Turning the corner in the labryinthine corridors of the Davos nerve-centre, I ran smack into Chinese premier Wen Jiabao - followed by a regiment of retainers and senior offices in full regalia.
They have not quite adapted to the "sport" dress code of capitalism in Alpine retreat. Jeroen van der Weer - a Davos stalwart - wears horrendous corduroy trousers (pink sometimes) with a 1950s-era Tyrolean woolly. I dread to think how they react to Swiss prices if they venture into the restaurants.
Mr Jiabao smiled at me benignly, but he is not in a good mood. Indeed, he is fuming over the remarks by US Treasury Secretary Tim Geithner that China was "manipulating" its currency to gain market share. Reports were circulating this afternoon in Davos that Mr Jiabao erupted into a tirade after lunch at the mere mention of Mr Geithner's name.
Mr Geithner - the first US Treasury chief who can actually speak Chinese, and Japanese, nota bene - is clearly operating under instructions from President Barack Obama. If his resolve fails, Hillary Clinton is there at Foggy Bottom (State Department) to renew the broadside against Beijing - at least judging by her Sinophobe reflexes in the campaign.
This has the makings of an almighty superpower bust-up. It is fast becoming the theme of Davos 2009. It may soon be the burning issue of our times. We will all learn how to pronounce Renminbi.
The Bush Administration -- in its day -- deflected all attempts by Congress to crack down on China's currency policy. Perhaps sagely, perhaps not.
There is no question that Beijing has pursued a mercantilist strategy of conquering US and European markets by holding down the yuan/renminbi. It has a monthly trade surplus of $40bn, the highest ever recorded by any country. Or put another way, China is exporting its surplus capacity to the rest of the world. It has become a global deflation machine.
Even so, Mr Geithner is playing with fire. Beijing has amassed reserves of $1.9 trillion. From what we know, most of this money is held in the form of US Treasuries and other bonds. Creditors exercise power. Don't be fooled by claims that China could not deploy this weapon without damaging its own interests. All kinds of things can and do happen when tempers flare, and they were flaring today.
The IMF's chief economist Olivier Blanchard said it was unwise to "obsess" over the exchange rate in this fragile climate. "It is probably not the right time to focus on the Chinese exchange rate, given that it is not a central element of the world crisis. There are many other things we should be thinking about. It is an item on the list, but it is not at the top of the list."
Stephen Roach, head of Morgan Stanley Asia, offered a harsher verdict, calling it pure folly to pick a fight with Beijing. "The Chinese economy most likely contracted in final quarter of 2008 and most likely in this quarter too. China has hit a wall," he said.
"A country that is contracting doesn't take kindly to its major trading partners saying you have to increase the value of its currency. What they are being told to do is tantamount to economic suicide," he said.
Quite. This conflict needs to be handled with extreme care. There is a battle going on within the Chinese Communist leadership over currency policy. A bloc within the central bank has long argued that China itself is the victim of a policy that fuels domestic inflation and leaves the country dangerously dependent on the goodwill of export markets.
Wen Jiabao, speaking as I write, says that China's fiscal stimulus package of $600bn will be worth 16pc of GDP over two years. If so, that is huge. China is now doing its part to shore up the global system, even if he rather annoyingly continues to blame "low-savings" countries for the crisis - skipping over the role of Asia in stoking a credit bubble (Takes two to tango).
Be that as it may, China's fiscal blitz is the beginning of a shift in strategy that should - over time - start to boost domestic demand enough to eat into the trade surplus.
Mr Jiabao said it was "imperative that China and the US step up their co-operation". He pleaded with the West not to retreat into protectionism. Washington - and above all Capitol Hill -- would be well advised to listen.
Vladimir Putin speaks next. END
China has over 1 trillion dollars of usa treasury debt. I can assure you that the Chinese are seriously contemplating liquidating all of its usa debt holdings to cover infrastructure spending on their side of the pond.
We are now hearing that major banks are predicting we will enter an hyperinflationary environment. Looks what Morgan Stanley has to say on the subject:
Hyperinflation is a possibility, say Morgan Stanley
Posted by Izabella Kaminska on Jan 30 10:38.
That’s not in Zimbabwe by the way.
