people.....
Article I, Section 8, Clause 5 of the Constitution states: “The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”
BUT>>>>>>The United States monetary system currently creates, emits, and circulates paper bills of credit known as Federal Reserve Notes. Such acts are not authorized by the Constitution – they are literally prohibited by the Constitution, and should be repealed forthwith.
D...we are losing it people.....
Sunday, March 19, 2006
WAKE UP AMERICA WE ARE BEING BUSHWINKED
http://www.cbsnews.com/stories/2006/03/17/60minutes/main1415985.shtml Bush *&&!!sucker pulled out of Kyoto green house gasses treaty..is now censoring CLIMATE REPORTS!!!!
It is going to be TOO late and no place to hide!! Hate them maybe too , but if a Dem with environmental leanings comes up as candidate.....better vote them in!
Temp at Antarctica is rising 2X as fast as elsewhere, the GOV is censoring your right to know, keeping the TRUTH from you.
If we haven't made drastic changes in 10 years there will be NO reversing this process.
D
It is going to be TOO late and no place to hide!! Hate them maybe too , but if a Dem with environmental leanings comes up as candidate.....better vote them in!
Temp at Antarctica is rising 2X as fast as elsewhere, the GOV is censoring your right to know, keeping the TRUTH from you.
If we haven't made drastic changes in 10 years there will be NO reversing this process.
D
Saturday, March 18, 2006
Excerpts from Doug Noland
found @ prudentbear.com
March 14 – Bloomberg (Walden Siew): “Companies are selling floating-rate debt in the U.S. at the fastest pace ever as investors seek securities that will keep their value while the Federal Reserve raises interest rates. Borrowers sold $62.9 billion of floating-rate notes this year and are on track to beat the 2005 record of $302 billion, according to data compiled by Bloomberg.”
Investment grade issuers included GE Capital $3.0 billion, Goldman Sachs $1.75 billion, Wells Fargo $1.5 billion, USB Capital $1.25 billion, Tyson Foods $1.0 billion, Shinsei Finance $700 million, World Savings $600 million, Clear Channel $500 million, HRPT Properties $400 million, Archstone Communities $300 million, Genworth Global $300 million, Compass Bank $275 million and Boston Edison $200 million.
March 14 – Financial Times (Jennifer Hughesin): “Inflows into emerging market equities have set an annual record just 11 weeks into the year as investors continue to chase the higher returns seen in developing markets. In the week to March 8, $20.9bn has been poured into emerging market stock funds breaking last year’s record of $20.3bn, according to Emerging Portfolio Fund Research. Brad Durham, a managing director of EPFR, said: ‘While it is natural to assume that such strong inflows into any asset class are a worrisome sign, there are institutional investors just waiting for corrections in equity and bond markets to plough more money into emerging markets.’”
As I believe we witnessed this week, extraordinarily speculative global financial markets took comforted from inferences of a lack of nerve from the Fed and the Bank of Japan. Global bond markets (generally) abruptly retraced some of recent declines, spurring the resurgence of global equity market speculation (and short covering). Currency markets vacillated, the dollar index was hit for 2%, and the energy and metals complexes rallied back smartly. Middle Eastern equity Bubbles lurched toward collapse then retreated. All in all, it has the look and feel of a major topping process, as players assess and reassess the prospects for a continuation of, or destabilizing interruption to, the Global Credit and Asset Bubbles.
I can imagine that the Fed today takes comfort from its amassed war chest of 450 basis points of reflation ammo. But the enemy is often not as anticipated. There’s a critical issue of which I am left unclear. How does “mopping up” – or perhaps better stated, what is to be “mopped up” - in the middle of a currency crisis?
March 14 – Bloomberg (Walden Siew): “Companies are selling floating-rate debt in the U.S. at the fastest pace ever as investors seek securities that will keep their value while the Federal Reserve raises interest rates. Borrowers sold $62.9 billion of floating-rate notes this year and are on track to beat the 2005 record of $302 billion, according to data compiled by Bloomberg.”
Investment grade issuers included GE Capital $3.0 billion, Goldman Sachs $1.75 billion, Wells Fargo $1.5 billion, USB Capital $1.25 billion, Tyson Foods $1.0 billion, Shinsei Finance $700 million, World Savings $600 million, Clear Channel $500 million, HRPT Properties $400 million, Archstone Communities $300 million, Genworth Global $300 million, Compass Bank $275 million and Boston Edison $200 million.
