John Hussman: Not Concerned About Inflation

John Hussman:

“The bottom line is that we can expect real wages to stagnate for several years, as a predictable reflection of slack capacity in the labor market. While credit concerns will be helpful in augmenting the demand for U.S. government liabilities as a default-(food poisoning)-free alternative to other assets, there is a continued prospect for significant price inflation beginning in the second half of this decade. With the ECB surrendering monetary discipline for the sake of short-term expedience, that prospect has become even more hostile. Continue reading

Gold Down On Biggest Volume In History..

Via Economic Policy Journal:

“The exchange-traded fund, SPDR Gold Shares, that holds gold bullion was down 5% Friday afternoon on record trading volume as the gold price fell. More than 70 million shares have traded hands with an hour of trading to go. It’s the highest volume in its history. The gold ETF was launched in late 2004 and has assets of more than $40 billion”

Madoff -Related Accounting Firm Does Dubai´s Accounts..

From the Independent:

“Dubai World will start a formal process next week that will see it invite leading banks, including HSBC, Royal Bank of Scotland (RBS), Lloyd’s Banking Group and Standard Chartered, to create a steering committee to represent the many lenders. KPMG has been lined up by the lead banks to represent them in negotiations, with a formal appointment expected once the compilation of the five-to-six bank steering committee is finalised.

My Comment:

Now, KPMG is the big four accounting firm that gave Madoff´s representations to Tremont Group Holdings (a US fund that Madoff purportedly hoodwinked) a thumbs up.  The Tomchin Family Charitable Trust, one of numbers of investors who were allegedly scammed by Madoff,  has launched a lawsuit against KPMG and Tremont for negligence in monitoring one of Tremont´s funds that invested with Madoff.

The lawsuit included a list of other Madoff clients that included Victoria de Rothschild of the banking family of the Rothschilds and a Tory party contributor:

“Also on the list of Mr Madoff’s British clients is Lady Victoria de Rothschild, who is related to Nathaniel Rothschild, the co- chairman of Atticus Capital, the hedge fund.

Lady Victoria is a well-known figure on the society circuit and became known more recently as a lender to the Tory party, having set up a special company that gave the party a £1,014,000 loan that is due to be repaid in 2010.”

(Times Online, February 5, 2009)

KPMG has also been hit with a $1b lawsuit for “reckless and negligent” auditing of failed subprime broker, New Century Financial, reportedly the first major case against an auditor arising from the financial crisis.

My Comment

So we have a Madoff-tainted accounting firm KPMG, with multiple legal problems, representing the banks that loaned to Dubai on one side, and  (as I noted before) French banking legend Rothschild on the other side, heading up the restructuring efforts for Dubai….

Wiki has a list of KPMG´s legal infractions that includes this:

“In February 2007 KPMG Germany was investigated for ignoring questionable payments in the Siemens bribery case.[29] (Siemens agreed to pay a record $1.34 billion in fines to settle the case in December, 2008.) In November 2008 the Siemens Supervisory Board recommended changing auditors from KPMG to Ernst & Young.[30]

In 2006, Fannie Mae sued KPMG for malpractice for approving years of erroneous financial statements.[31]

In March 2008 KPMG was accused of enabling “improper and imprudent practices” at New Century Financial, a failed mortgage company[32] and KPMG agreed to pay $80 million to settle suits from Xerox shareholders over manipulated earnings reports.”

Some confidence-builder… a bank that´s been closely connected to the Madoff scam and to the Fannie and Freddie case (and hence, to Goldman Sachs)…

And, how about this:

KPMG and Deloitte were brought in to investigate India´s ¨Madoff¨” – the fraud- riddled IT outsourcing giant Satyam (now Mahindra Satyam, its post-merger avatar – over the objections of the Institute of Chartered Accountants, India´s regulator, which said KPMG was not registered with it and would thus not be subject to its code of conduct or disciplinary proceedings.

India Fears Effects of Dubai Meltdown

After earlier assurances that the Dubai meltdown wouldn´t impact the Indian market much, top officials now admit in published reports that the Indian labor market could be affected.

