MF Global - Beginning of the End?

On Halloween weekend, there was a primary dealer that went bankrupt.  It's been in the news for a while, maybe you've heard of it, maybe not.  It's MF Global, a commodity futures brokerage firm, kind of like TD Ameritrade/Scottrade/Fidelity, only for commodity futures, options and derivatives.
http://en.wikipedia.org/wiki/MF_Global

One thing I've learned from this bankruptcy is that it shows our system of everything is braking, and it may be beyond repair, but we'll see.

But let's back track a little to 2008 during the financial crisis.  Back then, if a company went bankrupt, (i.e. Bear Sterns, Lehman Brothers) the parts of the company would be sold off if possible to other competitiors, customer's money/assets were made whole and transferred to the new company, the remaining assets were divided up to the next stakeholders in line.  These companies going bankrupt damaged the financial system as I've mentioned before leading to the government (tax-payers) bailing out AIG, and a whole bunch of banks from the counter party risk they had with each other.  Most of these banks were foreign banks in Europe if you recall.  So private companies went bankrupt because they were stupid and were betting on highly leveraged collateralized debt obligations (CDO) and mortgage backed securities (MBS) based on sub-prime mortgages (rated AAA for some reason).  The private companies after getting bought out by Barclays and JP Morgan, then had to sell their unsaleable products (CDO and MBS) to the government in the form of the Federal Reserve purchasing these toxic assets (CDO and MBS) and bailing out companies.

How did the government fund this?  Through the sale of it's own bonds to raise the money needed.  They just called it "providing liquidity to the system" or some garbage like that.  (This raised the debt ceiling, and our national debt.)

So that was the first financial crisis where by private sector companies went bankrupt and the burden fell onto the government to fix the problem.  There's a lot of issues involved with the whole financial crisis in 2008, but I'll stop there.

That was then...this is now.

Think of MF Global as a smaller version of what happened in 2008 because, they were smaller, and they didn't have their hands in everything like Bear Sterns and Lehman Brothers.  They weren't investment bankers and securities brokers to that level, but they were similar in their own industry of commodity futures and options.

Now MF Global went bankrupt because they were doing similar things as Bear Sterns and Lehman Brothers by highly leveraging investments in sovereign debt of European countries, instead of CDO's and MBS's.  The thing to take away is that MF Global leveraged (40-1) the amount of their actual assets to purchase the debt of European countries.  This is similar to how a bank can leverage 9-1 (or more) the money you put into the bank to loan to other people, businesses, etc. (This is why bank runs are bad, they only have a small % of the actual assets in the bank, the rest are tied up in other things.  Again, think It's a Wonderful Life).  MF Global did this by borrowing money (very cheap right now w/ historically low rates) and then using that money to purchase government bonds.  Thereby borrowing money at a lower interest rate than the bonds were paying back in interest to create basically free money.  The loans were collateralized by the bonds.  So the only thing that needed to happen, was MF Global needed to maintain their minimum margin (down payment % in a way) to carry the loans.  They couldn't.

That's how the MF Global bankruptcy got started.  But it's after it was started that things started to go really badly...potentially for everyone.

One of the first things that came out was that MF Global had missing customer money.  First it was $633 million that was found to be missing by Interactive Brokers who tried to acquire the company on October 30, 2011 and made the deal fall through.  But now it could be $1.2 billion or more.  This money has still not been "found."

Here's a great link to the MF Global bankruptcy.
http://www.btrtrading.com/Legal/MF%20Global%20White%20Paper%20Revised%20-%2012-1-11.pdf

Well, there's been a lot of talk about this "missing money" and where it went, etc.  The consensus I've seen is that it was rehypothecated. http://en.wikipedia.org/wiki/Hypothecation  Basically, since MF Global didn't have the collateral to maintain the margins on the loans, they pledged their customer's money from the segregated accounts.  This is obviously not a good situation as if you had an account with MF Global to trade in commodities, that was your money you were trading, so you have a claim to that.  Well MF Global used that money as collateral, so JP Morgan (who loaned them the money) also had claim to a portion of the customer's money ($633 million - $1.2 billion+) when they filed bankruptcy.

