The Weekly Report

By: Mick P | Tue, Oct 14, 2008
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Welcome to the Weekly Report. As I write this on Saturday afternoon, I see nothing from the G7 statements that can be taken as co-ordinated action. Indeed all I see is a repeat of what is becoming a tired mantra:

Notice the complete lack of a plan, just a repeat of actions already taken. This is because the European Leaders want to be seen as the ones implementing new ideas, if any are forthcoming. It has to be considered as a snub to the US, especially Mr Bush. Here is the statement from Europe:

The will be no common European Bail out Fund because the ECB doesn't have the remit to carry out such an operation. The ECB can do discount window type operations to European Banks but it does not have the powers of the Federal Reserve, US Treasury or the Bank of England. It shows the weakness of a Federal system in the full glare of examination and need.

It also shows why Iceland was left to go bankrupt, the ECB has no authority to intervene or "help" those banks outside of the Euro system. Iceland is not alone, many countries in Europe do not belong to the Euro and will have to survive on their own abilities or, in a move reminiscent of earlier decades, become reliant on intervention from the International Monetary Fund (IMF). The only country I saw helping Iceland was Russia who lent them $8Bn. Iceland will be the first of quite a number of countries that will be unable to guarantee the obligations of domestic banks, a pointer is to look for low GNP countries with a high density of domestic banks operating across international borders.

How effective the IMF would be in the face of global financial systemic failure is questionable, they currently do not have the reserves to make much difference to a medium sized European nation, let alone a continent, or 5. They also lack the ability to take notice of what they see. The times have passed when the following should be acceptable analysis:

Three weeks or so later and Iceland is bankrupted even when using the methods outlined in the second paragraph. Boosting confidence is one thing, trying to do so whilst your liabilities are 10 times greater than your earning power is another.

The fallout is stories like this:

Yet gold exhibits the action of an asset coming off a parabolic rise notice, just like the Dow, the increase in volatility and the downtrend forming after the top in March '08.

Although the UK is not part of the Eurozone, PM Brown will be attending by invitation to showcase his latest "idea" of part nationalization of some UK banks. It seems that after repeating the mistakes of the past, he is about to try the cures of the past. As I have said before we are unlucky with the timing of this depression, there is a distinct lack of innovation and original thinking among those who rule.

It is also very clear that the global cure is directed at Banks to "strengthen the reserves". This innocuous looking phrase means a depression is guaranteed in economies reliant on credit for expansion. The banks will hoard cash and close down the lending desks. The unwinding of margin levels, margin calls and de-leveraging coupled with outright selling to raise cash is more than evident in world wide stock markets. The failure of Lehman cost $270Bn (so far) but it may not be the Broker/Banks that bring down the markets. I am extremely wary of the consequences if the likes of GE, Ford and GM go bankrupt. The CDS obligations on these 3 if a default event occurs would dwarf the cost of Lehman going under. Notice the concentration of risk in the Industrial/Financial sectors by using these 3 companies as examples.

Credit Default Swaps were meant to spread risk and avoid concentration of exposure. Clearly this has not happened, the CDS situation has played out the way I thought it would. If you sell insurance you need to ensure you are able to pay when an "event" occurs. If you ignore this rule or used "assets" to show you could pay up then when a day of reckoning arrives you have to either hold your hand up and go broke or sell assets. If the sellers of insurance are now facing the possibility of a widening of credit tightening to the industrial and service sectors of the economy the selling of assets will continue. Eventually we get a default on a default event. I suspect that day is not far off.

Consequently the Collection Agency is now positioning for an imminent systemic global meltdown of banking, credit and insurance liabilities and the destruction of the ability to carry out normal trade.

Why so dramatic? Because the World's Central Banks combined are no better off the Iceland. They do not have the reserves or "assets" to cover the total liabilities of the CDS market, let alone the total of outstanding OTC derivatives:

Bank of International Settlements

Remember these are liabilities that belong to the Banks; a failure of one market will automatically cause a collapse in all the others. The 2 currencies that dominate the world are the Yen and the Dollar:

Courtesy of

The chart above uses the Euro as a baseline and shows the +/- movement of the Dollar, Yen, Sterling and the Dow. I fully suspect the current moves are preparation for a currency crisis and shows demand for the 2 most liquid currencies in the world as the unwinding and de-leveraging of global trades intensifies. I expect this trend to continue until the "credit crisis" is resolved. Indeed as far as I am concerned the term credit crisis no longer accurately describes the current situation. We are facing the recentralization of wealth, away from the global economy and back to the Government/Banker complex. Why do they need cash? To pay liabilities and ensure enough cash is at hand to avoid using credit in the future. In a deflationary depression those holding cash need not invest to get wealthier, the asset itself appreciates.

Finally for this week I continue to see calls for massive intervention to over-ride free market mechanisms. Such calls are justified because "its different this time" the events are so big, the fallout so enormous that Governments must act in a coordinated manner to overcome the threat. So just to remind readers, this is not different this time, we are seeing the same results from an over-expansion of credit and lax lending as the US did in '29-39. We are seeing the same attempts using the same methods to fix the problem as we did back then. The only difference is the size of the current crash when compared to the '30s.

It didn't work then and it will not work now. The only reason the US pulled out of the depression in the '30s was thanks to WW2 and the increase in demand that caused. Whilst I am not advocating WW3 as a cure, it will take a similar large scale, global increase in demand to allow business to recover. The hope would be that by the time of the next recovery the use of credit for expansion and consumption will no longer be tolerated.

In the meantime, get rid of debt, save cash and stop spending on anything that is not essential. The Governments of the world and their shills will try and tell you to do otherwise, as they did post 9/11, in an attempt to encourage profligate consumer spending. We are now living with the results of that wish, that patriotic demand. Now is not the time to fall for such rhetoric again.

Saving is the new "investing". Just make sure the savings are safe.



Mick P

Author: Mick P

Mick P (Collection Agency)
About Collection Agency

An Occasional Letter From The Collection Agency in association with Live Charts UK.

For some years now I have written an ongoing letter, using macro-economics, to try and peer into the economic future 6 to 18 months ahead. The letter was posted on a financial bulletin board to allow others discuss its topic.The letter contains no recommendations to buy or sell, indeed I leave that to all the other letters out there and to the readers own judgement. The letter is designed to make us all think about what may be coming, what macro trends are occurring and how that will affect future trends and how those trends will filter down to everyday life and help spot weak or strong areas to focus on for trading or investing.

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