“Annual remittances to India from UAE is about 2 billion US dollars, out of the $52 billion sent by Indian expats from across the world.Two-thirds of the six million people living in Dubai are Indians, more than 60 per cent of them Malayalis, much to the worry of Kerala’s Finance Minister T M Thomas Isaac.“One main fear,” he notes, “is that the credit to realty sector in Dubai would be frozen for some time. It could seriously affect the construction sector, thereby our workers.” There is also concern about the fate of Kochi’s Smart City project as the Dubai-based real estate giant TECOM is already alleged to be in a bad shape.Most of the Indians employed in the UAE, according to recruitment agencies, are in the real estate sector, financial services and retail.“The Middle East meltdown,” says E Balaji of Chennai-based headhunting firm Ma Foi Management Consultants, “will lead to at least 25 per cent contraction in the job market. It can have a ripple effect.”

My Comment:

I´m assuming that the job market refered to is the job market for Indians in the Middle East….

Meanwhile, the rupee has come under pressure as the Indian stock market sold off on the events in Dubai.

Deadbeat Expats Flee Sharia Crackdown on Debtors

Foreign workers lured by the promise of easy living and credit are turning tail and choosing to leg it, rather than face Dubai´s tough Sharia law which mandates prison for debtors [not a bad idea in some cases…]:

“Now, faced with crippling debts as a result of their high living and Dubai’s fading fortunes, many expatriates are abandoning their cars at the airport and fleeing home rather than risk jail for defaulting on loans.

Police have found more than 3,000 cars outside Dubai’s international airport in recent months. Most of the cars – four-wheel drives, saloons and “a few” Mercedes – had keys left in the ignition.

Some had used-to-the-limit credit cards in the glove box. Others had notes of apology attached to the windscreen.”

Abu Dhabi Agrees to Selective Bail Out

“We will look at Dubai’s commitments and approach them on a case-by-case basis,” the official told the Reuters news agency by telephone, adding: “It does not mean that Abu Dhabi will underwrite all of their debt.”  Al Jazeera, November 28, 2009

An unnamed Abu Dhabi official has said that the rich UAE [United Arab Republic] emirate will help its spendthrift neigbour Dubai on a case by case basis.

This gets pretty interesting for all the other countries out there with sovereign debt problems .. even though, as I blogged earlier, Dubai´s is not a sovereign debt problem. It´s a problem for Dubai World.

However, there seems to be a perception issue involved, which is causing credit default swaps for Irish banks to rise dramatically.

What´s going on?

This isn´t the first time the Dubai story has caused jitters in the market. Ten months ago, Dubai CDS´s rose to record levels on fears that neighboring and much richer Abu Dhabi wouldn¨t ride in to the rescue.
But that was Dubai CDS. Now it´s Irish CDS´s that are up.

Over at the Baseline Scenario, Simon Johnson has an explanation. He says the Irish tremors are caused by the perception that as Dubai goes, so go the other sovereign debt crises around the world:

1. If Dubai can effectively default or reschedule its debts without disrupting the global economy, then others can do the same.
2. If Abu Dhabi takes a tough line and doesn’t destabilize markets, others (e.g., the EU) will be tempted to do the same (i.e., for Ireland and Greece). “No more unconditional bailouts” is an appealing refrain in many capitals.
3. If the US supports some creditor losses for Dubai (e.g., because of its connections with Iran), this makes it easier to impose losses on creditors elsewhere (even perhaps where IMF programs are in place, such as Eastern Europe).

I´m not sure I follow this reasoning at all. Nor do I understand why Mr. Johnson seems to think this adds up to strengthening Ben Bernanke´s hand…..

Let´s see. Is Mr. Johnson saying that if picking and choosing whom to rescue is OK for an Arab sheikh, it should be good  enough for Ben Bernanke?

Frankly, that sounds less like an explanation and more like advance PR for the Fed to engage in arbitrary treatment – bailouts – of banks and other companies..

