It would be interesting to hear some of the private conversations of the OPEC ministers. At what dollar exchange rate to the euro do they begin to seriously contemplate switching the price of oil from the dollar to a basket of currencies?

It's the $1 trillion question. We saw what happened a month ago when the Chinese first began moving their reserves into hard assets (the Blackstone private equity firm) as opposed to Treasury paper. The Treasury market dropped 150 points within a few weeks time. This made all the remaining Treasury paper China still holds worth a bit less than before.

Then the Chinese announced they were investing some money in Barclays Bank to help with their bid for ABN Amro. The first reaction out of the U.K. government was to express doubt about the wisdom of selling precious domestic assets to foreigners.

If Western central banks had their way, China would just keep buying U.S. and European government paper and sit inscrutably on any market losses they may incur. The Chinese are just too smart for this, so the battle has been joined. But the Chinese also know they have the weaker hand, because their only real weapon is to dump a bunch of paper on the credit markets and possibly cause a meltdown.

In their perfect world, the Chinese would diversify out of all this government paper and into Western companies with interesting technology. Western consumers would continue to load up on debt to buy Chinese goods and keep the Chinese miracle growing.

The real question yesterday in the markets was whether this perfect world is possible any longer. Have U.S. consumers run up against their debt limits, and are all these leveraged buyout companies discovering they too can't borrow any longer on easy terms?

If so, the Chinese may have a bigger problem than what to do with their reserves.

In finance it is answered by the question of how much capital underlies the loans an institution has made. The loans largely are its assets, and what it borrows from depositors + other sources are its liabilities. It makes money on the spread between its lending and its borrowing.

The difference between the assets and the liabilities is capital, and it can be very small. Sometimes it can be faked, by odd valuations based on models and not markets.

Finance can be a kind of shell game, especially with crooked accountants, traders and the alleviations of counsel. A reading of financial statements and a knowledge of what one's countrymen are known for is one good way to answer your question.

http://mauberly.blogspot.com/

This is what Greenspan said for years, pointing to capital ratios of 8 - 12% for the big U.S. banks, up substantially from 10 - 15 years ago when 6% was the norm.

Maybe the capital itself cannot be easily faked, but banks can delude themselves on their assets and liabilities. How many of the big banks were prepared for the highly-leveraged loan market to shut down overnight, leaving them stuck with Daimler-Chysler, Alliance Boots, and other shaky loans?

My guess is few if none, because the first thing the banks did is go back to the issuers and private equity buyout firms and demand better terms. That's where it got interesting with one big buyout firm - they refused to improve the package and told the banks "park that paper on your balance sheet, that's what you are paid to do and that's what underwriting means."

I think the stock market looks at these developments and concludes the banks have large, unexpected poor credits now jammed onto their balance sheets. Which begs the question - do they have enough capital for these risks?

Plus a lot of this lending is being done by firms that don't have the capital requirements of US Banks. If this starts to melt in a medium sized way, we'll be in trouble. To me a key is watching the emerging markets debt and European private equity debt and so on.

They seem to have been able to calm fears before. They got the Chinese Banks financed after 04. It looked worse then, other than for subprime.

We're down a crispy 3 digits again here. I may be taking back some earlier comment of mine.

http://mauberly.blogspot.com/

NEW YORK (AP) -- Wall Street extended its steep decline Friday, propelling the Dow Jones industrials down more than 500 points over two days after investors gave in to mounting concerns that borrowing costs would climb for both companies and homeowners. It was the Dow's worst week in nearly five years.

Investors cast aside a stronger-than-expected read on the economy and maintained negative sentiment that dominated Thursday when the market shuddered amid worries over the U.S. mortgage and corporate lending markets. Investors globally took flight from equities, shifting cash into safer investments in Treasurys.

Although the market has often rebounded after a steep drop -- and has done so in recent weeks -- investors appeared unable Friday to set aside their concerns about a weakening housing market and tightening credit.

A Commerce Department report that the U.S. gross domestic economy rose at a better-than-expected pace in the second quarter appeared to do little to quell investors' unease Friday. GDP increased at a 3.4 percent annual rate, indicated that the drag from the housing sector lessened. Economists had expected an increase of 3.3 percent.

http://biz.yahoo.com/ap/070727/wall_street.html?.v=56

http://mauberly.blogspot.com/

TAVIA GRANT
Globe and Mail
July 27

The contrast between the Canadian and U.S. housing markets has never been starker.