This is where things start to show why our system is breaking, if not already broken.

When MF Global filed for bankruptcy Chapter 7, they were not listed under Sub Chapter IV (Commodity Broker Liquidation).  They were listed under Sub Chapter III (Stockbroker Liquidation).  When that happened, that basically put the customers way down the list of stakeholders, and put JP Morgan to the top of the list.  Why this was done, I could only guess.  The fact is, MF Global was a Commodity Broker with $5.4 billion in assets on over 50,000 accounts for commodities, vs. $100 million and 400 or so contracts for securities.  http://uscode.house.gov/download/pls/11C7.txt

But the point is, that decision has just changed our legal system, and puts into question it's viability.  This also should put questions about our financial system's viability if JP Morgan had to steal (with the help of the legal system and bankruptcy courts) $600 million to potentially over $1.2 billion of customer's money.  If they didn't do that, would JP Morgan have gone bankrupt due to leverage on their own books?  Would that have collapsed the whole financial system in a worse way than 2008?  I don't know for sure, but it's definitely unprecedented actions that have taken place during this bankruptcy.  So I would have to imagine there would have been unprecedented re-actions if things did not happen this way.

So what does all of this mean?

Some would say that nobody's money is safe...any where.  After all, it was because of this bankruptcy that Ann Barnhardt closed her commodity futures brokerage company.  She said she could no longer guarantee her customer's funds.  Maybe she's a little nutty, but she had her own company in this industry, and that's more than anyone I know has.  http://www.zerohedge.com/news/entire-system-has-been-utterly-destroyed-mf-global-collapse-presenting-first-mf-global-casualty

But what's the difference between some commodity brokerage's company with their accounts and say TD Ameritrade and a stock trading account, Fidelity and a 401k/IRA, Charles Schwab investments, Insurance annuities, or your bank account even?  Well, that's up to you to decide.  It could be that everything is different and if something happened to the company the accounts would be made whole.  Or maybe nothing is different and your money could be stolen as well at any time, and replaced with 65% of what you originally had.

The one thing I can guarantee, the problems that caused this situation are similar.  Companies, governments, banks, individuals all leveraging their assets (your home is a leveraged asset when you made your down payment of 3-20%, and you leveraged the other amount in a loan to actually purchase the house).  These are being collateralized as well, mostly by the assets backing the leveraged loans.  But more importantly, banks are also collateralizing leverage of assets with customer money (just like MF Global did)...see Bank of America.  They are currently leveraging and collateralizing the $53 Trillion of derivatives with $1 Trillion of customer bank accounts.  Luckily, those are FDIC insured, up to $250k.  But the actions are the same, and the result could potentially be the same, so be forewarned.


http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html
http://www.zerohedge.com/news/bank-america-forces-depositors-backstop-its-53-trillion-derivative-book-prevent-few-clients-dep


So, is this the beginning of the end?  Who knows?  Maybe the next financial crisis like 2008 started with MF Global on Halloween.  Maybe instead of the governments bailing out the banks and putting it on your shoulders, they'll just take your money directly instead.  One way or the other, your money is being taken from you.  Whether it's through direct stealing like with MF Global, or Government inflation...all of the debt has to be paid, one way or another.  And it doesn't help when the national debt just keeps getting larger.  It's already clear that companies will steal your money.  And at some point, inflation won't be an option for governments to increase and pay their debts.  So the question is, then what?