[Update:  And lo, it turns out that Ben Bernanke does need all the help he can get. He wants his power, dammit…see this oped at the Washington Post, hat tip to EconomicPolicyJournal]

A more convincing explanation of the Irish reaction than Johnson´s is Irish exposure via investment and employment to the Dubai economy.

“The Emirate was a Mecca for the Irish glitterati during the Celtic Tiger years, with many would-be investors taking a gamble. Ireland captain O’Driscoll bought an apartment in the e389million Tiara Residence in 2006 off the plans. However, the property may now be worth much less than the €500,000 he paid for it.

But thousands of Irish investors are facing the prospect of their Dubai prop-erties plunging in price. Price drops in Dubai have been severe. According to Knight Frank Global House Price Survey, prices dropped by 40%.

It’s all a long way from the glittering heights of the middle of the decade – and from the 1980s, before the ruling Al-Maktoum family decided to turn their dusty emirates into a leading city.

The Irish have shaped the landscape of Dubai like few other nationalities, with Irish builders, engineers and architects prominent in building up the city state.

But now, question marks hang over the fate of hundreds of Irish who escaped the slump at home for jobs with companies under Dubai’s control.”

More here.

Fall-Out from Dubai World (Update)

I´ll try rounding up the reaction in the market and the punditry to Dubai World´s threat of default.

Two clarifications.

First: Dubai World´s problem is being referred to as a sovereign debt problem, but as far as I can understand, it´s not. The Dubai government is the 100% owner of Dubai World, which is itself a holding company. But, as William Buiter points out in the Financial Times, the Dubai government has only limited liability, just like any other limited liability company.

It wouldn´t have to reach into its pockets to make good any obligation unmet by Dubai World or its subsidiary Nakheel.

Second. The debt crisis is being referred to as a Black Swan. Again, this is inaccurate. A black swan is an unexpected event that doesn´t fit (and in fact upends) the prevailing paradigm. This debt crisis has been on the horizon for a while. And the announcement of the standstill in payment was obviously calculated to roil the markets as little as possible – being made during the Thanksgiving holidays, when the market is partially shut, and also at the start of Eid which lasts until December 6.

Update: With those caveats, I was going to try and list the banks and sectors that might be affected…but I found that Bob Wenzel´s site  had already got a chart of Dubai World´s obligations to Nakheel Holdings from Izabella Kaminska at the Financial Times. You definitely need your coffee before you read this one.

However, the text below the chart, although just as abstruse, does make it clear that investors are not going to be able to get any blood out of the Dubai government.

“Investors should note, however, that the Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World.”

Update: I should add here that while technically the government of Dubai is not responsible for the debt, it is implied everywhere that the safety of the debt derives from its backstopping by the government. The reaction of furious investors that Dubai would never be able to raise a penny again implies that default would taint the government and not simply the company.

Dubai Govt. Unable to Pay Debt

Via EconomicPolicyJournal:

“The government of Dubai is in major financial trouble.

The government late Wednesday said it would restructure Dubai World and announced a six-month “standstill” on repayments of the state-run wide-ranging conglomerate’s debt.

Government-owned Dubai World is a conglomerate with interests in real estate, ports and the leisure industry. The firm carries around $60 billion in liabilities. Credit agencies Moody’s Investors Service and Standard & Poor’s downgraded the debt of a range of government-related firms, including DP World, after the restructuring announcement.

The dollar amounts involved with Dubai are relatively small in this tranche (compared to the real estate debacle0, but this continues to indicate the shortage of dollars to support the current capital structure.

As one would expect, markets are reacting negatively. International stock markets are down across the board. The dollar is climbing.”

More at The Telegraph.

My Comment

We´ve been watching this story since we first read it via Peter Cooper, who has some other insightful comments on his blog, Arabian Money.net.

“The Private Equity World Middle East 2009 conference this week attracted a good crowd and many sponsors. However, the gloom and despondency among delegates and speakers is tangible. Why are these canny business operators so depressed?

Basically they do not believe in the recovery and see a double-dip in the global economy as stimulus packages are withdrawn. The current uptick has left businesses too highly priced and their owners overconfident in the opinion of private equity firms.”

