US Commerce Secretary: Stimulus 2.0 Under Consideration

Which is more naive? To believe that the economy is recovering or that another stimulus may actually work? I guess that's why they call it survival of the fittest - those who cannot evolve and learn from mistakes will be eliminated by nature (the market).

The myth that intervention and quantitative easing positively impact a macro economy (not micro - individuals/corporations may do well) is dead. So too will the currency be if there is another stimulus package - although it may be irreversibly damaged already. Skip to the last 50 seconds for his details on the administration's consideration of a second stimulus. Bloomberg followed this report up with a "correction" from Locke's staff that he misspoke...riigggghhhhhhttttt. Sounds pretty clear to me but you listen for yourself.

Gold Up, Long Way to go

Gold, up today to an all time nominal high of $1,081 + (and rising) is still less than half of it's inflation adjusted high from 1980 of $2,000 +.

Because of the confidence in the dollar as the world reserve currency, it's role in pricing oil contracts and general acceptance everywhere like it was Visa ("everywhere you want to be")- currency integrity was taken for granted.

As that confidence continues to erode in harmony with the greenback's parabolic increase in supply, the price can no longer be effectively manipulated for more than short periods of time by paper exchanges which create derivative contracts on fractional reserves of physical, hard assets.

Gold can come down in a nominal value, but expect it's purchasing power to increase (takes fewer ounces of gold to purchase the DJIA).

India purchasing 200 tons from the IMF is a screaming siren alerting the world that the trend of purchasing metals is here to stay.

Those who do not acquire physical gold and silver and hold it in the palm of their hand in the very near future may lose both the opportunity to do so and a substantial portion of their wealth on a time line of now to two years.

“Gold is the ultimate currency. In fact, only gold came to our rescue during (the) 1991 crisis, so it makes sense that RBI should try to increase its gold holdings.”

RBI To Buy 200 Tonnes of IMF Gold

Mumbai: The Reserve Bank of India, or RBI, is buying 200 tonnes of gold from the International Monetary Fund (IMF), nearly half of what the fund plans to sell.

In 1991, when India faced its worst ever balance of payment crisis, the country had to pledge 67 tonnes of gold to Union Bank of Switzerland and Bank of England to raise $605 million (Rs2,843.5 crore today) to shore up its dwindling foreign exchange reserves, which were then barely enough to buy two weeks of imports. India’s foreign exchange reserves were at $1.2 billion in January 1991 and by June, they were depleted by half. Currently, the Indian central bank’s foreign exchange reserves stand at $285.5 billion.

RBI’s decision to shore up its gold reserves needs to be seen in the context of other central banks across the globe increasing their gold reserves. Among them are the central banks of China, Russia and a few countries in the European Union.

In the last one year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%.

Compared with this, India’s central bank did not add anything to its gold reserves in the last one year, according to Bloomberg data.

In fact, the share of gold in India’s total reserves has dwindled over the decade.

In March 1994, the share of gold in the total reserves of the country was 20.86%; by the end of June 2009, gold constituted only 3.7% of the total reserves.

An IMF spokesperson in India declined to comment on this development.

RBI’s foreign currency assets consist mainly of sovereign bonds, mainly US treasurys. So, buying more gold will help the Indian central bank diversify its assets.

“Gold as a proportion of our reserves is relatively small,” said R.H. Patil, chairman of National Securities Depository Ltd and Clearing Corp. of India Ltd.

“Gold is the ultimate currency. In fact, only gold came to our rescue during (the) 1991 crisis, so it makes sense that RBI should try to increase its gold holdings,” Patil said.

RBI’s foreign exchange reserves consist of foreign currency assets, gold, special drawing rights (SDR)—an international reserve currency floated by IMF—and RBI funds kept with IMF.

Out of RBI’s $285.5 billion foreign exchange reserves, foreign currency assets account for the most—$268.3 billion—followed by gold ($10.3 billion), SDR ($5,267 million) and reserve position in the IMF ($1,589 million).

