|
Emerging
market currencies usually have trouble when the dollar rises. I am surprised
to see this popping up so quickly after the rather short dollar rise since
July, but it has been quite dramatic. The Eastern European currencies have
been particularly hard hit.
I'm
not going to go on and on about it. The fix is simple, especially for those
countries with substantial foreign reserves. Here's what you do:
Assuming
that you want to support the value of your currency:
1)
Sell dollars (from reserves) and buy your currency.
2) This must be unsterilized
intervention. When you buy, for example, a billion rubles or
hryvna, they must disappear from existence. This means a contraction of base
money equivalent to the size of the intervention.
3)
There should be no interest rate target or other monetary open-market
mechanism. Often, these systems will cancel out the effects of the
intervention. Thus, when base money is reduced by step 1), you must not allow
base money to rise via some other open-market operation. The market for
short-term debt is free and unmanipulated.
Optional:
You
can also reduce the supply of base money via sales of domestic debt, or
really any other asset. Once again, this
must be unsterilized intervention. Base money must contract
and stay contracted, at least until the crisis passes.
That's
it. It's pretty easy when you get the hang of it.
The
Russian Central Bank said that as of November 10, the monetary base was 4,416
billion rubles. At 27 rubles/dollar, that's about $163 billion (quite a large
number by the way). So, with $163 billion, you could buy every ruble in the
world. If the central bank does not have $163 billion of foreign reserves, it
can use domestic reserves. The unsterilized sale of 1,000 billion of Russian
government ruble bonds, for example, would reduce the monetary base to 3,416
billion rubles, worth about $126 billion. In practice, of course, you
wouldn't have to reduce the monetary base by that much. Maybe 20% would be
more than enough. So, we're talking about $32.6 billion in foreign reserves
or the equivalent (883 billion rubles) in domestic bonds. This is really no
big deal.
The
Russian central bank says that as of September 1, 2008 (before the recent
crisis, we'll say), the monetary base was 4,508.7 billion rubles. So, how
much has the monetary base contracted? Not a whole heck of a lot.
On
August 29, 2008, foreign reserves were $582 billion. On November 7, 2008,
foreign reserves were $484.6 billion, a decline of $98 billion.
Now,
if you followed the process above, the ruble monetary base would have
contracted by about $98/$163 billon or 60%. That probably would have solved
the crisis at least three times over. Instead, you're $98 billion poorer and
still pulling your hair out.
Here's
a hint, Russians: If you act like a dumbass, you get dumbass results. I'm a
big Russia fan. Don't blow it.
Somebody
call the Russian embassy and tell them to Solve the Damn Problem:
January 27, 2008: Crisis Management
Here's
the website:
http://www.russianembassy.org/
* * *
These
charts speak for themselves:
 
I
think we'll probably go to about 1:3 Dow/gold ratio, which would take us all
the way back to levels of 1900. However, stocks would be quite cheap then,
while in 1900 they were relatively expensive.
Here
are some nice charts on U.S. and U.K. houses:
In
2004-2005 I bought 2000 oz. of silver, with the idea that I could trade it
for a house in the future. At the time, the average U.S. house cost about
40,000 oz. of silver, so that would be a 20:1 improvement. We can see that
houses got to about 2000oz. of silver in both the U.S. and U.K. around 1980.
* * *
This
is a good one: spreads on BAA corporate debt. Kinda wide. As we saw a couple
weeks ago, BAA corporates hit a maximum yield of 11.5% during 1932, while the
government bond yield was about 3.5%. So, an 800 bps spread (on a monthly
basis). We're around 550 bps now. This suggests to me that either: a) the
bond market is nuts, or b) the stock market is nuts.
* * *
A nice
quote from 1939, in a letter to the WSJ:
Andrew
Wilson is right: The New Deal did not end the Great Depression ("Five
Myths About the Great Depression," op-ed, Nov. 4). No less an authority
than FDR's Treasury secretary and close friend, Henry Morgenthau, conceded
this fact to Congressional Democrats in May 1939: "We have tried
spending money. We are spending more than we have ever spent before and it
does not work. And I have just one interest, and if I am wrong . . . somebody
else can have my job. I want to see this country prosperous. I want to see
people get a job. I want to see people get enough to eat. We have never made
good on our promises . . . I say after eight years of this Administration we
have just as much unemployment as when we started . . . And an enormous debt
to boot!" Indeed, FDR's market-suffocating policies are almost surely
what put the "Great" in Great Depression.
Laura S. Clancy
Arlington, Va.
See,
just like I told ya. I am actually appreciative of the New Deal. For one
thing, it introduced the 5x8 40 hour workweek, instead of the 6x10 60 hour
week that was common at the time. I think everyone can give some thanks for
that. Plus, it introduced a lot of other things that people had been
agitating about for decades. In a broader scope, steps such as the New Deal
are what made the downtrodden/exploited factory worker of the 1890s into the
fat and happy worker of 1960. Plus, there were some important welfare
aspects. However, it did almost nothing to resolve the economic problems of
the time. A soup kitchen can be very welcome when there is high unemployment.