A couple other good articles to read from which I have gained knowledge about this bankruptcy and have included in the above...
http://gonzalolira.blogspot.com/2011/12/run-on-global-banking-systemhow-close.html

http://www.washingtonpost.com/the-systemic-risk-revealed-by-mf-globals-collapse/2011/12/14/gIQAtrTI1O_story.html

Iran

Well, I can't say I'm thrilled about reading this...

http://www.telegraph.co.uk/news/worldnews/northamerica/usa/8969551/US-military-ready-to-engage-in-a-conflict-with-Iran.html

Since missles, planes, ships, and military personnel don't pay for themselves, there's only one option...raise the debt ceiling and print more money.


In case you wanted an updated chart...nothing has really changed too much. Still have the dome shape.  Although the POMO's (Federal Reserve's "Primary Open Market Operations") have slowed things a bit.  It's possible there's a reversal of this, we won't know until 2012 though without some kind of news. 

Updated Charts (again)

So it's been about a week (in trading days) and the Dow has finally broken lower out of that sideways trading that was going on.  Honestly, I would have thought that there would be some huge selling off after the Federal Reserve announcement of basically nothing the other day.  Instead, things have been slowly working their way down.

If I break out the handy eraser in MS Paint, we can get rid of that quick drop and rebound from the opening of liquidity to European banks through the Federal Reserve Swaps from a couple weeks ago, and here you can see what's happening.

As you can see, there's definitely a pattern here of a rounded top.

Implication

A Rounded Top is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend.

top

Description

A Rounded Top is dome-shaped, and is sometimes referred to as an inverted bowl or a saucer top. The pattern is confirmed when the price breaks down below its moving average.

http://www.trending123.com/patterns/rounded_top.html

So pretty much, back to where we were a couple weeks ago almost where the bottom dropped out and it looked like a very dire situation developing.  Well, this is where again, the government will have to step in and provide more "liquidity" for the new "double dip recession" to not continue developing.

Ok, shifting gears...

Eventually I will have a specific post on the developing Currency War that's going on.  But when you hear talk of the government being upset with China (or anyone else) for "currency manipulation" and tariffs or sanctions or anything else along those lines to "boost" the economy, that is a new battle in the Currency War.  Currency Wars aren't good for anybody.  It's just more government intervention directed to get extremely short term gains on some chart or statistic.  In the long run, these are bad and hurt the economy.

http://news.yahoo.com/china-gets-revenge-obama-tariff-u-autos-213747820.html

Here's an article discussing China's actions or (response) to a previous battle the U.S. initiated.  Obviously this is going to be very bad for the automakers and the companies that are selling these vehicles into China.  They will immediately have a 20% price increase.  That will change people's minds about purchasing these specific vehicles, and buy something domestic instead.  Not too dissimilar to what has taken place here in the past 3 years.

So there's two things to think about.  More later.

Financial Repression

A couple weeks ago I posted this ( http://playwithmonopolymoney.blogspot.com/2011/11/banks-making-moneystill-through.html ), which discusses how the banks have been making money still through obtaining very cheap money through the Federal Reserve discount window, buying government bonds and taking the profit.  I explained how this is a major reason for the artificially low interest rates, mortgage rates, etc.  So that's the how.

If that's the how, "Financial Repression" and this post is the combination of the how and the why.

First, a definition...

A term that describes measures by which governments channel funds to themselves as a form of debt reduction. This concept was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon. Financial repression can include such measures as directed lending to the government, caps on interest rates, regulation of capital movement between countries and a tighter association between government and banks.
Read more: http://www.investopedia.com/terms/f/financial-repression.asp#ixzz1gI5wfkvU

From wikipedia's definition...bold and underline mine

These measures allow governments to issue debt at lower interest rates than would otherwise be possible. A low nominal interest rate can help governments reduce debt servicing costs, while a high incidence of negative real interest rates liquidates or erodes the real value of government debt.^[3] Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation, and it can be considered a form of taxation.^[4]"

Definition link...

http://en.wikipedia.org/wiki/Financial_repression

How I would translate...Financial Repression is a collection of ways that governments use to manipulate the costs of borrowing money for themselves, paying back the borrowed money, and directing money that they need toward themselves.

