UPDATE:



I am going to attend the ASPO conference this week in Washington, DC and will pass along anything of interest.

This is a gathering of the usual suspects, all telling each other how ruined we are.

Speaking of ruin, the euphoria of last week that accompanied the incredible success of the EU management to get its debt problems under control has evaporated starting this week as it becomes clear the EU management has done nothing to get its debt problems under control.

In fact, the EU debt problems are intractable and cannot be solved, wished or incanted away, exported overseas, painted over, or buried in a landfill, only endured until resolution takes place.

One step of the resolution process was this morning’s bankruptcy of MF Global — what’s that?

MF Global is/was a hedge fund with investment bank ambitions that is notable because it was owned/operated by an ex-governor of New Jersey. No, not that one. While is unclear at this moment what exactly brought MF Global to this sorry state, what is likely is that ‘investors in the firm lost confidence’ and that it ‘suffered from too much exposure to risk’ and that it ‘had inadequate capitalization’ that is, Bernanke did not return ex-New Jersey governor’s phone calls.

 

MF Global Holdings Ltd., the holding company for the broker-dealer run by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy after making bets on European sovereign debt.

The New York-based firm listed total debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan. Affiliate MF Global Finance USA Inc. also filed, with debt of as much $50 million and assets of as much as $500 million. The largest unsecured creditors include JPMorgan Chase Bank NA, as trustee for holders of $1.2 billion in debt, and Deutsche Bank Trust Co., as trustee for holders of $690 million in debt.

MF Global’s board had met through the weekend in New York to consider options including a sale to avert failure, according to a person with direct knowledge of the situation. Following a record loss, MF Global was suspended today from doing new business with the New York Federal Reserve, according to a statement on the regulator’s website. Trading in MF Global’s stock was also halted.

MF Global declined 67 percent last week and its bonds started trading at distressed levels amid its disclosures of bets on European sovereign-debt …

 

Let’s get this straight: a bank has leveraged exposure to EU debt and goes bankrupt. What does this say about the other banks who have leveraged exposure to EU debt particularly the EU banks? Firxt Dexia and now MF. Who’s next?

Meanwhile, there is the auto industry Death Watch: Saab orbits the drain … and is given a temporary reprieve.

 

Saab Sputters On, Saved by 2 Chinese Automakers

David Jolly (NY Times)

Saab Automobile said Friday that it had won a reprieve from collapse after two Chinese carmakers agreed in principle to buy the ailing Swedish automaker just hours before it faced court action that could have led to its liquidation.

Zhejiang Youngman Lotus Automobile and Pang Da Automobile Trade agreed to pay 100 million euros, or $140 million, for Saab and its British unit, according to Saab’s parent company, Swedish Automobile.

 

Saab was a quirky Swedish firm that was swallowed by by decidedly non-quirky GM then shed as part of that company’s bankruptcy in 2009. Saab is still quirky but they make cars. So what: Saab is walking dead, needing billion$ along with more than its two or three customers. Swedes are smart, they buy relatively few cars and the rest of the world is broke. Saab looks to have sold enough of itself for a few more months before is sinks into well-deserved oblivion.

Speaking of oblivion, here is the China Economy Death Watch:

 

A weekend scuffle in Shanghai over a drop in apartment prices adds to increasing evidence that China’s efforts to tame a surging property market are having an impact – even as it offers a hint of what could happen if the measures go too far.

A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.

 

Unrest is increasing in China: a Google search for ‘China riots September 2011′ brings 41 million results! There are riots over taxes, pollution, land grabs by corrupt insiders, working conditions as well as real estate losses.

‘Investors’ in China front as much as 25% of the asking price of new apartments in cash. The strategy is buy and hold: to await inevitable appreciation then sell for immense, easy profits. Because these are speculation vehicles rather than actual dwellings, many of these apartments are unfinished. Many of these apartments are in buildings that are completely vacant. Sadly for these so-called investors, prices are failing to go up which puts the trillions of yuan at risk!

The money still exists but is now in the hands of the property developers who borrowed themselves to put up the buildings. The developers also lent large sums to apartment buyers, who are now falling underwater. If all this sounds like the EU and Italy’s loans to Greece and Italy’s to Spain (and Germany’s to both) they should because the process is identical. The identical consequence is that both China and the EU are broke. Neither the loans nor the apartments built or bought with the loans are worth very much if anything at all.

