CREs in Trouble

If we are to believe the people smoking and inhaling green shoots, then things are improving and even less bad is now good.
Hhm, then riddle me this.

A post on Big Picture points  us to a story, which originally ran on the NYT, displaying some nice charts on the state of bank loans.

Banks Loans

Banks Loans charts on NYT

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Merval had Best Month in Three Years

The Merval Index closed yesterday with a gain of 1.71% for the day, which translates to a monthly gain of 24.46%. As the Argentinian newspaper La Nacion writes, May was the best months in the last three years for the Bolsa Commercial (Argentinian Stock Exchange).

According to La Nacion, the pheonmenon was due to the solid performance of the papers that are related most closely to the oil sector, since the gain in the price of oil more than compensated for the loss in value of the USD, as well as to the performance of certain financials.
Among the companies who profited most was Petrobras, up 3.59% and 36.06% for the day and month respectively, and Tenaris, a company specialized in oil exploration and exploitation, which was up 3.35% for the day, Grupo Finaciero Galicia, up 42.5% for the month and Banco Francés, up 42.5% for the month.

I find that interseting, because it dosen’t seem to indicate a fundamental economic recovery in Argentina either, but ‘a fiddling with the numbers’ by speculators. Financials can be manipulated very easily as we have come to learn, so they are simply not reliable indicators of economic development.
Besides, even if the values assigned to the financial were reliable, they still don’t produce anything of real value, therefor they don’t increase the wealth of anyone, except the chosen few executives.
The oil price is controlled by OPEC which announced a price target of $75 per barril and we know that some speculators have already prepared for reaping the windfall from that rise by buying oil cheaply, filling up storage tanks in ports and leaving the oil on tankers until the prices rise, so they can sell it at a hefty profit (for themselves).

Thus I conclude that the rises in certain stock exchanges are not a sign of recovery, but indicate clearly that the market are not efficient at all, but that they are rigged. In other words, those markets do not deliver any usefull econmic indications at all.

FSA not going to publish stress-test data

The UK Financial Services Authority (FSA) is standing by its decision to not publish the results of the ‘stress-test’ it performed on UK banks. However, the FSA felt compelled to clarify the use of the tests. In a press release on May 28, 2009 it wrote:

The UK authorities have not applied stress testing in the same way as in the US – a single exercise covering simultaneously the top 19 banks which account for two thirds of the assets of the US banking system. Instead, over the last eight months since the intensification of the financial crisis, the Financial Services Authority (FSA) has:

  • Greatly increased the use of stress tests as an integral element of our ongoing supervisory approach.
  • Begun the process of embedding this revised approach in our intensive supervisory regime.
  • sed stress tests to inform policy decisions such as access to the Credit Guarantee Scheme (CGS) and the Asset Protection Scheme (APS) working closely with the other Tripartite authorities.

The FSA writes:

The stress tests used are not forecasts of what is likely to happen but deliberately designed to be severe. Their purpose is to consider whether an institution would be able to sustain adequate capital and liquidity under conditions which at the time the stress is conducted are considered unlikely to arise. They therefore aid our determination of whether firms are able to comply with our regulatory framework.
Stress testing is necessarily forward looking and therefore involves an element of judgement. This is particularly true given that the most important challenge facing the banking system has changed over the last six months.

and goes on to provide some details:

The current stress scenario models a recession more severe and more prolonged than those which the UK suffered in the 1980s and 1990s and therefore more severe than any other since the Second World War. It assumes a peak-to-trough fall in GDP of over 6%, with growth not returning until 2011 and only returning to trend growth rate in 2012. It models the impact of unemployment rising to just over 12% and, crucially, the impact of a 50% peak-to-trough fall in house prices and a 60% peak-to-trough fall in commercial property prices.

The FSA further points out that its efforts were supposed to fit into the EU-wide stress testing exercise to be performed on the aggregate banking system the CEBS coordinates, which Ireported on in an earlier post:

The UK approach to stress tests is similar to that followed in most countries, other than the US, which have applied stress tests to inform decisions on specific institutions and as part of intensified supervisory processes, rather than as a one-off, system wide and publicly disclosed process. CEBS has, however, now committed to co-ordinating a Europe-wide stress testing exercise to inform assessments of the aggregate health of the banking system. This exercise will use common approaches and scenarios and aims to increase the level of aggregate information available to policy makers in assessing the European financial system’s resilience to shocks.