According to RBI’s latest annual report, the foreign currency assets consisting of foreign securities declined by Rs81,010.25 crore from Rs12.98 trillion on 30 June 2008 to Rs12.17 trillion on 30 June 2009 mainly due to net sales of dollars in the domestic foreign exchange market.

At the current market value of $1,054 an ounce, or per 28.5g, RBI would need to spend about $7.4 billion to buy 200 tonnes of gold. With this, its gold reserve will rise to $17.716 billion, or roughly 6.20% of the total reserves.

IMF in September had announced that it wanted to sell 403 tonnes of its gold reserves, or one-eighth of its total holdings, to boost its finances on a long-term basis and to generate money to raise lending to needy nations. Under the concessional lending facility, IMF will lend at zero interest through end-2011 for all low-income members to help them tackle the impact of the financial crisis that rocked the world in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc.

A committee set up by a group of central banks overseeing the gold sales by the IMF has allowed the fund to sell 400 tonnes of its gold annually and 2,000 tonnes in total during the five years starting 27 September.

According to a report by the Associated Press dated 20 September, India, along with China and Russia, had evinced interest in buying IMF-held gold.

At a total holding of 103.4 million ounces, or 3,217 tonnes, IMF is the third largest official holder of gold after the US and Germany.

IMF’s total holding at historical price is valued at about $9.2 billion on its balance sheet. At market prices, as of 28 August, the fund’s gold holdings were worth $98.8 billion.

Traditionally, India has been the largest importer of gold, with imports ranging between 400 and 800 tonnes a year between 2000 and 2008. In the first half of 2009, gold imports have fallen drastically to 51 tonnes, according to the country’s apex bullion body the Bombay Bullion Association.

According to a fact sheet on gold on the IMF website, the yellow metal played a central role in the international monetary system until the collapse of the Bretton Woods system of fixed exchange rates in 1973. Since then, the role of gold has been gradually reduced. However, it is still an important asset in the reserve holdings of a number of countries, and IMF remains one of the largest official holders of gold in the world.

Commercial Real Estate Dominos Falling

Large commercial real estate groups have been embattled since August 2007 and in survival mode for the past 12 months. The underwater loans have been rolled forward over and over again with the hope of asset price increases across the board. This simply will not happen fast enough and will begin taking down companies and causing massive deflation in the industry. Risky developments, such as the the largest apartment complex in Manhattan, will have to be bled out of the system. The numbers being played with dwarf those of the housing market.

In addition to the $3 billion senior loan, there is $1.4 billion of mezzanine debt secured by the borrower's equity interest. Wachovia reported a debt service coverage (DSC) of 0.71x and occupancy of 96% for the three-month period ended March 31, 2009.

Bad News Indeed for Tishman, BlackRock and other NYC Apartment Landlords

By Mark Heschmeyer

October 28, 2009

The grand experiment of converting New York City's rent-controlled apartment units to luxury market rentals has apparently come to a grand costly end. Last week, the New York Court of Appeals essentially ruled that Tishman Speyer Properties, LP and BlackRock Realty, the owners of Stuyvesant Town and Peter Cooper Village have wrongly been inflating rents at the 11,227-unit apartment complex totaling 10.2 million square feet on the east side of Manhattan.

The New York Court of Appeals affirmed an order of the New York Appellate Division and concluded that the current and former owners of the property were not entitled to take advantage of the luxury decontrol provisions of the New York Rent Stabilization Law while simultaneously receiving tax incentive benefits from the city.

Standard & Poor's Ratings Services said its believe the ruling has the potential to cause significant cash flow reductions at the property, resulting in an increased risk of default on $3 billion in loans held by the owners and eventual transfer of the loan special servicing.