The source of much of China’s funds is the easy-money policy of the US Federal Reserve. Right now, there is still Fed bond-buying, still ZIRP, still moral hazard. All the US funds flow to China by way of the dollar carry trade. As long as there are dollars and an interest rate differential there will be investment funds flowing to China to construct millions of empty apartments … that are now losing value if for no other reason than there are too many of them, far in excess of organic demand.

Meanwhile, the US is starved for investment capital. Go figure!

What is emerging is the required correction and the accompanying deleveraging. According to Victor Shih and others, the total amount of debt carried by the Chinese is much larger than the establishment lets on. Notice that China analysts focus on official government debt or external debt rather than the total public and private, internal and external indebtedness. The Chinese are in hock up to their necks: debt-to-GDP ratio for China is little different from Euro-deadbeat Portugal:

 

China’s Debt Problem Worse than Portugal

Elizabeth MacDonald (Fox Business)

Government officials in China, the largest foreign holder of U.S. debt, have been chastising the U.S. over Standard & Poor’s downgrade to AA+.

Guan Jianzhong, chairman of Dagong Global Credit Rating, has said the U.S. dollar is “gradually [being] discarded by the world,” and the “process will be irreversible.”

But China’s debt-to-GDP ratio is worse than the United States’ ratio. It is worse than insolvent Portugal, which is now relying heavily on the European Central Bank for help, and had to go to the International Monetary Fund to get a financial bailout.

The U.S.’s new AA+ rating from Standard & Poor’s is still higher than the one assigned to the Middle Kingdom. S&P has China’s debt rating stuck at AA-, the fourth highest level, due to its “sizable” contingent liabilities in its banking system.

China’s own system is jammed with rotten debt held in off-balance sheet state enterprises. Its countryside is littered with eerie, empty ghost towns. And Moody’s Investors Service says last month that China’s local debt was understated by hundreds of billions of dollars.

Despite that, the People’s Daily said S&P’s downgrade of the U.S.’s credit rating “sounded the alarm bell for the dollar-denominated global monetary system.” China owns an estimated $1.16 trillion in U.S. debt. China prints yuan to hold down its value so as to keep its exports dirt cheap. It then uses that extra printed currency to buy U.S. debt.

Here are estimates to keep handy as this debate rolls along:

China’s debt-to-GDP higher than Portugal’s ratio: China likes to say its debt-to-GDP ratio is 17%. Not so fast. The respected Beijing-based research firm Dragonomics says it is 89% of GDP, worse than Portugal’s 83% of GDP, and the U.S.’s 79% by 2015. Stephen Green, China economist at Standard Chartered Bank, figures China’s total debt, including contingent liabilities, is 77% of GDP. China’s balance sheet is notoriously murky.

 

China’s murk: Its massive and growing underground economy launders dollars and holds the resulting transactions off the balance sheet. What comes next is additional Chinese easing, more money printing, more carry trade, more bailouts for Chinese real estate in an attempt to keep the bubble inflated.

Keep an eye out on China. Europe teeters but China could crash any minute.

24 thoughts on “UPDATE:

  1. Fourier2020

    Everybody thinks China has money. They have over a trillion dollars in fx reserves, so they have money, right? They can take those dollars and convert them to euros and buy into the European stability fund, right? Well … what happens if they did take half of their dollar fx and use it to prop up Europe?

  2. Jb

    Thanks, Steve – I look forward to hearing your thoughts. I’d especially like to know if there is a general consensus emerging among the speakers.

    Orlov seems to be echoing your sentiments in his most recent piece: “…without growth the temporary tricks used by government and finance to keep the game going have to be seen as permanent tricks, and as permanent tricks they do not work.” http://cluborlov.blogspot.com/2011/10/stages-of-collapse-revised-joined-at.html

    1. ben

      read that the other day, jb. and then there were 4, stages. i guess that makes up for such a lengthy extend and pretend. with the apparatus sending a message by arresting Occupiers in riot gear, among other things, it does feel like martial law could be just around the corner.

      1. Jb

        A thought provoking post this AM by Charles Hugh Smith: http://www.oftwominds.com/blognov11/democracy-market11-11.html.