So why is this important?  Well, we all know that governments around the globe have run massive trade deficits and increased their debt by huge amounts.  Specifically in the U.S., there was all of the news about raising the debt ceiling over the summer.  Specifically in Europe they are going through a crisis again just like in 2010 with multiple countries having Debt to GDP ratios that are too high and unsustainable that could even collapse the Euro currency.

Here is a chart showing the Debt to GDP Ratio from a great summary of a great study done on Financial Repression.  The study focused on how governments reduced the amount of debt they carried after WWII.  As you can see, we are back to those levels.

Study of Financial Repression...very technical, long and boring, I haven't gone through it yet, but some good research is in there.

http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf

Summary article...I encourage you to read this

http://www.financialsense.com/node/5487

From the article link above...summary of the financial repression in the study
The specifics of financial repression took somewhat different forms in each of the advanced economies, but they shared four characteristics: 1) inflation; 2) governmental control of interest rates to guarantee negative real rates of return; 3) compulsory funding of government debt by financial institutions; and 4) capital controls. 

So let's get into how Financial Repression affects you...

#1 is inflation.  In order for the government have this work for them, they need inflation as I've said before.  Inflation makes the money they borrow cheaper, while making everything else more expensive for us when we purchase something.  

#2 is control of the interest rates to guarantee negative real rates of return...

When I took my finance classes, we were taught that whatever we invested in, we needed to focus on Real Rates of Return.  A Real Rate of Return = (Nominal Rate of Return - Inflation)...let's just ignore taxes and fees for now, although taxes and other fees would also be subtracted.

So let's say you can invest your money in a money market account and get a 3% a year return (interest) on that money.  This would be the Nominal Rate of Return (3%).  But if inflation is 3% a year, your Real Rate of Return is actually 0%.  

But right now, you probably couldn't get 3% on a money market account because the government has manipulated the bond markets through this Financial Repression #1 (capping interest rates very low).  So maybe you could get lucky and find 1% right now.  Well inflation right now is say 4% (I believe it to be much higher).  So your real rate of return right now if you leave your money invested in a money market account is -3%.  So you are thinking that you're actually making money, 1% by keeping your money in the money market account, but really, the government is inflating the currency and taking 4% of your money in the future when you buy something with that money, so you're left with losing 3%.  This is how the countries paid back the debt they incurred from WWII through the bond market.

Some countries had higher inflation, some had lower, but it just took more or less time to pay of the debts.  I believe the United States officially paid of WWII under Bill Clinton in the 1990's (so 50 years).  Not every year were there negative real rates of return from bonds, but the study showed quite a few.  

So one would hopefully wonder why anyone would invest in treasury bonds at such low interest rates (.12% for a 1 yr T-Bill) and inflation around 3.5% (officially)?

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

http://www.bls.gov/cpi/cpid1110.pdf

Well, most people usually don't, some investors do to get a "risk-free rate of return" and offset the risks of buying stocks right now.  But as I explained in my previous post, banks will.  They'll buy a ton, because they can borrow the money for even cheaper from the Federal Reserve.  They still get to book their spread as profit so they can keep making their money, and the government gets a guaranteed way to inflate the currency, and keep real rates of return negative (therefore helping to pay off their debt more cheaply). 

#3 Compulsory funding of government debt by financial institutions.

Here we're talking about either the government forcing mutual funds, teacher retirement accounts, pensions, and banks to purchase government bonds, or making it highly desirable to so.  Right now with the stock market and the world economy the way that it is, many are investing in government bonds for safety reasons,  even if it is a negative return, because the alternative is the riskiness of stocks with the potential to lose even more money.  Also, as mentioned earlier, the Federal Reserve is making it VERY attractive to borrow nearly free money to purchase government bonds.  As long as people have confidence that the government will be able to make their interest payments to keep interest rates low, this will continue.  When it doesn't, you can look at Greece, Ireland, Italy as examples.