U.S. existing home sales sank to a near five-year low Wednesday while prices continue to slide. In Canada, however, home sales continue to defy all expectations, breaking records for the last three months.

“Such a divergence between the Canadian and U.S. housing markets is unprecedented,” said Marc Pinsonneault, an economist at National Bank Financial, in a note to clients.

More bad news landed with a thud Thursday, with a report showing U.S. new-home sales plummeted 6.6 per cent in June — twice as much as expected.

Generally, economic growth in Canada tends to mirror the ebbs and flows of its next-door neighbour. That's not the case nowadays, for several reasons.

High energy prices are underpinning growth in Alberta, and sending national housing statistics higher, Global Insight (Canada) chief economist Dale Orr said in a report earlier this month. The swift rise in U.S. interest rates is another factor, and so is the fact that the Canadian housing market has been more steady in recent years.

Much of the difference may stem from exposure to the once-booming sub-prime mortgage market in the U.S. Over the past several years, low-interest mortgages were offered to many people with poor credit histories or low incomes. When borrowing costs sharply rose, however, new homeowners got squeezed.

The result has hammered U.S. economic data, corporate earnings and, this week, the stock market.

Today's results, combined with Wednesday's data show “the U.S. housing slump is far from over,” said Benjamin Reitzes, economic analyst at BMO Nesbitt Burns Inc. “At some point falling home prices will affect the consumer, the only question is how far do prices have to fall? Housing continues to weigh on the economy with no end in sight.”

In Canada, meantime, the economy is expanding, jobs are being created and interest rates remain at a historical low.
More

Sorta like Russia but with a polite foreign policy. It sounds like Alberta, Vancouver and other hot real estate spots will continue churning along if energy prices stay high and these local economies can prosper. What I don't know is whether the absurd loosening of credit standards in the U.S. has been duplicated in Canada. If so, the road down is going to be as bumpy as it is in the U.S.

http://www.usagold.com/germannightmare.html
http://www.joelscoins.com/exhibger2.htm

The government took the currency off of a gold standard at the beginning of the war. During the war, the amount of currency quadrupled, but consumer inflation was only 140%.

Between war reparations and people exploiting inflation by delaying tax payments, the government was stuck monetizing the debt, further weakening the currency.

Once inflation was significantly outpacing interest rates, it made financial sense to borrow and delay payments as much as much as possible, so massive market speculation was encouraged, and there was massive liquidity.

When there was a loss of confidence in the currency, the buying power started plummeting precipitously, which is, of course, a self-reinforcing issue. Meanwhile, because the drop in buying power was tantamount to plummeting effective liquidity, the government was printing money as fast as it could, which, of course, devalued the money as a secondary self-reinforcing factor.

Historical indications are that hyperinflation is counter-acted by reducing the numeric money supply. Germany did this by physically limiting the issuance of currency, and Brazil instituted more stringent lending standards.

n/t

With electronic trading being for the most part, unregulated, there's a swamp of "virtual" money out there, the extent of which can only be guessed at.

Consider, for example, what happens when you direct your broker to purchase, say, 10 shares of AT&T. What frequently happens is that an IOU for 10 shares is simply added to your account and your cash fund debited. It's entirely likely that your stockbroker is playing the "float" and it may be quite some time before a share is actually purchased for you. Your broker, on the other hand, can purchase the shares when the price is advantageous to him. It's a double-whammy--you get charged for the trade, and your broker uses your money to speculate on the side.

Just like money, the number of shares in circulation far exceeds the actual market capitalization.

about this. Much is electronic; that is true. And OTC market makers do squirrely things with certain stocks, but I don't think the practice with exchange traded stocks is quite so fast and loose as suggested. I sure hope it isn't.

I think it probably is with OTC derivatives. But Numerian would know the current practices.

http://mauberly.blogspot.com/

But there are few squibs out there on subject of "naked shorting":

Here's a video done back in March by Bloomberg TV

Wikipedia has many other cites under the subject "naked shorting".

My impression is that the trading's out of control.

often occurs in OTC markets with microcap stocks that are being squeezed by hedge funds who have loaned the companies money and have convertible bonds that underlie their position. Some years ago there was a guy who posted(from Houston, coincidentally the land of John O'Quinn in the video) about it on the old eco board.