Morgan Stanley’s Jocahcim Fels and Spyros Andreopoulos look at the possibility of hyperinflation hitting the western shores of the UK, Europe and the US in their latest note. Their conclusion is a little scary (our emphasis)…
http://ftalphaville.ft.com/blog/2009/01/30/51876/hyperinflation-is-a-possibility-say-morgan-stanley/.
and this comment by Garic which completely supports the Morgan Stanley scenario:
Garic points out…
Notice that the traders are looking for the Fed to do a coupon pass to support the Treasury market. Combine that with the Morgan Stanley blog that hyperinflation risks grow as the government turns to a central bank to finance deficit spending. The fear of the next leg of the crisis starting is gaining momentum in the mainstream investment community. Whether this leg is a Treasury Bond crash, currency crisis or hyperinflation is unfolding. Given Ben Bernanke’s reckless monetary policy, I would expect the Fed to monetize the debt. I still believe risks of hyperinflation are way underestimated.
http://ftalphaville.ft.com/blog/2009/01/30/51875/pop/
Yesterday gold traded up by 21.00 to 925.50 and silver rose by 42 cents to 12.57. This is the first time in many years that we saw gold and silver follow through from Thursday's outside day reversal. The cartel could not attack the metals, so they hit the gold shares big time. They tried to influence gold down by whacking the Euro but that was to no avail. Gold and silver advanced! Most of the excitement is coming from England as many Britishers are selling their pounds and buying gold. The usa is soaking up the pounds in support of its "financial sister".
I reported on the silver deliveries to you on Thursday. Bryant also caught the significance:
First : his comments and then I will explain:
JP Morgan COMEX Silver Deliveries
Bill,
Thursday was the last day for deliveries for the January contract at COMEX. Action in gold was non eventful but in silver 503 contracts were delivered, 502 of which were by JP Morgan which is 2,510,000 ounces worth. For the month 2,105 silver contracts were delivered representing 10,525,000 ounces. Usually 80 to 90% of deliveries are on the first 2 or 3 days of the month, so to have 24% of the deliveries made on the last day shows the cartel is sucking wind. This is irrefutable proof that JP Morgan is the big COMEX silver short. March is the next large delivery month for COMEX silver. Based on the cartels struggle to deliver a minor 2,105 contracts in January (a minor month), March looks like it will result in a silver default. Regards,
Bryant
January is an off month and very few participate in these months. Generally it is options exercised to get a contract that are fulfilled.
The previous high delivery for an off month was in October with over 5.5 million oz delivered upon. The month of January had 10.5 million oz delivered upon and 2.5 million came in the last 2 or 3 days. JPMorgan was the supplier of the silver.
We are hearing many stories of 2 or 3 contracts that have massive delays in their deliveries for silver. I reported this to you yesterday, concerning the non delivery of January silver with respect to HSBC sale of silver to a purchaser.
Not only we witnessed 10.5 million oz of silver being delivered for January, but the first day of February saw delivery of over 1000 contracts or 5.0 million oz.
All points seem to point to the March delivery month where it will be impossible to handle all those deliveries. This is why Bryant believes that March will result in a silver default.
And now for economic news: GDP figures for the quarter show a contraction of 3.8% of an annual basis. However inventories were up 1.8% as nobody sold goods. Somehow this helps GDP. Here is the report:
US 4th-qtr GDP down 3.8 pct, biggest drop since '82
WASHINGTON, Jan 30 (Reuters) - The U.S. economy shrank at its fastest pace in nearly 27 years in the fourth quarter, government data showed, sinking deeper into recession as consumers and business cut spending.
The Commerce Department on Friday said gross domestic product, which measures total goods and services output within U.S. borders, plummeted at a 3.8 percent annual rate, the lowest pace since the first quarter of 1982, when output contracted 6.4 percent. GDP fell 0.5 percent in the third quarter. These were the first consecutive declines in GDP since the fourth quarter of 1990 and the first three months of 1991.
Analysts polled by Reuters had forecast GDP contracting 5.4 percent in the fourth quarter. The U.S. economy slipped into recession in December 2007, driven by the collapse of the housing market and resulting global credit crisis.
For 2008, GDP rose 1.3 percent, the slowest pace of growth since 2001, when the economy expanded 0.8 percent.
The advance report from the Commerce Department showed consumer spending, which accounts for two-thirds of U.S. economic activity, fell 3.5 percent in the fourth quarter after declining 3.8 percent in the third quarter, also the first consecutive drops since the last quarter of 1990 and the first quarter of 1991.
Spending on durable goods like cars and furniture plunged 22.4 percent, the steepest decline since the first quarter of 1987.
In response to the slump in demand, investment by business slumped 19.1 percent for the sharpest pull-back since the first quarter of 1975. Residential investment plummeted 23.6 percent.
The sharp economic downturn is putting a lid on inflation pressures, with the personal consumption expenditures price index plunging a record 5.5 percent after rising 5 percent in the third quarter. Excluding volatile food and energy items, core prices grew at a muted 0.6 percent, the slowest rate since the fourth quarter of 1962. Core PCE rose 2.4 percent in the third quarter.
Analysts polled by Reuters had forecast the PCE index falling 5.4 percent.
-END-
The Chicago Midwest report on Manufacturing for December was again pretty dismal.
U.S. Midwest business weakens again in January
CHICAGO, Jan 30 (Reuters) - Business activity in the U.S. Midwest contracted in January and at a more severe rate than expected, a report showed on Friday.