One thing to keep an eye on is the mandatory purchase of government bonds as "safe assets".  Most likely you see this in teacher retirement accounts, pensions, etc where there is more concern about loss of wealth vs. the preservation of wealth.  If you see that happening all over, you'll know for sure that there are no longer the number of buyers the government needs to continue funding their massive spending, so either interest rates would have to rise (which is undesirable for governments to owe more on their interest), or they would have to force the purchase of bonds by other parties.  

I also think about WWII when there was advertisements to "Buy War Bonds".  It wasn't mandatory, but man would you have been un-patriotic if you didn't take a negative real rate of return on your "investment."

#4 Capital Controls.  

This is where the government puts controls on the flow of money in and out of the country and usually impacts the exchange rates.  I haven't seen too many examples of this recently, so we're not really to this stage yet.  If we were to this point, it's basically as if the government locks you into only investing within the country and the dollar.  I would think we'd have to be in pretty bad shape for this to happen, but you never know.  If the first three aren't working and people are sending their money to China, South America, etc at very high rates to escape the inflation, negative interest rates and near mandatory purchasing of government bonds, I could see it happening.  I would imagine they would also sell this as a "do it for your country" type thing first though.

So when you're saving your money, you'll want to have a real rate of return at 0% or better.  Otherwise, think of anything else as a donation to the government to pay down the debt and finance their excessive, and mostly idiotic spending.  And this is on top of the taxes you already pay.

I found these articles/threads useful.

• http://www.bloomberg.com/news/2011-05-16/pimco-sees-financial-repression-in-u-s-amid-deteriorating-debt-dynamics-.html
• http://seekingalpha.com/article/269022-protecting-against-financial-repression
• http://www.pimco.com/EN/Insights/Pages/The-Caine-Mutiny-Part-2.aspx
• http://www.tfmetalsreport.com/forum/2793/financial-repression-watchtower
• http://www.reuters.com/article/2011/11/18/uk-financial-repression-forces-savers-in-idUSLNE7AH01J20111118

Updated Chart for next week

Real quick as there's something more important I wanted to post about today.

Well, last week sure looked like there would be some direction didn't it?  Well, not so much.  Initially the chart went into a corner and broke down like I thought it might with all of the bad news, then popped back up later that day, then went down on Wed and Thursday, but Friday popped back up again.  Oh the markets, so fun to watch.

Eventually, there will be decisions that will turn this one way or the other from the governments of the world.  What are they going to do though?  Something, or nothing.  Until we hear that, I think we're going to be stuck in this sideways pattern.  There may be some very serious underlying problems in the shadow banking side of things that are forcing the buying of time (not allowing the market to correct down) right now.  I mean, who really wants another crisis like 2008?  I sure don't.  But they aren't really coming out and saying we're going to print a bunch more money to offset it either.

I guess we'll see next week what could happen.

Counterparty Risk

So what is Counterparty Risk and why would I talk about it?  Let's start with some definitions.

What Does Counterparty Risk Mean?

Read more: http://www.investopedia.com/terms/c/counterpartyrisk.asp#ixzz1fwEidkPc

Investopedia explains Counterparty Risk

Read more: http://www.investopedia.com/terms/c/counterpartyrisk.asp#ixzz1fwEboipE

Also read...

Counterparty risk. Counterparty risk is the risk that the person or institution with whom you have entered a financial contract -- who is a counterparty to the contract -- will default on the obligation and fail to fulfill that side of the contractual agreement.

In other words, counterparty risk is a type of credit risk. Counterparty risk is the greatest in contracts drawn up directly between two parties and least in contracts where an intermediary acts as counterparty.

For example, in the listed derivatives market, the industry's or the exchange's clearinghouse is the counterparty to every purchase or sale of an options or futures contract. That eliminates the possibility that the buyer or seller won't make good on the transaction.