        In the final paragraph he wrote: “…Ireland, Greece et al. would be doing the world a great favor by bringing down the corrupt, venal, bankrupt global banking monolith.”

        Time will tell if the Greek referendum can push the Monolith (think Kubrick) over or if it’s just another misdirect to buy time. Why wait until next year to hold the referendum – why not have it next week?

        Meanwhile, I can only imagine martial law in the U.S. under extreme duress. The majority of the population would have to accept it as ‘for our own good.’ At the moment, the government is better off letting the Occupy Movement serve it’s purpose as an outlet for peaceful civil disobedience under the guise of ‘freedom of speech.’

      2. ben

        i don’t necessarily mean military governorship and full-on political collapse. and i’m certainly not talking in the context of the Occupation. i guess i’m talking curfews, use of military personnel over civilian personnel to plan and implement the suppression of with riots and violent protests, securing government buildings (and handing out food?) with the military, the further erosion of civil law with ratcheting up of homeland security, the implementation of obama’s ‘council of governors’ executive order.

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

        as for the police themselves, here’s a quote from the great duwayne jossephson (the cassandra of troy, mi) over at empire burlesque in the context of a discussion on the loss of police to budget cuts:

        “Detroit as typical has:

        Detroit Police Force.
        Wayne County Sheriff Deputies
        State Police

        Detroit Public School Police
        Wayne St. University Police
        U of Detroit-Mercy Police
        Henry Ford Health System Police
        Detroit Medical Center Police

        The Canadian – National Grand Trunk Police (A Canadian Crown Corp)
        The Norfolk-Southern Police

        The Comerica Police
        All of these have almost full Police power and require Police academy training with many Officers being Detroit Cops.

        Feds. Oh dear!

        FBI
        IRS
        ATF
        Secret Service
        Department of Defense Police
        US Postal Police who have the authority to enforce the law wherever they are!
        Homeland Security Police
        Military Police
        US Marshal

        WOW there’s more. So if a city like Highland Park cannot afford its Police Dept there’s so many option for academy trained and experience officers
        Not to mention the cooperation of Suburban Police and surrounding County Sheriff Dept.

        And then come the private Security corporations like Pinkerton, Burns, Wackenhut, Blackwater/XE.

        So the 1% is supported a by a significant Police Security grid which has NOTHING in common with the rest of the working classes. Not knowing the exact numbers I would say the 1% defended by the 10% against the 89%.”

        orlov suggested that with the financial and political collapses coming together in a top-heavy fashion we would see the pancaking of the rest (with the next being commercial) as opposed to doing so in the relatively orderly fashion that he had hoped.

      3. Jb

        Hi Ben,

        For isolated protests / riots, I would expect govenors to mobilize local and state authorities as well as national guard units. But if we see a widespread collapse of the credit markets and the shelves at Walmart go bare (especially in the pharmacy), then I think we could see nation-wide policies put into effect very quickly. I do think this is the scenario that Orlov, Tverberg and Foss are warning us about – something quite sudden. That’s why I asked Steve to report if he notices any consensus amongst the speakers. I’d like to know if it’s because they are reading each others work or have come to their conclusions based on individual expertise; I suspect the latter.

        Thanks!

  3. Sandor

    The MF Global debacle highlights the extreme moral hazard that underlies our ‘system.’ The problem is not with Corzine or Obama or Bernanke or Merkozy, etc. The problem is human nature. We are programmed for insecurity about our survival. The concept of the future and the ability to plan/strategize when combined with an overclocking of scanning the horizon for threats leads to a paranoid, greedy, fearful species that hoards and fights over resources even as it crowds out itself. In short, humans are insane as a default. The fact that we have ‘evolved’ to the point where we can rationally discuss our insanity and learn to let it go through self-discipline and training is remarkable. This form of psychological training and mental focus is the necessary anti-virus to human society.

    There are simple solutions to prevent the financial problems, such as not allowing firms (brokerages/banks) that handle customer money to do any other business. Strict permission controls on account transfers, etc. Personal and joint liability for all senior management of any bank/insurance company/hedge fund in the event of institutional insolvency for 5 years after leaving the firm (to prevent escape by jumping off the ship when they see it going down). Hard caps on leverage. Daily margin calls forcing all books to be marked to market daily would prevent anyone except the idiots (ala Corzine) from oversizing their positions. But most governments don’t do this because most people get addicted to the fantasy of ‘something for nothing’ that the drugs of debt, financial fees and kickbacks provides.

