Dubai Default Damages Denial

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

Real estate bubbles and their subsequent collapses frequently accompany financial crises, especially the ones that linger and last a long time. The current Dubai default is merely the latest episode in the unwinding of a global real estate glut. Local authorities denied there was any problem right up to the end. Until the excesses are wrung out of the system, sustainable economic recovery is not possible - and even then it's not guaranteed. The crisis in Japan began 19 years ago and they have yet to get their economy fully functioning again. Japan also provides the worse case scenario for a drop in real estate prices - 90% for residential real estate and 99% for class A office buildings in Tokyo. While Dubai might not get that bad, real estate price drops there could be considerable.

The UAE central bank has pledged to provide funding for both domestic and foreign banks in an attempt to prevent bank runs in the region. It is estimated that a quarter of Dubai's $80 billion in real estate debt came from UAE banks. British and eurozone banks may hold as much as 70% of the remaining $60 billion. Exposure in the U.S. and Japan seems to be fairly minimal. Stock markets have been closed in the Gulf region due to an Islamic holiday since the crisis unfolded on Thanksgiving day. Dubai and Abu Dhabi opened on Monday and were down 7% and 8% respectively. The extent of contagion to other bourses in the region remains to be seen. Dubai is particularly vulnerable because it is not an oil producer, the other oil-rich countries in the region should ultimately be in much better shape.

The price of oil is recovering today and briefly peaked above $77 a barrel . Light sweet crude was down as much as 7% at one point the day after Thanksgiving. Oil is in a seasonally weak period until next March however, so this is likely to keep a cap on any possible rally for the next few months. Even at current levels, oil is causing inflation to return to Western countries. The eurozone just announced that year over year consumer inflation turned positive in November for the first time since last April (this inconvenient news seems to gotten buried in U.S. mainstream media coverage). Rising oil prices were cited as the cause. The inflation figures will start increasing soon in the U.S. for the same reason. The eurozone monetary authorities, just like the U.S. monetary authorities, consistently deny that inflation will be a problem. Nevertheless, the ultimate inflation indicator gold keeps hitting new all-time highs.

The U.S. dollar spiked higher on Thanksgiving day and Friday as a safe-haven trade. The move was exaggerated by low volume with most American traders gone for the holiday. The trade-weighted dollar got well above the 75.00 support level that it broke decisively early last week. However, in early Monday morning trading, it once again fell below this level dropping as low as 74.49 before starting a new rally. The dollar can't seem to stay up for more than a day or two and it consistently hits new yearly lows. The U.S. government denies it has a weak dollar policy. The market seems to disagree.

Disclosure: Long gold.

NEXT: Falling Supply and Rising Demand Cause Gold to Soar

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

IMF Selling Gold to Dampen Rally

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Like clockwork, the IMF gold sale has reared its ugly head again as has occurred during a number of previous gold rallies since 2007. This time the IMF is actually selling the gold. It only threatened to do so the previous six times or so. It says it is looking for a central bank buyer. For some time, rumors have claimed that the central bank buyer will be China and these resurfaced again last week before the IMF announcement. China is playing coy however and says it wants the gold at a discount to the current $1000 price. Other possible buyers include Russia, the Gulf Oil States, Japan and India, all of whom have relatively low gold holdings and too many U.S. dollars.

The IMF is selling one-eight of its claimed gold holdings (the IMF is not audited, nor will it answer questions about whether its gold is held in individual contributing countries and being double counted as part of their gold reserves) or 403 metric tons. While this sounds like a lot, its is less than $13 billion at current prices. China alone has approximately 2000 billion dollars in reserves held in foreign currencies, almost half of which are in U.S. dollars. China's current gold holdings are 1054 metric tons, up from 400 metric tons in 2003. So it has less than $33 billion in gold versus almost 1000 billion in U.S. dollars. It is thought that the gold sale is being used as a way to let China get rid of some its U.S. dollars without dumping them on the open market.

There is also a two-day Fed meeting this week on Tuesday and Wednesday and a G20 meeting this Thursday. Since the Credit Crisis began two years ago, the U.S. dollar has rallied from just before the Fed meeting to just after (gold falls in response). This has happened no matter how much the Fed has announced it is debasing the currency. No one in their right mind would buy dollars under such circumstances, which leads to the obvious conclusion that global monetary authorities are acting in concert at these times to hold the dollar up. Expect this again this week. As mentioned in this blog on Friday, the dollar is too extended from its 50-day moving average and will try to rally back to that point.

Gold has traded as low as $996 this morning and the trade-weight dollar is at 76.97 at the moment (still below its 78.33 break down level). Expect general weakness in gold and the other precious metals and strength in the dollar until Thursday. A reversal for both after that is highly likely. Keep an eye out for buying opportunities, particularly in the mining stocks.

NEXT: Manipulation Fails, Gold Rallies Back

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Muriel Siebert Discusses the Credit Crisis

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

At the January 9, 2008 meeting of the New York Investing meetup, I had the pleasure of interviewing stock market legend Muriel Siebert. In 1967, Siebert became the first woman to have a seat on the New York Stock Exchange. In the mid-1970s, she was appointed Superintendent of Banking for New York State. No bank failed under her tenure. In her more than 50-year career on Wall Street, Muriel Siebert had personally witnessed almost the entire post World War II financial era. She had seen it all and had done it all.