The clearinghouse, in turn, protects itself from risk by requiring market participants to meet margin requirements. In contrast, there is no such protection in the unlisted derivatives market where forwards and swaps are arranged.

http://financial-dictionary.thefreedictionary.com/Counterparty+Risk

So how I understand Counterparty Risk is this, there's a risk that one entity will default on their end of a promise.  I could come up with an example like this....

I loan my car to a friend for a week, and in return they promise to give it back to me in the same condition, and with a full tank of gas.  They also promise to give me an extra $100 (like a rental fee) for the use of my car.  We are both taking on risk in this situation called Counterparty Risk.  I risk that my friend will damage my car, bring it back with less than a full tank of gas, not bring it back in a week, or not give me the $100.  My friend risks the fact that I could need my car back in less than a week and take it back.

If either of us default on our promise, we open up a whole new can of worms on determining what the repercussions would be.  If I need to take my car back in 3 days, but my friend went to Las Vegas, we have a new problem because I can't get my car back.  So I need to "default" on my friend, but by defaulting, I create many more problems that need a resolution.

In the same way, if my friend takes my car and either damages it or doesn't bring it back in a week, we have problems again that need to be resolved.  I need a new car, we need to work out an arrangement for damages or loss of use, etc.  Sometimes what happens can be easily resolved, other times it can't and it's much more complicated.  So the lesson on Counterparty Risk is, it's always there when you make an agreement for things.  You expect that the agreement will be kept as is and nothing will come up to change that agreement.  But inevitably things always could come up.

So I want to take this one step further as it'll help some explanation later.  Let's say that I make an agreement with my friend as stated above.  As far as I know, he's driving the car for a week.  Well what if my friend borrows my car that's a Ferrari.  It's a sweet ride and it's the envy of all of his friends.  They also want to borrow the car for a day during the week.  Well my friend then lends out my Ferrari to 3 other people on different days at a higher lending rate and makes the money to easily cover the cost of the gas and the $100 he owes me and turns a profit.  Then on each day his friends also lend the car to some of their friends for an hour each day to help cover the cost of them borrowing the car.  I would call this leveraging, and it greatly increases the Counterparty Risk because now there's not just me and my friend, but now three of his friends borrowing the car for a day (5 friends) and three of their friends borrowing the car for an hour each day (11 people involved in total).  Each friend is leveraging the one car to 11 people.  And each friend now has created additional Counterparty Risk.  If any of those people default on their agreement, we could have a Systemic Risk of all of our agreements failing and tons of things needing to be sorted out among all of us.

So what does this have to do with money?

Well, this is the situation that has occurred over the past 3 years, but on a much larger scale involving our entire financial system.  In 2008, when Bear Sterns went bankrupt, it was as if there was a default in me loaning my car to my friend.  We were able to resolve it just like Bear Sterns went bankrupt and got bought out by JP Morgan, and all was well.  Then Lehman Brothers went bankrupt a few months later.  Let's compare their bankruptcy to my friend lending my car to one of his 3 other friends for a day.  If that default happens, the solution is a lot more complicated.  The same was when Lehman Brothers went bankrupt, it created a whole bunch of more problems.  It brought in AIG into the mix as the insurer.  

This would be the equivalent of say my friend buying insurance to protect himself in case of his friends defaulting on their daily agreement causing great problems for himself and our weekly agreement.  In this sense, in the financial world, I would call it a Credit Default Swap.  Only in the financial world, they are lending money, not cars.  And it was this that caused AIG to almost go bankrupt because they had to pay back all of the defaults that Lehman Brothers among others were causing during the 2008 crises.

Hopefully now you are beginning to see the much bigger problem in the financial world.  Things are developing every single day to further us down the path.  The problem is, when you're dealing with money in the financial world, Credit Default Swaps, Derivatives, leverage of assets, lending of securities and the mass amounts of Counterparty Risk between all involved, it becomes a Systemic Risk of the entire financial system collapsing.  