The Stuyvesant Town and Peter Cooper Village loan is the largest exposure in the three commercial mortgage-backed securities: Wachovia Bank Commercial Mortgage Trust series 2007-C30 (WBCMT 2007-C30; $1.5 billion, 19%) and ML-CFC Commercial Mortgage Trust 2007-5 (ML-CFC 2007-5; $800.0 million, 18%) transactions. It is also the fifth-largest exposure in the Wachovia Bank Commercial Mortgage Trust Series 2007-C31 (WBCMT 2007-C31; $247.7 million, 4%) transaction. In addition to the $3 billion senior loan, there is $1.4 billion of mezzanine debt secured by the borrower's equity interest. Wachovia reported a debt service coverage (DSC) of 0.71x and occupancy of 96% for the three-month period ended March 31, 2009. The loan was current in payments as of the October 2009 remittance report. The current balance of the debt service reserve was $24.4 million as of the October 2009 remittance report, and S&P said it believed it is likely to be depleted by the end of the year.

Looking beyond Stuyvesant Town and Peter Cooper Village, there are other loans that might also be affected by the ruling because they followed very similar conversion plans: The others are: The Belnord, a luxury apartment building on the Upper West Side, securing a $375 million loan included in JP Morgan 2007-LDP9; and The Parkoff Eastside Portfolio, a $170 million loan in Morgan Stanley 2007-HQ12, securing six Upper East Side apartment buildings.

CIT Bankruptcy Looks to be Unavoidable

Can you say, CHAIN REACTION! This is a game changer: "CIT finances about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the clothing chain in Bellevue, Washington, that’s operating under bankruptcy protection. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier."

CIT Bonds Signal Bankruptcy Inevitable as Debt Exchange Expires

By Pierre Paulden and Caroline Salas

Oct. 30 (Bloomberg) -- CIT Group Inc. bond and credit- default swap prices show that investors are betting the 101- year-old commercial lender will file for bankruptcy after the deadline for a debt exchange expired overnight.

Since CIT Chief Executive Officer Jeffrey Peek started a $30 billion debt swap Oct. 1, the company’s notes due Nov. 3 dropped 12 cents to 68 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders of the $500 million in notes were offered 90 cents on the dollar in new debt and equity in an out- of-court exchange that expired at 11:59 p.m. yesterday in New York. They would get 70 cents on the dollar in bonds and new stock in a pre-packaged bankruptcy.

“We believe they will file for bankruptcy within the week, provided nothing unexpected occurs,” Adam Steer, an analyst with CreditSights Inc. in New York, said in a telephone interview before the deadline passed.

CIT, which lost $5 billion in the past nine quarters and failed to get a second round of taxpayer funding in July, sought to avert collapse by asking bondholders to agree to the swap or vote for the pre-packaged bankruptcy. It faces opposition from billionaire investor Carl Icahn, who says he’s the largest bondholder, with $2 billion in debt. If CIT is forced into a “free-fall” bankruptcy, unsecured claims may fetch as little as 6 cents on the dollar, said Peek, who plans to leave the company at yearend.

Keith Rodwell, a spokesman for CIT in Sydney, declined to comment on the outcome of the debt-exchange offer. Curt Ritter, a company spokesman in New York, declined to comment yesterday.

READ ENTIRE ARTICLE HERE

$1,000,000,000,000,000 In Derivitives (Quadrillion If You Don't Want to Count)

The fed hasn't just painted itself into a corner, it's taken a bath in cement and is now frozen in place. Raise interest rates - keep them the same...there is no cheating the invisible hand.

Trillion Dollar Ticking Derivatives Time Bomb to Explode Under Bankrupt Banks

* The current notional value of derivatives on US commercial banks’ balance sheets is $203 trillion.
* 97% of these ($196 trillion) sit on FIVE banks’ balance sheets (more on this shortly)
* If even 1% of this $203 trillion is “at risk” … you’re talking about $2 TRILLION in at risk bets made in the derivatives market
* If 10% of that 1% end badly, you’re talking about $200 billion in losses

Total equity at the five banks is $737 billion. So if you assume that only 1% of derivatives are “at risk” (odds are it’s more) and 10% of that at risk money is lost, you’ve wiped out nearly 1/3 of the banks’ equity.