The Institute for Supply Management-Chicago business barometer fell to 33.3 from 35.1 in December, a new low for the current downturn. Economists had forecast the index at 34.0. A reading below 50 indicates contraction.
The employment component of the index fell to 34.8 from 39.2 in December. Prices paid rose to 39.8 from 32.7 and new orders slipped to 30.7 from 31.5.
The University of Michigan consumer sentiment was again down:
9:55 Jan Univ of Michigan reported 61.2 vs. consensus 61.9
Prior reading was 61.9.
* * * * *
This next report concerns the Bank of NY Mellon and JPMorgan. It seems that they pulled out their own funds but left client money with Madoff. When this was reported, they both decided to pony up 1/2 billion dollars so nobody would ask questions. Here is the article:
Hi Bill.
This article on JPM and its Madoff connection is interesting.
We all know JPM has always had access to privileged information. To what extent does it abuse this privilege, even to the point of using "bait-and-switch" tactics on its own customers? And has JPM crossed one too many of those customers, such that Mr. Dimon et al. might be in the X-hairs, themselves?
The NY Times is finally asking questions to which you have long known the answers. We should expect much more to come.
BUSINESS | January 29, 2009
JPMorgan Exited Madoff-Linked Funds Last Fall
By CLAUDIO GATTI and DIANA B. HENRIQUES
Investors are criticizing JPMorgan Chase for not sharing its concerns about funds tied to Bernard L. Madoff
***
Hours later …. Caught and feeling guilty:
Banks Agree to Send $535 Million to Madoff Trustee
Jan. 29 (Bloomberg) -- Bank of New York Mellon Corp. and JPMorgan Chase & Co. agreed to transfer about $535 million in the accounts of collapsed trading firm Bernard L. Madoff Investment Securities LLC to Irving Picard, the trustee liquidating the brokerage.
Bank of New York agreed to transfer $301.4 million and JPMorgan agreed to transfer another $233.5 million, according to court papers filed today in U.S. Bankruptcy Court in New York….
http://www.bloomberg.com/apps/news?pid=20601087&sid=avcSeEXgs4Ew&refer=home
-END-
I am now coming to the key part of todays commentary. Goldman Sachs yesterday stated that the banking sector will need 4 trillion dollars because of losses in the mortgage backed securities. First the article:
29 Jan 2009 04:35 PM
The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.
The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.
Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.
"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.
Obama and his economic advisers are expected to lay out their policy plan as early as next week. One idea that seems to be gaining traction is setting up an entity to buy troubled assets and hold them until they mature or resell them.
The hope is that once banks get rid of those bad loans, they can attract private investors, get back to the business of lending, and help revive the economy.
Vice President Joe Biden said Thursday that Treasury Secretary Timothy Geithner was considering all options to restart normal lending, but that no decisions had been made.
Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included. (How much would it cost if we put Goldman and Morgan Stanley into receivership - Jesse)
New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.
The Wall Street Journal said government officials had discussed spending $1 trillion to $2 trillion to help restore banks to health, citing people familiar with the matter.
At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand.
Depending on how the plan is structured, the government may not have to put up the full amount, and since the majority of people are still paying their mortgages and credit card bills, there is a reasonable expectation that taxpayers would recoup a substantial portion of the cost.
However, the potential loss is huge, and if more public money is needed to boost capital even after the bad assets are removed, the total would undoubtedly climb.
The International Monetary Fund said Wednesday that worldwide losses on U.S.-originated loans may hit $2.2 trillion, well above its October estimate of $1.4 trillion. It said banks in the United States, Europe and elsewhere probably needed to raise $500 billion to cover losses coming this year and next.Cutting Out a Zero
For U.S. lawmakers who are already taking grief from voters over a $700 billion bailout approved last fall, passing another big spending measure carries significant political risk.
At the same time, Obama's team wants to take action that is bold enough to fix the problem once and for all, hoping to avoid the sort of ad hoc approach that has been criticized for adding to investor uncertainty.
Time is not on Obama's side. The more the economy weakens, the longer the list of potentially dodgy debt grows. That is why he faces enormous pressure from Wall Street to act fast.
The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total.
Spending $400 billion would certainly be more palatable to Congress than $4 trillion. It may not even require that much additional funding. Economists estimate that perhaps $250 billion of what remains in the $700 billion bailout fund could be devoted to the "bad bank."
That money could buy bad assets, which would then be repackaged and sold to investors to raise more money which could then by recycled to buy more assets.
Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses.
"If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said. end
Discussion: (Harvey)
On Thursday, we discussed that the entire mortgaged backed securities, subprime, commercial and student loans was around 10.5 trillion dollars. I told you that conventional wisdom on the street figured that 35-50% was bust or 3.5 to 5.6 trillion dollars of writeoffs.
Goldman Sachs has come right in the middle with a loss of 4 trillion dollars.
The Obama administration is now going to form a bad bank to buy these toxic assets. I am going to numerically tell you the problems that they are going to face!!