2008 was about one part of the financial system, namely the real estate market and mortgages causing problems.  The original agreements caused a chain reaction through out our system as the bank who lent money to people for homes started to default, causing the banks to sell and remove liquidity from the leveraged system, causing more deleveraging of other companies until one couldn't get the liquidity it needed and failed (Bear Sterns, Lehman Brothers).  

So liquidity is a big concern right again right about now.  It was the reasoning, I think, behind the reduction in the swap lending rates last week that took us out of the dire situation we were in and bought a week or so until this week.  But things are brewing again just like in 2008, only the situation is a whole lot bigger this time.  The Dow Jones and the rest of the market are just outward reflections of the liquidity and money flows around the world.  When there's issues, like what's going on in Europe right now with liquidity, it gets reflected in the stock market.  So when I post a chart like the Dow that I've been following for the past month, and all of the other charts look the same way, there's underlying problems.  Problems like 2008's credit crisis don't happen very often.  So to compare a chart to 2008 is saying a lot, because that crisis brought the US and the rest of the world to it's knees for a couple weeks.

But think of right now as if all of the friends have bought insurance against something happening as far as loaning the car to each other because now they learned from the first time they had problems.  So they are all insured and have somewhat of a game plan in case one of the friends defaults on their agreement, only this time there's no longer a problem with the loaning of the car among friends, there's a problem with the car itself.  That's where I think we are today and why the similarities are there just like 2008, only much different.

More later...

Because A is a counterparty to B and B is a counterparty to A both are exposed to this risk. For example if Joe agrees to lends funds to Mike up to a certain amount, there is an expectation that Joe will provide the cash, and Mike will pay those funds back. There is still the counterparty risk assumed by them both. Mike might default on the loan and not pay Joe back or Joe might stop providing the agreed upon funds.

In most financial contracts, counterparty risk is also known as "default risk".

The risk to each party of a contract that the counterparty will not live up to its contractual obligations. Counterparty risk as a risk to both parties and should be considered when evaluating a contract. 

China's Ghost Towns

Here's something else that I've been watching and these videos are short, and pretty good.  When we purchase all of our products from China, they get a huge influx of cash, US Dollars.  Well, they have to trade their Yuan for our Dollars anyhow.  Now, the entire world has been buying Chinese products for years.  Normally, the Chinese currency would appreciate in this scenario versus all other currencies (i.e. they would be able to purchase more with their Yuan vs. our Dollar, Euro, etc as the Yuan would become stronger).  But a strange thing has happened, they decide to print more Yuan to maintain an equal exchange rate (mostly due to pressure from the buying countries as they don't want to spend more to purchase the items).  When they do this, they are printing money to give out, as loans, government programs, whatever they want really.  

What would you think they would use all of this new money for, the same things we used the money for from 2001-2007, building new houses of course.  I mean, real estate is the ever appreciating asset right?  Yes and no.  It depends on what causes the appreciation.

In China, it's inflation from a stronger currency being purposely weakened to maintain a target exchange rate.

Well, this is the kind of thing that happens when you have too much supply and not enough demand, but people choose to build anyway, it's nearly free money.  Then this happens, just like in the U.S. housing prices start to plummet, and quickly.

But here's the interesting thing.  Most countries and governments use GDP (Gross Domestic Product) as their measuring stick of economic activity.  Well, cheap or free money gets converted into loans to build, build and build some more.  Always increasing the GDP of China with these new construction projects and jobs, jobs and more jobs.  But if there's nobody there to purchase these at the inflated prices, prices have to go down drastically until there is buyers.  If there isn't buyers, it stays as a ghost town, all of the loans and capital used to build the towns and housing goes to waste.  This is what is called Economic Prosperity by the government and on the news.  Many economists may even talk about how great China is and all of it's glory of state planning and the communist system.  But none of that matters.  If a government is going to give away cheap and/or free money by printing it, whether it's the U.S., China, England, Germany, where ever, you will see "investments" in bubbles like these homes in China, Dot Com companies, Education (College and higher), Sovereign Debt, anything that will get a great return, even if it's only a return long enough to make a quick buck and leave someone else holding the bag.  All the while the news is that the country is growing, we're doing great and just like the guy in the video thinks, prosperity will never end.