March 14 – Financial Times (Jennifer Hughesin): “Inflows into emerging market equities have set an annual record just 11 weeks into the year as investors continue to chase the higher returns seen in developing markets. In the week to March 8, $20.9bn has been poured into emerging market stock funds breaking last year’s record of $20.3bn, according to Emerging Portfolio Fund Research. Brad Durham, a managing director of EPFR, said: ‘While it is natural to assume that such strong inflows into any asset class are a worrisome sign, there are institutional investors just waiting for corrections in equity and bond markets to plough more money into emerging markets.’”
As I believe we witnessed this week, extraordinarily speculative global financial markets took comforted from inferences of a lack of nerve from the Fed and the Bank of Japan. Global bond markets (generally) abruptly retraced some of recent declines, spurring the resurgence of global equity market speculation (and short covering). Currency markets vacillated, the dollar index was hit for 2%, and the energy and metals complexes rallied back smartly. Middle Eastern equity Bubbles lurched toward collapse then retreated. All in all, it has the look and feel of a major topping process, as players assess and reassess the prospects for a continuation of, or destabilizing interruption to, the Global Credit and Asset Bubbles.
I can imagine that the Fed today takes comfort from its amassed war chest of 450 basis points of reflation ammo. But the enemy is often not as anticipated. There’s a critical issue of which I am left unclear. How does “mopping up” – or perhaps better stated, what is to be “mopped up” - in the middle of a currency crisis?
Friday, March 17, 2006
Tuesday, March 14, 2006
DEVIL IN THE DETAILS
http://briefing.com/Investor/Public/MarketAnalysis/Calendars/EconomicCalendar.htm
Consumer slowing down, gov deficits not. Strain on interest rates to go higher because of huge appetite for debt from all orifices.
Higher rates putting brakes on housing, the engine of WORLD economy. utility rates going up as much as 70% with price controls ending in July.
Cash flush corporations NOT using cash for INVESTMENTS IN SELF OR CAPITOL EQUIP., no they are using it, FED induced super profits to BUYBACK SHARES (insiders love this) to boost earnings as they are actually declining, and fo M and A activity resembling 2000.
Here we are, within 1.5% of Dow bubble highs, yet avg Dow stock off 20% from 52 week highs!!!
Devil in details, cash I am in.
Duratek (surgery last wed, one armed man for now) I hope my readers are hanging in there with me, let me know you want me to continue my blog, and I am doing some good.
Consumer slowing down, gov deficits not. Strain on interest rates to go higher because of huge appetite for debt from all orifices.
Higher rates putting brakes on housing, the engine of WORLD economy. utility rates going up as much as 70% with price controls ending in July.
Cash flush corporations NOT using cash for INVESTMENTS IN SELF OR CAPITOL EQUIP., no they are using it, FED induced super profits to BUYBACK SHARES (insiders love this) to boost earnings as they are actually declining, and fo M and A activity resembling 2000.
Here we are, within 1.5% of Dow bubble highs, yet avg Dow stock off 20% from 52 week highs!!!
Devil in details, cash I am in.
Duratek (surgery last wed, one armed man for now) I hope my readers are hanging in there with me, let me know you want me to continue my blog, and I am doing some good.
Tuesday, March 07, 2006
RECENT COMSTOCK PARTNERS PIECE
Comstock Partners, Inc.
The Derivatives Mess March 02, 2006
Over the past year New York Federal Reserve President Timothy F. Geithner has become increasingly concerned about the use of derivative instruments as outlined in a few of his speeches and a number of largely unnoticed articles buried inside the Wall Street Journal. In a recent speech before the Global Association of Risk Professionals, Geithner stated that the widespread use of derivatives “have not eliminated risk” and “have not eliminated the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure…And there are aspects in the latest changes in financial innovation that could increase systemic risk in some circumstances, by amplifying rather than dampening the movement in asset prices, the reduction in market liquidity and the associated damage to financial institutions.”