One might conclude from this, that the national authorities in the EU consider it a problem of the banks to ensure that they are sufficiently capitalized and it is only the system as a whole who they need to be concerned with. However, we note that unlike the EU-wide test, which is not going to assess the health of individual institutions, the FSA has done just that.

I am still wondering how the CEBS wants to meassure the health of the EU financial system without relying on stress-test results of individual institutions.

The Greatest Fraud Ever

Interesting reading at (via Financial Armageddon) which confirms what we – and many others have been thinking and writing about for some time now: There is a bit more to this financial meltdown than ‘bad luck’ and ‘could not have been foreseen’.

Those are lies propagated by those who would like to cover their tracks, avoid accountability and pocket even more money. This amidst economic calamity which will wipe out the economic foundation on which many million people depend for a living, without any show of remorse, guilt or regret.

In Newsweek, Paulson claims “I didn’t understand the retail market; I just wasn’t close to it.”

Hhm, that coming from the former head of Goldman Sachs, who made some $650mln dollar in the process and was a frequent-flyer with destination China, this has zero credibility. Even if true, it would only prove that no particular knowledge or insight is needed to make hundreds of millions on Wall St. The ‘best and brightest’ they are not then, their bonuses totally undeserved and their frequent ‘trust-me-I-know-what-I-am-doing’ sales pitches are demasked as, well, crass overstatements having no connection to reality. So the ‘we’ve got to pay high salaries’ is just bull/bear droppings.

That the danger of a repeat of this economic meltdown is not only possible but almost a certainty can be seen by the fact that those people have learned nothing, is best demonstrated with Deutsche Bank CEO, Josef Ackermann’s, recent remarks that he intends to pursue his 25% return-on-equity target profitability. Back to business-as-usual, and the ripp-off can continue.

’nuff said

IWM and SPY are up – How Come?

Today, Tyler Durden posted the following charts on  Zero Hedge which show the trading volumes for the IWM and SPY ETFs of May 26, 2009.

As Tyler points out, the trades are overwhelmingly dominated by JP Morgan for SPY and Deutsche Bank for IWM.



It is interesting to see how this relates to index development during morning trading. As published by the NYSE, this looks the following way. For convenience I took screenshots of the data this morning. The original data for SPY is here, and for IWM here.

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Japanese, Korean and US Crises

Let me return to a previous post, The Lesson of the Kobayashi-Maru Test where I analyzed John Hempton’s article on Bronte Capital about the banking crises in Japan and South Korea. In today’s post, John elaborated his arguments, so I’d like to have a look at those.

If I understood him correctly, then John argues – in my words – that the banking system must be maintained at all costs, otherwise the US and world economy will behave like the South Korean economy and go into a (relatively) short, painful recession in which many legitimate and profitable businesses would go belly-up, simply because they cannot get any credit from the failing banking system. It is thus preferable to keep the US banking system alive – even if unpopular – so that the US economy will behave more like Japan, where people where kept at work with stable salaries. However, this was at the cost of a drawn out malaise with no recovery for twenty years or so.
I agree with the thrust of this argument, with some differences though.

It is worthwhile to compare Japan to the US as the factors mentioned above are concerned.

First, how did the Japanese and U.S. banking actually work?

The Japanese banks were working with real money, i.e. they took the deposits the Japanese made on their bank accounts and loaned these out to industrial firms. This is what banks historically have done for hundreds of years – taking deposits and making loans.
In turn those industrial firms kept people at work with decent salaries, who then could consume and again make deposits. This cycle was based on real value.

The US banks, in contrast, did not work the same way. They did not loan out money that was deposited with them by Americans. They invented ‘money’ by doling out loans in all sorts of forms. Then they sold that debt after neatly packaging it into opaque derivatives, and everyone believed and acted as if those derivatives were worth the amount of US dollars attached to it. However, they never were worth that, simply because banks are not allowed to print money. Those derivatives were just repackaged debt that was sold around the world. Profits came from this reselling. But debt is a contract based on a promise to repay (with interest), if the promise is broken for whatever reason, the derivative is worth less or even nothing. With a dollar, being official legal tender, you can at least still buy a loaf of bread. With a broken promise, you cannot buy anything.

Japan, then, worked with real money and deposits, the US worked with Monopoly money and credit/debt. Japanese where thus creditors of their banks, whereas Americans are debtors to their banks. This is a pretty important difference in my view.
As a result, the Japanese government did not have to pump in trillions of Yen into the banks and blow up its budget deficit and debt to plug a gap of real worth and imagined worth – as there was no such gap.