Nonetheless, the video affirms your account of a seriously fraudulent practice. Your impression is not at all unfounded. Good video.

http://mauberly.blogspot.com/

If you buy shares of stock from a registered broker, by law I believe the broker must either deliver the stock to you from his inventory, or purchase them in the open market for credit to your account. Your ownership of the shares are registered electronically at an independent third party serving the whole market, and your dollars are debited your bank account, usually using Fedwire or the ACH or some such independent payment system. In some circumstances you can still ask for shares in paper form.

The SEC regulates the settlement period for stocks (T+1 for trades settled the day after transaction, T+2 for two business days after, etc.). Maybe it is possible for the broker to benefit from dollar float - in other words, receiving your money first in good funds before paying out on their obligation (in the form of their own money to purchase the stock, or an internal debit if it is in their inventory). But I don't think they can manipulate the system beyond what a bank normally would do with the float.

I'm not an absolute expert on this but it seems highly unlikely and excessively dangerous that the SEC would allow brokers to give investors fictitious records of their stock ownership. In other words, the sum of all shares circulating in the market must equal at all times the total shares issued as stated on the company's balance sheet.

In someone has some credible evidence otherwise, I would love to read it.

that Petronius cites is evidence, beyond what I thought. I had thought,as you did, of the proper delivery procedures.

The claim is that people are being allowed to fail to deliver securities against short positions. So there are in effect more shares being traded than issued.

I was made aware of this by a visitor to the old board back in '03, I think. O'Quinn was his attorney, now that I think about it. And he had a microcap that was buried by short selling.

One technique is to do a PIPE(Private investment in public equity) and short against it, since you already have a discount on the shares that you own by means of the PIPE. If you have debt that is convertible or has warrants, you can end up making a fortune and owning the company, especially if the debt has some seniority.

http://www.investopedia.com/terms/p/pipe.asp

Subsequently, I then found out that certain brokers were failing big time on short sold small caps.

But with a big cap like AT&T, I still don't think so.

The practice on Overstock.com is disturbing, regardless of the performance of the company.

http://mauberly.blogspot.com/

... Numerian's conclusion i.e. that "Inflation is still a problem but is being contained".

The dollar is after all no longer tied to gold - his historical analogy does not hold there. I bet on hyper-inflation rather than deflation when things finally break apart.

Robert Prechter makes the most convincing case so far - that the debt implosion will result in deflation, not inflation. He doesn't advise investing in gold or other traditional inflation hedges, and doesn't see an inflationary surge occurring.

His argument is based first on the long term wave formations, which I don't understand that much, but from a fundamental perspective, on the massive expansion of debt in industrialized economies. This debt has been used for frivolous expenditures, to be sure, but this is always the fall back scold of contrarians. The real problem with the debt is that to the extent it has gone into productive resources, these are duplicative investments. China already has an alarming surplus of steel mills, clothing manufacturers, automobile companies, machine tool factories, appliance makers, etc. This doesn't count the equivalent number of such industries in industrialized countries.

You could take his argument successfully into another direction, leading to the same conclusion. The economic progress of previously secluded economies such as India and China has not meant a rising tide of prosperity for all countries, as has been traditionally assumed. Instead, it has come at the cost of the well-being of the industrialized economies and their labor force. Living standards in countries like the U.S. are being propped up by borrowing, but those days are coming to end. With their end, according to this argument, comes deflation. Central banks can't continuing reflating their domestic economies when the manufacturing base itself has been hollowed out.

... "Central banks can't continuing reflating their domestic economies when the manufacturing base itself has been hollowed out."

But that does not mean that they will not try. My bet is that when push comes to shove Helicopter Ben will attempt exactly that.

As far as Eliott Wave analysis goes: It seems to me that fitting the wave counts in hindsight seems always to work very well but as far as the predictive power goes it doesn't really convince me. I tend to prefer other technical chart analysis. The crux of the matter is that both deflation and hyper-inflation is in the cards - it depends how the Fed plays it. It seems to me that strong Eliot Wave believers deny that the key players have any influence in the outcome i.e. the wave will play out in an almost deterministic fashion towards deflation. On a very fundamental level I can not buy into such a world-view. On the other hand if we had another Paul A. Volcker at the Fed's helm I'd rather bet on a deflationary outcome as well.