    The fact that these simple fixes are not only not in place but are forcefully resisted by the regulators via obfuscation and excuses indicates a collective failure on the part of all of us. We are all too greedy and fearful. I question whether survival in and of itself is the value worth pursuing. The game we are playing of trying to save ourselves while the ship goes down is not a fun one. I have given up sounding the alarm with my friends and family. Comfort is too comfortable. So we will continue to dissect and analyze the illusion of leveraged prosperity while we burn more fuel on borrowed time. I can no longer summon the outrage for the insanity and moral hazard when I realize that the problem is within ourselves. Acknowledging this is a start. Towards what I am not yet sure. Perhaps some form of truth, justice, beauty and sanity.

    1. ben

      hey sandor. maybe there is no human problem. if there’s a greed problem it’s libidinal in nature. i’m reading ‘cannibals and kings’ (h/t el gallinazo) and i think that there is in itself no problem with the rise and fall. welcome to the fuck shop, we doin’ it up real big this time. here’s a review (pdf) of the book.

      1. p01

        And if you think “Apocalypto” was a tough movie, think again; they did not let all that protein to rot in the sun.

    2. Josh

      Sandor – I think you’re onto something here with your passage: “I question whether survival in and of itself is the value worth pursuing. The game we are playing of trying to save ourselves while the ship goes down is not a fun one.”

      Here’s a quote from the visionary that runs the IlluminatiMatrix site, Bryan Kemila. I think it will resonate with you:
      “There’s nothing one can do to change it, or fix it, it’s all just bullshit all the way down the line. It’s a fake, a fraud, a sham! There is no god, no sin, no hell, no right, and no wrong. Everything is designed to fail. The only way out is to realize this, … that all is well. There’s nothing to fix, for the thing is playing out as it’s intended to play out. Humanity is just another aspect of this conjured up illusory plane, so just chill…Non-reaction means to not be emotionally effected one way or the other, … but just interested to simply observe the goings on. This really fucks with the luciferian agenda more than anything else.”

      Here’s his masterwork which I have posted here before. It’s a mind-blower:
      http://video.google.com/videoplay?docid=-6226036544608625413

      1. Raul

        Non-reacting to a punch in the face–or worse, a punch in the face to a loved one or a just plain stranger doesn’t exactly fuck with the luciferian agenda; it is the luciferian agenda.

  4. James

    The thermodynamic processes of the universe are not amendable by human will. They will produce what they are meant to produce. If energy and its consequent survival value can be had by humans that cooperate, then it will happen. If deceiving and cheating within a cooperative group happens, then it is only because it has conferred a survival advantage. A complex, adaptive dissipative structure will respond to its environment according to its billions year old programming and limited real – time development of its neural tissue.

    How does the human organism survive? What is the motivation? Pleasure. We pursue the full spectrum of pleasure throughout our lives. Why? Because organisms that do so, survive. Why do they survive? Because they felt enough pleasure. They drank some cool water, ate some fatty food, copulated, defecated and laid down for a long comfortable nap. Dopamine will be released if it fits within the evolved neural framework of our survival. We can learn five hundred different ways to hit the sugar/carbohydrate dopamine release. We can spend ourselves silly trying to gain social status dopamine release. You can Kama Sutra until you’re blue in the face and the dopamine flows a river.

    Your imaginary fears of death can be obviated by an equally imaginary heaven and what is responsible for the hallelujah feeling? Dopamine.

    The conflict between cooperation and individual greed is within the evolved brain. The Superego, social morality, has been placed upon the greedy Id by evolution because it worked, it gave a survival advantage. But that doesn’t mean that evolution has not produced super deceptive and selfish individuals that will try to game the system, those that will try to take all of the advantages of cooperation and at the same time manipulate that cooperative group for individual advantage. We are many little greedy Ids glued together by an evolved prefrontal cortex. The greedy Ids stick together to satisfy their needs but will just as often stab each other in the back and dissociate to form new groups or get so disgusted with their fellow humans, they drop out of social life.