There seems to be another, maybe cultural, difference. The banks obviously were ok with this arrangement and didn’t feel the need to be very profitable either – in short, they didn’t have to worry or care about the share-prices. They also don’t seem to have been too concerned about doling out big bonuses to themselves and their buddies. As John points out correctly here, the only people that didn’t like this arrangement were ‘stock investing capitalists like him’. For all others, the arrangement worked.

Not so the US bankers. Their first, last and all other thought is about themselves. They are concerned about their own well-being only, and even in times of crisis and peril for the whole nation, they think they need to earn more because they are so great – forgetting completely, that it was them who caused this problem in the first place. There is no self-reflection, no introspection no sense of remorse, let alone even guilt. They just think they are entitled to go on to do what they have done. There is a real mortal danger in allowing them to do that.

Second, Japanese and American industrial enterprises

In Japan, industrial companies (heavy-industry) that should have folded were maintained with the loans from the Japanese banks, not from the government, as is done in the US.
How did those companies manage to stay in business at all? Obviously they must have found someone who actually bought some of their products, they just weren’t able to make a profit from it and thus couldn’t repay banks’ loans in their entirety.
In the case of the steel-industry, keep in mind that even if it is not sexy from an investment point of view, it still is the basis of many other things we take for granted. Cars, trains, buildings, ships, airplanes and many more rely on the steel industry. So while the Japanese steel industry taken by itself may not have been profitable, the car industry was very successful all over the world. This justified the Japanese loans to this industry, if you take a systemic view.
It is the same for the US car industry. Just because it currently doesn’t turn in a profit, doesn’t mean the industry is completely useless and thus expendable.  They are still helping to enable other parts of the economy to turn in a profit. And let’s not forget that many people have to rely on their cars for work, living, leisure, etc. In my view, they even have a unique opportunity to ditch outdated technology and push fuel-cell technology. Details are here.

However, in general it is true that companies or even whole industries that are no longer viable should be allowed to fail. The diminishing resources mankind has available simply don’t allow for the propping up of inefficient technologies just to keep people at work. Such policies are not only distorting the market, they are impeding innovation and progress and are in the end self-defeating. Unfortunately, currently there is no choice – people need to be kept at work, proving them with a living wage so that this consumer driven economy is kept working.

Third, the systemic view

You might want to look at the economy as a social ‘eco’system. The rules of which can be set by humans as they choose, subject, of course, to certain real physical conditions and constraints. The important thing is to be aware that there is no natural law that determines that the economy must function the way it currently does. We do have a choice.

It is simply not true that everything must be or should be organized around the financial sector. They do not produce anything except debt and misery – but that in abundance.
Every solution therefore has to start with the people.
That’s what Japan did – maybe without being aware of it, but nevertheless did. In the U.S. this would have to be achieved with government intervention. Instead of doling out money to the banks, dole it out to people.
This could be done in the form of a basic guaranteed income. With that people will a) consume some, b) save some and c)pay down debt with some of it. This will help wipe out the debt, or at least reduce it significantly and allow the banks to retire these moronic derivatives.
In fact, this is now required by law. If one accepts the concept of corporate personhood, then there is no legal basis for treating a corporate person better than a normal person. Equality before the law requires that both be bailed out.
Besides, the U.S. consists of its people and the States. Neither in the Constitution nor in any act can I find a law or rule that makes corporations, banks or the financial sector a required part of the social contract. They are simply disposable. However, strangely enough, the government has opted to pamper these entities and even more strangely, refuses to support individual citizens or the States. History will demand an answer for that choice.

Fourth, the morals of the story

It is an error, in my view, to expect every link in a production, service or supply chain to turn a profit – this is not possible, simply for the reason that the money supply is limited, i.e. finite. If someone makes a profit, someone else – or several someone else’s – will need to make a loss.
The market economy is in essence nothing but an organized – and more or less civilized – way to take away each other’s money. The one who does this most efficiently, or is the most ruthless in doing so, wins, i.e gets richer or is ‘profitable’.
By bailing out the banks and the bankers, you are teaching people individually, and society as a whole, a lesson. You reward failure, recklessness, lying, cheating, cooking books, fraud, theft, greed, sociopathic and psychopatic behavior, bullying and abusing other people.
Such behavior must be punished not rewarded. Otherwise the next generation of abusers will be even worse. Let me illustrate what we can be expecting from this, with this article.