These are the dangers of inflation.  These are the dangers of government intervention in the marketplace.  And you absolutely don't want to be holding the bag when the bubble disappears.  This kind of prosperity does end.  It ends terribly because it shouldn't have started in the first place (i.e. there is no demand for it).  The result is "bad deflation" or monetary deflation.  It's as unnecessary as these Chinese Ghost Towns.

It'll Be Interesting Tomorrow (Updated)

So it really looks like tomorrow is going to be a very interesting day.  Will there be some kind of Central Bank action to propel the markets above key resistance, or will the previous recession looking chart come back into form?  Only time will tell.  We may even know by tomorrow morning when we wake up as Europe will probably determine this one.

Three times in the past week 12,200 held.

It looks like 6 times 12,200 held as the ceiling since the end of October.

This holds true dating back to a month ago when this same level needed to be taken out if the deep recesses of the abyss were to be avoided.  Right now is about the time at the one week mark that the swap happened.  It looks like we will be in for a rough rest of this week, but who knows what Uncle Sam, Bernanke and the rest of the banks and media have in store for us.  

It may just be a Festivus miracle.

But it sure doesn't look like it.


UPDATE: 12/7/11 9:00

And there you have it...it tried overnight to get over and stay at about 3-5am over in Europe, but it didn't last.  Now to see how far it drops until there's more intervention or another recession (or continuing depression if you want to call it that).

Here's some news about that topic this morning.
http://www.ft.com/intl/cms/s/0/3d23a05c-20cc-11e1-816d-00144feabdc0.html#axzz1frYhv8Yj
http://uk.reuters.com/article/2011/12/07/uk-britain-manufacturing-idUKLNE7B601120111207
http://www.reuters.com/article/2011/12/07/italy-output-idUSL5E7N71KZ20111207

And here's a nicely done chart from Zero Hedge showing exactly why they had to drop the swap rate last week...because it was needed by somebody quickly.

http://www.zerohedge.com/news/we-just-had-rerun-bear-stearns-when-lehman-coming

Overdraft Fees

This was just a little something that I saw on Zero Hedge, linked from the Pew Charitable Trusts that everybody should be aware of if you keep low balances and are in danger of overdraft fees.  I don't know if Wells Fargo still does this, I don't know if other banks have or will do this.  But you should probably be aware as it's happened in the past to other people.  Don't assume that just because you purchase something at different times, that those transactions clear the bank in that order.  Think of it like writing a check, who knows when that check will be taken out of your account.  Just make sure you don't spend more than you have.

http://www.pewtrusts.org/our_work_report_detail.aspx?id=85899364999

Unemployment down?

This has only an indirect relation to money, but it is WHY we all work, and HOW we get our money, so it's important to follow.

Here's the headlines today...

JOBLESS RATE DROPS TO 8.6%

http://finance.yahoo.com/news/jobless-rate-drops-8-6-133402269.html

http://www.marketwatch.com/story/us-jobless-rate-falls-to-86120000-jobs-added-2011-12-02

We can all bask in the glory of an economy getting better!  Hooray!  Markets are all up this morning.  Everything is great again.

Well, not quite.  The BLS numbers mean very little.  These are the charts and numbers you want to look at, not the headline unemployment rate. So you can ignore everything you hear about unemployment on TV, newspapers, news sites. 

You just need to know it's not good, and it's not getting better.  And when a bunch of people you know are still out of work, or can't find a job, or a good job, you can think about these charts and understand why what you hear in the headlines doesn't match what you see in reality.

 




All courtesy of...
http://www.zerohedge.com/news/key-charts-nfp-report-records-jobless-duration-and-people-who-want-job-civilian-labor-force-plu

So until these charts change, don't expect anything else to significantly change out there.