Geithner stated that so far the expanded use of derivatives has taken place in a period of generally favorable conditions, but that “we know less about how these markets will function in conditions of stress, and the most sophisticated tools available for measuring potential losses have less to offer than they will with the benefit of experience with adversity.” He pointed out that the gaps in the infrastructure and risk management is most conspicuous in credit derivatives, where the measure of credit risk “may not adequately capture the scale of losses in the event of default in the underlying credits or the consequences of a prolonged disruption to market liquidity. The complexity of many new instruments and the relative immaturity of the various approaches used to measure the risks in those exposures magnify the uncertainty involved.”
As explained by David Wessel in the Wall Street Journal, the problem is that the derivatives market has grown so fast that it has overwhelmed the legal, technical and paper-work handling infrastructure. Under present conditions no firm can be sure who owes what to whom. According to Geithner, “The post-trade processing and settlement infrastructure is still quite weak relative to the significance of these markets…The total stock of unconfirmed trades is large and until recently was growing considerably faster than the total volume of new trades. The time between trade and confirmation is still quite long for a large share of transactions. The share of trades done on the available automated platforms is still substantially short of what is possible…firms were typically assigning trades without the knowledge or consent of the original counterparties. Nostro breaks, which are errors in payments discovered by counterparties at the time of the quarterly flows, rose to a significant share of total trades. Efforts to standardize documentation and provide automated confirmation services has lagged behind product development and growth in volume…the assignment problems create uncertainty about the actual size of exposures to individual counterparties that could exacerbate market liquidity problems in the event of stress.”
To his credit, Geithner began stressing the nature of the problems in late 2004. Former New York Fed president Gerald Corrigan organized an industry group to deal with the problem in early 2005 and the members have met a number of times since then to report on their recommendations, most recently on February 16. Despite reported progress there is still a backlog of thousands of unconfirmed trades, and about 40% of new trades are still not matched electronically. There’s still no centralized means of processing trades.
In our view the derivatives mess described above is another potential time bomb (among many) that could throw the financial markets into a severe crisis. In the last 30 years every period of monetary tightening has eventually led to financial crisis. These included the Penn Central bankruptcy in 1970; the Franklin National Bank failure in 1974; the First Pennsylvania bank failure in 1982; the Continental Illinois bank failure in 1984; the savings & loan crisis in 1990, the Mexican Peso crisis in 1994; the Asian, LTCM and Russian crises in 1998; and the bursting of the Nasdaq bubble in 2000. The derivatives market is a leading candidate to trigger the crisis on this cycle, although there are obviously many other candidates as well.
The Derivatives Mess March 02, 2006
Over the past year New York Federal Reserve President Timothy F. Geithner has become increasingly concerned about the use of derivative instruments as outlined in a few of his speeches and a number of largely unnoticed articles buried inside the Wall Street Journal. In a recent speech before the Global Association of Risk Professionals, Geithner stated that the widespread use of derivatives “have not eliminated risk” and “have not eliminated the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure…And there are aspects in the latest changes in financial innovation that could increase systemic risk in some circumstances, by amplifying rather than dampening the movement in asset prices, the reduction in market liquidity and the associated damage to financial institutions.”
Geithner stated that so far the expanded use of derivatives has taken place in a period of generally favorable conditions, but that “we know less about how these markets will function in conditions of stress, and the most sophisticated tools available for measuring potential losses have less to offer than they will with the benefit of experience with adversity.” He pointed out that the gaps in the infrastructure and risk management is most conspicuous in credit derivatives, where the measure of credit risk “may not adequately capture the scale of losses in the event of default in the underlying credits or the consequences of a prolonged disruption to market liquidity. The complexity of many new instruments and the relative immaturity of the various approaches used to measure the risks in those exposures magnify the uncertainty involved.”
As explained by David Wessel in the Wall Street Journal, the problem is that the derivatives market has grown so fast that it has overwhelmed the legal, technical and paper-work handling infrastructure. Under present conditions no firm can be sure who owes what to whom. According to Geithner, “The post-trade processing and settlement infrastructure is still quite weak relative to the significance of these markets…The total stock of unconfirmed trades is large and until recently was growing considerably faster than the total volume of new trades. The time between trade and confirmation is still quite long for a large share of transactions. The share of trades done on the available automated platforms is still substantially short of what is possible…firms were typically assigning trades without the knowledge or consent of the original counterparties. Nostro breaks, which are errors in payments discovered by counterparties at the time of the quarterly flows, rose to a significant share of total trades. Efforts to standardize documentation and provide automated confirmation services has lagged behind product development and growth in volume…the assignment problems create uncertainty about the actual size of exposures to individual counterparties that could exacerbate market liquidity problems in the event of stress.”