Highlights of the this historical interview with Muriel Siebert have been condensed to three eight minute videos, which can be seen at:
http://www.youtube.com/watch?v=UHxRCNd0HSI
http://www.youtube.com/watch?v=bZLsD2DHvLw
http://www.youtube.com/watch?v=_tL2bOmkMwo

In the interview, Siebert indicated that things had changed considerably since the 1970s, the last period of high U.S. inflation. The U.S. had lost its dominant economic status and emerging economies around the globe were not as dependent on it as that had been previously. She also pointed out how their growth was creating a voracious demand for commodities and the wealth transfer from rising commodity prices enabled the takeover of major U.S. financial institutions by commodity producing countries like the Gulf states. She was not sanguine about the prospects for the U.S. dollar, pointing out that the U.S. needed to cut the deficit considerably to support it and the consequences of doing so would be severe.

Siebert said the she had seen nothing like the subprime crisis during her long career on Wall Street. She thought the abuses had been so extreme and damaging that some people involved in creating the problem should go to jail. Siebert asked, "Where were the regulators?; "Where were the rating agencies?"; and cited mortgage brokers as being key players in generating the large quantity of irresponsible loans. The subprime crisis wasn't the only thing she thought we had to worry about either. She mentioned the collapse of private equity and how this had helped juice the market up and that its loss would cause the stock market to fall.

Siebert pointed out the similarity between how Enron hid its financial activities and the banks had done so in the 2000s by pushing their subprime activities off-shore and off-balance sheet. She stated that under Sarbanes-Oxley that audits should be complete by March 31st and a clearer picture of just how extensive the damage was would begin to emerge. Her opinion was that no one really knew how big the problem was. Siebert mentioned the large amount of derivatives that now exist and the complete lack of regulation for them. She thought the we need global security regulation that should be instituted on a similar model as global banking regulations that are now in place. Siebert thought that there was too much leverage in the system and said this was what really scared her, although she concluded that she didn't see a 'total' collapse of the financial system.

NEXT: Central Bankers Gone Wild

Daryl Montgomery

Organizer, New York Investing meetup

For more about us, please go to: http://investing.meetup.com/21

Sovereign Wealth Funds Bail Out the Banks

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

As the credit crisis unfolded in the fall of 2007, a number of big banks and brokerage houses were desperate for capital - far more desperate than was ever admitted publicly. While they needed large cash infusions to continue operating, a number of sovereign wealth funds in the oil-rich Gulf and the Far East had swollen coffers of dollars that they needed to place somewhere. It was therefore almost inevitable that some of the first bailouts (an insolvent financial institution requires multiple bailouts) of struggling financial institutions would be done by sovereign wealth fund purchases. By the end of 2007, it was estimated that these funds would make at least $37 billion of investments in Western financial companies.

The idea of foreign investment as a means of providing capital was not a completely new one. Prince Alwaleed Bin Talal of Saudi Arabia had purchased 5% of Citibank (then Citigroup) when it was reeling from the Savings and Loan Crisis in the early 1990s. Earlier in 2007, China purchased a $3 billion stake in Blackstone's IPO, which debuted just before the collapse of the private equity bubble and promptly plummeted in price. By November, Abu Dhabi had bought a 4.9% stake in Citibank for $7.5 billion. At the time of the purchase, rumors were circulating on Wall Street that Citi might be insolvent. U.S. government officials admitted being involved in the transaction, which begs the question as to whether or not they would have allowed the deal to go through if it wasn't absolutely necessary for Citibank's survival.

In early December, the Government of Singapore Investment corporation got 9% ownership in UBS for a little less than $10 billion and an unnamed middle eastern investor (thought to be Oman) bought a 2% stake. China then bought a 9.9% stake in Morgan Stanley only days before Christmas. Singapore's Temasek Holdings then helped bail out Merrill Lynch on December 24th. By mid-January, Citibank was already in need of a second bailout by the sovereign wealth funds, only two months after the first one had taken place. The Government of Singapore, the Kuwait Investment Authority and Price Alwaleed were part of a $12.5 billion capital infusion for which they got some ownership of the bank in return. On the same day, only weeks after its first cash infusion from a sovereign wealth fund, Merrill Lynch received an additional $6.6 billion from parties including the Kuwait Investment Authority and the Korean Investment Corp.

None of these deals had to undergo scrutiny by the U.S. Committee on Foreign Investment, which only examines whether acquisitions by overseas buyers compromise national security when their stakes rise above 10%. Given the large number of sovereign wealth funds and wealthy individuals in the Gulf States and Far East, it would be possible for their aggregate ownership to reach 100% without a review ever taking place.

Next: Government Investment Pools Dry Up

Daryl Montgomery

Organizer, New York Investing meetup

For more about the New York Investing meetup, please go to our web site: http://investing.meetup.com/21