If 2% of derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out $400 billion or nearly HALF of the banks’ equity.

If 4% of derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out ALL OF THEIR EQUITY and they go to ZERO.

Remember, I’m only accounting for derivatives here… I’m not even including ON BALANCE sheet risks, mortgage backed securities, and all the other junk floating around.

Suffice to say derivatives are HUGE time bomb waiting to go off.

And what could trigger them?

Interest rates.

Of the $200+ trillion in derivatives on US banks’ balance sheets, 85% are based on interest rates.

For this reason, I cannot take ANY of the Fed’s mumblings about raising interest rates seriously AT ALL. Remember %$firstname$%, most if not ALL of the bailout money has gone to US banks in order to help them raise capital. So why would the Fed make a move that could potentially destroy these firms’ equity (essentially undoing all of its previous efforts)?

However, at this point, the Fed may not have a choice….

As I showed in yesterday’s issue, the bond market is DEMANDING higher yields from US debt. Put another way, US debt holders are unwilling to continue funding our profligate spending without getting paid more to do it… I can’t say I blame them, since the prospect of collecting a 3% yield to own a currency that’s lost 15% in the last six months isn’t too appealing.

But if yields rise this could blow up the derivatives market (remember 85% of derivatives are related to interest rates). So the question remains:

I want to be clear here. The above chart MAY not be as bad as it looks. Remember, NOT ALL notional value of derivatives are at risk. For instance, only 1% of the above numbers might actually be REAL money at risk…

The issue however, is that NO ONE knows how much money is at risk here. No one. But considering:

* The derivatives market is TOTALLY unregulated….
* The nightmare that has occurred due to instruments that were allegedly regulated (mortgage backed securities, etc.)…
* EVERY attempt to increase transparency or accounting standards at the banks has been met with threats of financial Armageddon…

It’s very difficult NOT to be freaked out by the above numbers. Personally, I sure hope that less than 0.0001% of that stuff is “at risk.” I hope bankers were more careful with interest-rate based derivatives than they were with mortgage-backed securities.

I hope… But I doubt it.

Two Face: Inflation Vs. Deflation

In the world of Batman, the public good is constantly under attack from Harvey Dent, aka Two Face: the insane arch criminal that makes decisions based on the flip of a coin. Unfortunately for those dependent upon the flip, each side of the coin is the same because two face likes to "make his own luck."

Today the world economy is under attack from two different scenarios that look different at face value but may lead to the same result for nations that are heavily indebted: deflation and inflation.

Over the past two years the debate has raged between inflationary and deflationary camps sparring over how the world economy would suffer. This talk has recently come to a crescendo as much ado is being made about the upcoming G20 meeting in early November where many countries are expected to discuss the role of quantitative easing in their internal economic policies.

Some feel that these nations will be forced to curtail the expansion of the money supply by abandoning QE and raising interest rates - end result massive deflation.

Some feel that these nations will be forced to continue QE as the only means to fund themselves - end result massive inflation.

The common ground between both is that the fundamentals of the world economy are far from healthy.

Is it not becoming more clear that both scenarios may lead to the same result for those countries which are heavily indebted? That perhaps we have already made our own luck?

If the intervention is stopped, the financial system faces potential systemic collapse - much of which is guaranteed by these nations' governments. With a collapsing tax base, the interest payments on the debts become untenable (both public and private) and the default scenario emerges - forcing a devaluation of the currency and isolation of country from trade/financing with others. (This is a much different scenario than deflation in the Great Depression - the level of personal and governmental debts for countries was minimal if not nonexistent - same story in Japan in the 1990s).
END RESULT - CURRENCY DEVALUATION

If the intervention is continued, the integrity of the currency is undermined by both supply and confidence as holders of currency try to unload it, rushing to the exits like somebody yelled fire in a movie theater.
END RESULT - CURRENCY DEVALUATION

One thing we can all agree on is that two face has a gun to the world economy's head.

Let's hope there is an economic Batman out there somewhere to save us.

A Little Perspective