To his credit, Geithner began stressing the nature of the problems in late 2004. Former New York Fed president Gerald Corrigan organized an industry group to deal with the problem in early 2005 and the members have met a number of times since then to report on their recommendations, most recently on February 16. Despite reported progress there is still a backlog of thousands of unconfirmed trades, and about 40% of new trades are still not matched electronically. There’s still no centralized means of processing trades.
In our view the derivatives mess described above is another potential time bomb (among many) that could throw the financial markets into a severe crisis. In the last 30 years every period of monetary tightening has eventually led to financial crisis. These included the Penn Central bankruptcy in 1970; the Franklin National Bank failure in 1974; the First Pennsylvania bank failure in 1982; the Continental Illinois bank failure in 1984; the savings & loan crisis in 1990, the Mexican Peso crisis in 1994; the Asian, LTCM and Russian crises in 1998; and the bursting of the Nasdaq bubble in 2000. The derivatives market is a leading candidate to trigger the crisis on this cycle, although there are obviously many other candidates as well.
Monday, March 06, 2006
Saturday, March 04, 2006
EXCUSES
NEW YORK - Now that America's savings rate has been negative for an entire year, a first since the Great Depression, the question is whether we're a spendthrift nation on its way to the poor house or whether we're looking at the wrong numbers when we calculate savings
http://news.yahoo.com/s/ap/20060304/ap_on_bi_ge/wall___main_1
The personal savings rate used to be 10 percent of disposable income from 1974 to 1984, according to the Bureau of Labor Statistics. It fell to 4.8 percent by 1994, and was negative for all of 2005.
http://www.naftemporiki.gr/markets/quotegraph.asp?id=.BADI&ctime=5Y&cperiodicity=W BDI 5 yr
http://research.stlouisfed.org/publications/usfd/page3.pdf zippity do da adj money
Doug Noland
March 2 – Dow Jones (Christine Richard): “A flood of foreign capital into U.S. dollar-denominated debt has some in the corporate bond market worried that the market's aversion to risk is getting washed away.
February 27 – Bloomberg (Darrell Hassler and Prashant Rao): “U.S. Treasury investors are more complacent about the prospect of an economic shock causing volatility in the $4.2 trillion market than at any time in at least 17 years.”
Broad money supply (M3) surged $54.1 billion to a record $10.335 Trillion (week of Feb. 20). Year-to-date, M3 has expanded at an 8.0% annualized rate. Over 52 weeks, M3 grew 8.5%, with M3-less Money Funds up 8.8%. *(HOLY CRAP!)
D
http://news.yahoo.com/s/ap/20060304/ap_on_bi_ge/wall___main_1
The personal savings rate used to be 10 percent of disposable income from 1974 to 1984, according to the Bureau of Labor Statistics. It fell to 4.8 percent by 1994, and was negative for all of 2005.
http://www.naftemporiki.gr/markets/quotegraph.asp?id=.BADI&ctime=5Y&cperiodicity=W BDI 5 yr
http://research.stlouisfed.org/publications/usfd/page3.pdf zippity do da adj money
Doug Noland
March 2 – Dow Jones (Christine Richard): “A flood of foreign capital into U.S. dollar-denominated debt has some in the corporate bond market worried that the market's aversion to risk is getting washed away.
February 27 – Bloomberg (Darrell Hassler and Prashant Rao): “U.S. Treasury investors are more complacent about the prospect of an economic shock causing volatility in the $4.2 trillion market than at any time in at least 17 years.”
Broad money supply (M3) surged $54.1 billion to a record $10.335 Trillion (week of Feb. 20). Year-to-date, M3 has expanded at an 8.0% annualized rate. Over 52 weeks, M3 grew 8.5%, with M3-less Money Funds up 8.8%. *(HOLY CRAP!)
D
Wednesday, March 01, 2006
PARTYING LIKE IT'S 1987?
http://www.sandspring.com/charts2006/cdj022206.html
I go in for elbow surgery next Wed, not sure how long it will be before I can post beyond that.
D
I go in for elbow surgery next Wed, not sure how long it will be before I can post beyond that.
D
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