Monday, October 5, 2009

Two Things of Potential Serious Interest


I heard rumors about this news story coming out in the London Independent earlier today. It finally hit the wires. There have been many articles lacking any sort of substance on this topic but this story has much more meat than previous stories. Bernanke goal of destroying America may be closer than he thought. I really think a must read article. Only cut and paste a couple of paragraphs. Follow the link to read the whole thing.

From the Independent

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.


China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East.


Japan may be revealing how the second iteration of trying to game the system will work. Just have a debt moratorium, alter the accounting rules so banks will be able to hide more losses, and keep companies that shouldn't survive in business which continues to hurt the strong companies and keep way to much capacity in the system. Guess what, this will probably cause banks to hold and hoard even more reserves. The crazy thing is that Japanesse banks are up big on this news right now (though it could just be follow through from Government Sachs gaming upgrades of technically insolvent institutions). From a true business model perspective (not talking about gamed earnings and gamed capital ratios) this would be very bad.

From Bloomberg:

Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.

Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said.

The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as

Market Implications

There is alot of noise in the news world. Things that really aren't that important but make headlines and investors get all excited about them. I don't think either of these two fall into that category assuming the article from the Independent is legitimate. They may not be important in the next twenty fours hours, but they could be very important over the next year. The Independent article is of course really bearish for the dollar which in the short term could mean bullish for stocks regardless of valuation. Now, if the dollar slide turns into somewhat of crash, stocks will crumble with the dollar. It is also of course very bullish for gold. It could also be very bearish for U.S. government bonds which if that would get out control would be bearish for stocks. Remember this is centering around oil. Wars, billions of dollars, and countless Americans have died over who controls the world oil reserves and who has the greatest influence. This is a huge power play by China using what was once our greatest strength, market systems. It will be interesting to see how that develops.

The Japan news stories is concerning on all levels. Primarily because it is exactly the sort of thing America did during the Great Depression. How do banks, businesses, individuals, plan and invest if the rules change? Will you owe debt payments or won't you? When does the moratorium end? Will I owe money in three months, six months, or never? If your the bank, will you get paid or won't you? How you plan cash flows and whether you will have the cash to reserve? If your an investor, how is valuation affected for a non performing loan that is not marked as non performing?

What ends up happening (this is proven over and over during the Depression) is that people do nothing. You don't have the information to know what the business environment is going to look like so businesses don't buy to invest for growth, banks don't lend, investors hoard cash, and the net result is the economy continues to sink. It is better to have losses set by defined rules than not have losses with rules that are constantly in flux.

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