But, it doesn't solve unemployment.
* * *
I am
Buddhist by upbringing, but such definitions are becoming less important
these days. Archangel Metatron has provided some information on the Soul
Journey of Jeshua. I have been asked to make this available to others at this
time. There is a small charge for the recording.
http://www.metatronminutes.com/soul_journey_of_jeshua.html
Archangel
Metatron also provides a free monthly newsletter at this site.
Actually,
the massive eighth density (or higher) energy being known as Sananda, a small
sliver of whom incarnated as Jeshua (Jesus), also incarnated a small part of
itself as the Buddha, Mohammed, Krishna and Brahma. So, there is no need to
make divisions. It's all the same guy!
Archangel
Metatron is channeled by Carolyn Evers.
Wikipedia on
Archangel Metatron
Wikipedia
on the Seven Archangels
* * *
A
reader asks why I like Obama. For one thing, I didn't particularly like the alternative,
a senile, bad-tempered war nut and his Nazi cheerleader. (OK, I thought Palin
was fun, just for the sheer whacko factor.) Plus, the Republican Party has
been overrun by its fascist/corporatist/imperialist wing, which even now is
looting the Treasury in its last days in office. I am more of the peaceful,
libertarian, small government persuasion. Will Obama's economic policies make
the recession worse? Probably. But, I think Obama and the sorts of people he
is likely to gather around him are also capable of learning. I think they
will make small mistakes rather than large ones, and maybe learn from those
mistakes. The Democrats will probably rescind a lot of the police-state
apparatus installed by the Bushies, and eventually withdraw from the pointless
foreign wars. Foreign policy in general is likely to be a lot more friendly.
There will be some welfare disbursements, which is fine and a lot more useful
than bombing a desert somewhere. Also, the Democrats will probably make the
first steps toward renovating the health care system in the U.S., which is
totally non-functional. I honestly think the Mexican system works better,
and, at 5.6% of GDP, is about 1/3rd the cost even in relative terms. (Would
you believe that in absolute dollar terms, health care spending in the U.S.
is about 50% of all the health care spending in the world? What
a scam!) Maybe we'll even get some trains built. As far as the economy goes,
it will probably be a disaster by the end of March, while Obama is still
figuring out how to use the White House copy machine. I think he'll be nice
to have along for the subsequent period.
* * *
Bailing
out GM: General Motors really needs to go through bankruptcy.
Remember, bankruptcy doesn't mean that everyone is fired and the auto
factories are turned into U-Stor-It facilities. It means that the company's
obligations become renegotiable. Pretty much all the U.S. airlines went
through bankruptcy in the early 1990s, but they kept flying. Some did it
again around 2003. GM's big obligations are to its employees. I've thought
that the employees are willing to deal here, but not until the equity and the debt take a haircut.
Which is as it should be. Why should a worker give up promised benefits just
so shareholders can get a dividend? First things first, buddy! I would guess
that the employees would be content with the same sort of deal that their
couterparts at Toyota or Volkswagen are getting at their Kentucky factories.
But, that discussion doesn't start until GM is in bankruptcy.
However,
for GM to enter this sort of bankruptcy-restructuring, it needs what is known
as debtor-in-possession financing. DIP loans keep the company going while the
other stuff is being worked out. This normally wouldn't be a problem, but
these days any sort of credit is a problem. If a company can't get DIP
financing, then liquidation becomes more likely by default. The U.S. government loan to GM
should be in the form of DIP financing. Then, GM could properly
restructure, which would probably mean cutting production roughly in half.
Certainly the brands and product lines need to be slimmed down to perhaps
sixteen vehicles, from sixty-something now. (Toyota has seventeen vehicles
under the Toyota brand, and a couple more in Lexus and Scion. Even that is
probably too many. Do we really need six Toyota SUVs?) You could also
organize the merger with Chrysler. The whole thing would be good for GM, in
the longer run. If the U.S. government loans the money to GM without BK, then
the money will all get eaten up funding overproduction and excessive employee
benefits, the two problems GM can't really solve without going through the
bankruptcy process. That would just leave GM with the same problems and still
more debt.
* * *
A
reader also asked about the moribund price of gold. This is a reflection of
the dollar's rise since July. Yes, I think the gold market is manipulated. It
has been "manipulated," to varying degrees, since the 1950s -- more
so now than before, it must be said. However, oddly enough, one effect of
this manipulation is the rise in the dollar. When they sell gold and buy
dollars, how do you know that they are
pushing gold down, and not pushing
the dollar up? Indeed, it appears that the effect is to push the
dollar up, at least to some extent. The dollar is also getting a lift from
the position-liquidation trade.Comex open interest in gold is collapsing.