    The rational mind tries to place humans in to camps of good and evil, yet whole groups, glued together by the prefrontal cortex, may behave morally towards each other and yet commit abhorrent acts beyond the confines of the group. Many selfish Ids can be nice to each other while they commit atrocities upon those that are not part of their tribe. The Nazis were cohesive and moral within their own bounds, but if you were outside the tribal identity, the results could be and were horrendous.

      1. slackjawedyokel

        yes … physiology is psychology is destiny sort of concept. Adaptive dissipative nonlinear responses are also possible where memes can propogate due to resonence with (“sane”?) preformed neural dance from structure eg maths proof // nuclear density gauges licenses // surrendering in war require several prefronta cortii acting concurrently/concertedly agreeing on reality in vastly different circumstances -[ Aside if you have managed to achieve some communication with the wild beings that coexist amongst humans (birds n mammals normally) then share n care -- even if it is preprogrammed not a bad idea - prompted Vism. (Namaoli?). ]
        To think of the same idea as another when thinking using factual result knowledge ( eg science, inventing, war ) is quite common, indicating some similarity in the neural dance I think. How about you? Does free will – the decision to maintain a change ( first mental, then if it was a true decision as moments accumulate physical, habitually then livelihood//life style) exist?

  5. iguanaisland

    Dear Steve,

    I really love your viewpoints on the debt crises and finance issues, but I have a favor to ask you: would you re-visit the issue of Fukushima now that reactor 2 has gone re-critical (and TEPCO and the Government have admitted that it has). I believe you did a whole long series of blog posts on Fukushima in which you predicted EXACTLY that! Although as I recall you said it might happen with reactor 3, but that might also be critical now.

  6. steve from virginia Post author

    A brief update as today is the last day of ASPO conference. It has been thought provoking as usual, covering a lot of the ground we discuss here. It’s also been somewhat grueling. This is to some degree a reflection of the seriousness of our situation. A bug with a pin through it doesn’t have a whole lot of maneuvering room even if it does not feel immediate pain …

    One sobering feature of our ongoing dilemma is the reactor situation in Fukushima, I’ve been working on an update which to some degree has been rendered obsolete by TEPCO’s admission in the past couple of days that there has been reactivity within the piles. What kind, what materials are involved, at what rate …. who knows? The bottom line(s) are: there is no ‘fun’ in Fukushima and maybe no fixes, either! More on this soon.

    Another situation is the mess in the EU with nobody in charge and nobody with a plan. It really looks like the current regime has run out of maneuvering room. Nobody has anything to offer of real value, not surprising when the primary activity over the past 75 years or so has been to burn value up for shits and giggles. Now what?

    Answer: bank failures. Two have failed within the past couple of weeks: Dexia and MF Global. Another — Jefferies Inc, a market-maker in EU securities — is on the brink. Interestingly, MF was not bailed out despite its high profile in the commodities arena and that of its Boss, Jon Corzine. I expect more banks to announce how secure they are (fail) in the upcoming week …

    I’ll also have an ASPO report …

  7. Ellen Anderson

    Been waiting to hear your ASPO report. How did people react to Orlov, I wonder? Anyone talking about how we might decommission our old nuclear plants?

  8. steve from virginia Post author

    It was a good conference. I got some ideas here which I will use to experiment on you, my captive audience. I have a lot of notes, I just need to sort.

    Most impression on the group would be Wes Jackson of the Land Institute. He has been working to develop perennial grasses that can produce high-yielding crops. He has developed a superior variety and he had the entire story behind it.

    Outside of that, there would be what I would categorize as the ‘garden tools’ group and the ‘electric car’ group. That the energy analysts were mostly in the garden tool group was sobering. The dominating personalities would be Sharon Astyk and John Michael Greer. To a large degree the ASPO is a writers’ circle. Most all of the speakers had books out or on the way.

    Because of the way the event was structured, there was little opportunity for me to keep an ongoing journal. Last year’s event struck me as more leisurely with more time to chat and to expand a bit more off-topic. There was also more space with few other conventions. This go ’round had little or no room to sit and work.

    Dmitry was actually very quiet and amiable, and witty. He actually didn’t much discuss the Soviet Union. Time marches on and it is becoming clear the twenty-first century USA is on its own path.

    Anyway, more later …

  9. Pingback: The World Is Passing Through Peak Credit … Diktat Will Provide Order Out Of The Chaos Of Deleveraging « EconomicReview Journal

Comments are closed.