Cooper has also noted that gold sales in Dubai have crashed, although with the increase in general investor interest, he thinks this won´t have a major impact on the world gold market. Cooper also thinks the China boom is driven mostly by government stimulus money and is very vulnerable to a collapse.

His opinion comes with regional expertise behind it, while mine is simply based on my sense that the 2008 crash was only a preview of coming attractions…but still, I´m wary of the move in gold.  My sense is that speculative money is pushing up the price and it could go down fast short-term. Long-term fundamentals remain good, of course.

Now, this is Thanksgiving and trading is thinner that usual, so market fluctuations do get amplified. Also, the move down in gold shouldn´t be taken out of context. It´s only to be expected, given its strong performance recently. But nonetheless, the strengthening of the dollar and the sell-off in the markets is significant.

Also significant is the fact that the Dubai government made the announcement after the local stock market had closed and on the eve of the Eid holiday that runs upto December 6.

Here are the numbers:

[(Note: the Asian markets sold off on Thursday, the other figures are opening figures in Europe and America.]

Update: there was some recovery in the markets by the close of Friday.

[Note also: First set of figures is from AP, Friday, November 27, 5:34 AM.]

Figures in brackets are from IBNLive.

Japanese Nikkei 225 down 3.2% (2.28%)

Australia down 2.9%

Shanghai down 2.4% (1.82%)

(India´s Sensex down 2.67%, Nifty down 2.8%)

Hang Seng (Hong Kong) down 4.8% (3.45%)

Kospi in S. Korea down 4.7% (4.01%)

Europe, down over 3% on Thursday, slid further:

FTSE 100 (UK) (down 3.2% on Thursday) 0.3%

DAX (Germ) (down 3.25% on Thursday) 0.4%

CAC-40 (France) (down 3.4% on Thursday) 0.6%

The Canadia market (TSX) dropped over 200 points.

On Wall Street, the Dow is down this morning by 2% and the S&P by 2.5%

Oil down by $4.17 to $73. 79 a barrel in Europe ($72.39 in Asia).

The dollar climbed back up from a 14 yr low of 84.81 yen to 86.33 and moved above parity to the Swissie.

Gold fell from a high above $1192 on Thursday to as low as $1136 (a move of $52 $56, which isn´t that big a deal for it, but nonetheless could be an indication of future downside volatility)

Looks like in a market sell-off, as before, the dollar gains..

This is why price-chasing is a danger.

It’s Not the Borrowers, It’s the Lenders

Karl Denninger at Market Ticker is usually someone I agree with, but on this he strikes me as at least partially wrong:

“But just as occurred in the 1930s, Bernanke cannot change the dynamic because there are no willing and able borrowers left.

THAT is the dynamic that sets off deflation and makes it pervasive. This is the condition that Bernanke has ignored and claimed does not exist, but the fact remains that it does.”

No willing and able borrowers left? Even anecdotal evidence says that’s not true.

People with solid credit histories are being refused loans.. and  if you have some kind of credit glitch, forget it. And forget about getting NINJA loans and liar’s loans and all the rest of the credit that used to gush from the spigot.

The banks aren’t lending. But it’s not because there are no borrowers. Of course there are people who’d like to borrow and can. A

ll the people who weren’t flipping houses and maxing out plastic, for instance. Believe it or not, there are plenty of us.

Banks aren’t lending because they don’t want to. They have other reasons besides unqualified borrowers:

*They have to shore up their balance sheets and build reserves

* They’ve been burned before, and don’t know what kind of collateral is out there and what kind of assets.

*No one knows the correct price of anything, because values are deflating in all sectors or are badly manipulated by government subsidies and intervention; and also, because the mark-to-market model was suspended (correctly, in my opinion).

*Lenders are uncertain about the future and are waiting

*Banks can get a better return investing/speculating with their money – and there are plenty of borrowers for that.

Investors are just waiting on the side-lines for the commodities/currencies/metals/housing/you-name-it casino to reopen.