It is
getting harder to say what
the price of gold is. It appears that gold is available at all
sorts of prices, with various limitations on quantity and delivery period. I
could sell 25 Krugerrands for $200 each, but that doesn't make the price of
gold $200. Is that any different than the various coin dealers etc. selling
for $850 or whatever, with limited availability and a two-month wait time?
I've heard of recent deals being done in the multi-million dollar range for
real bullion at prices north of $1,050/oz. Kilobars in Europe seem to be
getting mid-$900s consistently. The U.S. Mint is selling Gold Eagles at
$1,119 -- but they're out of stock. Can you really get a 100 oz. bar on the
Crimex for $72,000? Maybe you can get a few, who knows. (I got some in
October, but I think the likelihood of getting delivery for December is
declining.) But, obviously, you can't get enough to close the arbitrage gap
that seems to just get bigger by the day. I heard that at a gold coin show in
Munich last week, there were lines sixty
people deep trying to buy gold coins. How hard is it to get some
400oz. bars and bang them into coins? Not very hard. But, it's not happening.
It appears that some people are getting 400oz. investment bars in London, but
I'm also hearing that Middle Easterners and Indians are trying to get size
and can't. Eventually, all of this will resolve itself, maybe by the end of
next March. I think it will resolve itself at prices over $1,000/oz.
If you
are interested in buying gold today, I would look at Bullionvault or
Goldmoney. These are the only outlets I know of today where you can get real
bullion (or pretty close to it) for London posted prices, in retail size. You
might try to get delivery on the Comex, but be prepared for failure there.
For a
while, you could get 1000oz. silver bars for good prices. A nice trade was to
sell 1 oz. gold or silver coins (which get a nice premium) and buy 1000oz.
silver bars. One guy traded 460 coins for 46 bars with a dealer, a 100:1
ratio. However, I'm hearing that availability of 1000oz. bars has dried up.
I'd try the Comex.
If you
are going the Comex route, I'd suggest taking delivery in the off-months,
such as the November gold contract. You can still get delivery in November
gold up until about the end of next week.
* * *
OK,
since I mentioned it, here's another hintaroonie for incoming Democrats: U.S.
healthcare spending as a percent of GDP is about 16%, and is expected to rise
to 20% by 2017. The government (all levels) now pays about 45% of all
healthcare spending in the U.S., or about 7.2% of GDP. This 7.2% of GDP is
more than the cost of the comprehensive national healthcare systems of
Britain (6.9%) or Canada (6.9%)! It's more than Australia (6.4%) and almost
as much as Germany (8.9%). In other words, national health care is already being paid for in the
U.S. Just nobody is getting any benefits. Let's put it in
corporate terms -- OK, corporate masters (especially YOU Rick Wagoner), how
would you like to have
no healthcare costs at all? And no higher taxes either. Sound
nice? Talk to your Congressman.
* * *
Austerity
in Vallejo, CA: This WSJ article describes some of the
problems municipalities got themselves into.
WSJ: Cops making an average of $121,000 per year plus benefits,
for a total of $190,000+, and retiring on 90% salaries.
Remember,
this is an average.
Cops were getting paid retirement benefits based on the average of their last
three years of work. Of course, officers toward the ends of their careers
will tend to make above the average. Plus, they would pump up the number with
overtime for their last three years. I was hearing nearly $200,000 on salary
plus overtime alone. 90% of that is $180,000 per year. Still think paying
taxes is a moral imperative? Californians -- do you still want to pay that
extra 1.5% sales tax surcharge? Your policeman thanks you -- suckers.
* * *
Consumer
credit crunch? There seems to be a real credit crunch
on the commerical side. The trade finance issue doesn't seem to be going
away, for example. However, on the consumer level I'd say we still have some
tightening to do just to get back to normal. The new news in the mortgage
sphere is that you need a 20% downpayment for FICO less than 720. (You still
might get less than 20% down via FHA or some government-sponsored channel,
and for FICO above 720.) Well, in the olden days (1950s or 1960s), you needed
20% down plus
the equivalent of FICO above 720 to get any mortgage at all. That was just
the normal way of doing business. I still get credit card offers in the mail
on a daily basis.
* * *
A nice
op-ed by Judy Shelton for the WSJ regarding gold.
http://online.wsj.com/article/SB122663373660027575.html?mod=article-outset-box
And
here's one in the Washington Times:
http://washingtontimes.com/news/2008/nov/09/golden-opportunity/
For a
while, I've stayed out of these sorts of mainstream publications. They like
things to be very mamby-pamby, while I have a habit of plain speaking. I like
outlets like the Asia
Times or Pravda,
where a certain measure of eccentricity is accepted. (These get read by
important people too.) It's good that folks like Judy Shelton are softening
people up a bit.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
|