Do you really want to live in a world where those are the new ‘values’ and everyone is asked to behave like a psychopath to be successful? You cannot ignore the effect on society this is going to have. Especially keep in mind that those people do not feel bound by and do not feel obliged to respect human rights, in fact, by bailing them out, you negate the values as set down in the Constitution.


What we have is a consumer driven economy. To work it needs consumers. Obviously, people cannot consume (or save) if they don’t have a regular income which covers a bit more than the basic necessities people need to live. Income for people can be achieved as Japan did.
However, this will lead to inefficient allocations of resources to companies that are simply not viable anymore as times have change and which should be allowed to fail. However, letting the company fail, doesn’t mean that the people who worked for it need to fail as well.

Thus, from a social point of view as well as from an economic point of view (efficient allocation of resources) those two problems need to be disconnected from each other.

This can be achieved by providing people with a monthly guaranteed income which they will get regardless of whether they have a job or not. This income must allow them to make a living by providing for the necessities such as appropriate housing, clothing, food & beverages, basic communication, basic health care and some limited leisure. However, such an icome must not be as high as to completly remove any incentive to do work.

Paying people such an income would have additonal social, environmental and economic advantages.
For example, many people will not need to work full time. The need for everyone to commute at the same time is thus removed, which will relieve infrastructures as the loads are spread out.
Many people will choose to work according to their own needs, which will reduce the stress on the workforce considerably. Many ailings and sicknesses will just go away, which will relieve the health-care infrastructure.
People who do not work full time can spend more time with their families, do community work or volunteer to do some things if they chose to do so. This would relieve the stress on families and their budgets, and may also relieve community budget to some degree.

Catching a Black Hole

At the science blog of the NewScientist, I came across an article that, even though probably meant as a humouristic piece,  I found nevertheless interesting enough to think about a bit more. In it Joe Marchant, the article’s author, began with this:

How do you get rid of a black hole that’s threatening to gobble the Earth? It could be as simple as popping it in a box and shooting it into space.

A handful of doomsayers have argued that the Large Hadron Collider particle accelerator at CERN near Geneva, currently gearing up to start smashing protons together this autumn, could produce Earth-destroying black holes.

Now, this is a strange concept. Strange enough for me to dig a bit deeper.

First, the author writes loosely about black holes. The one’s in question here however are not the massive black holes that have been proved to exist, but hypothetical micro black holes (mbH). If they indeed exist, they would be very tiny.

The smallest mBH, i.e. the one that requires the least energy to create would have the dimension of the Planck length lp (dimension of 10-35 m) and the Planck mass mp(dimension of 10-8 kg or 1016 TeV/c2). To create the mBH, the Planck mass would have to be crammed into a region of the size of the Planck length. As a comparison, the LHC will be colliding protons at an energy of 7 TeV, or around 7/10,000,000,000,000,000 of what is needed to create such an mbh.
If the usual theories hold, it is simply not going to happen. However, there are theories, most notably some string theories, that would lower the energy required to a the GeV range and then it could happen. So let’s assume that it does happen. What now?

Chances are that it would not even be noticed, because it would evaporate, i.e. give off all its energy, due to Hawking radiation in a very short amount of time in the range of 10-97 s. So why are we so certain, that such mbhs are not being created and are not decaying all around us all the time? We may just not be able to see them, because they disappear quickly after having been created. In fact, that behavior would be consistent with the quantum foam or with the zero-point field behavior. Such mbhs with the above properties are also called Planck particles.

Great, but what if, due to some little understood interaction with the zero-point field the mbh does not evaporate or could be prevented from evaporation? Which are the properties such a thing would have, could it be controlled and could it be used to generate energy out of nowhere?

If there is such a thing as a stable charged micro black hole then it surely is possible to cage it into an electromagnetic field, as the author proposes. This is because the gravitational pull of the mBH would be small as compared to the electromagnetic forces. But there may also be a problem here. Since the electromagnetic field is just another form of energy or matter, wouldn’t that feed the mBH and lead to its growth?
The keeping-it-from-growing part might be the tricky part in such a scenario. It turns out that even in this scenario, the growth rate, or accretion rate as scientists call it, would be extremly slow, i.e. in the billions of years.

Thankfully, scientist have come up with their own assesments of the likelihood and the impact of such mBH creation scenarios at low TeV scales. One treatise is here.