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Soros: Collapse of Financial System “Real” and “Far From Over”

Jun 10th, 2010
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Billionaire investor George Soros, who earned his fame in the ’90s when he made billion betting against the pound, has just leveled criticism against the entire financial system. Today, at a conference in Vienna, he vividly described the global economy going down, driven by vast government deficits.

According to Bloomberg:

“’The collapse of the financial system as we know it is real, and the crisis is far from over,’ Soros said today at a conference in Vienna. ‘Indeed, we have just entered Act II of the drama.’ Soros, 79, said the current situation in the world economy is “eerily” reminiscent of the 1930s with governments under pressure to narrow their budget deficits at a time when the economic recovery is weak.

“Concern that Europe’s sovereign-debt crisis may spread sent the euro to a four-year low against the dollar on June 7 and has wiped out more than trillion from global stock markets this year. Europe’s debt-ridden nations have to raise almost 2 trillion euros (.4 trillion) within the next three years to refinance, according to Bank of America Corp.

“’When the financial markets started losing confidence in the credibility of sovereign debt, Greece and the euro have taken center stage, but the effects are liable to be felt worldwide,’ Soros said.”

Soros is echoing the same sentiment The Daily Reckoning is regularly driving home. Global governments have binged on fiscal and monetary policy efforts aimed at manipulating the market and are now tapped out. There’s no more fuel left to throw on the fire and the bull market embers are smoldering. We’re in for a bumpy ride.

You can find more details in Bloomberg’s coverage of Soros on entering “Act II” of financial crisis.

Best,

Rocky Vega,
The Daily Reckoning

Soros: Collapse of Financial System “Real” and “Far From Over” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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China’s Housing Market Worse Than US Before Subprime Collapse

Jun 2nd, 2010
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Whether or not China is in a bubble, particularly in housing, is a source of great debate… even among your very own Daily Reckoners. Now, even a staff member from inside China’s own central bank has weighed in with a dour opinion.

Li Daokui, of the central bank’s monetary policy committee, has publicly stated to China’s State Council that their nation’s housing market is deeply troubled in way that could cause profoundly negative financial and social outcomes.

From the AFP:

“‘The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis,’ said Li Daokui, a member of the bank’s monetary policy committee.

“‘It is more than (just) a bubble problem,’ he told the Financial Times in an interview published Tuesday. The property market in the United States collapsed as too many people were unable to repay their high-risk, or sub-prime mortgages, leading to a credit crunch in which thousands lost their homes and lending dried up…

“…He warned the high cost of housing could hamper future growth by slowing urbanisation. Rising prices were also a potential political flashpoint, especially among younger people who felt locked out of having their own home. ‘When prices go up, many people, especially young people, become very anxious,’ he said. ‘It is a social problem.’”

Chinese authorities have been looking at a variety of avenues to cool the potentially overheating market. A property tax will be tested in key areas like Beijing and Shanghai, and other new restrictions on home sales have been introduced. The real estate market is structured quite differently in China, but a collapse could be just as severe for its financial system, and possibly even worse in terms of social upheaval.

You can read more of Daokui’s comments in the AFP reporting on how China’s property woes could be worse than the US downturn.

Best,

Rocky Vega,
The Daily Reckoning

China’s Housing Market Worse Than US Before Subprime Collapse originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Three Arguments Against a Euro Collapse

May 28th, 2010
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Lee Munson, founder & CIO of Portfolio LLC, thinks the euro has been trading like the Greek drachma when it should be trading more like the deutschemark. With painfully high debt levels in Japan, and structural economic problems in China and the US, he sees little reason to fixate on the demise of the euro.

From Real Clear Markets:

“First, Japan has the worst debt to GDP in the developed world. How has this been overshadowed by Greece, the industrial powerhouse that it is, and its inability to pay its bills? While the yen has been stable relative to the dollar, Japanese trade will blow up if its currency keeps going up in a straight line.

“Second, China has its own fair share of problems stemming from new tax, labor, and environmental laws that will place serious pressure on bottom line growth. Add to the mix the expiration of their infrastructure stimulus, and margins could get squeezed. Since the currency is still tied to the dollar, there could be social unrest if their currency appreciates.

“Third, consider the United States of America, with its problematic economic future. When the stimulus starts to run out, and Congress raises taxes, the last thing we will need is a strong dollar. A weak dollar means higher exports, which means more jobs and more money for consumers to spend.”

As troubled as the eurozone is, the strongest competitors on the currency playing field also have their own weaknesses. While it’s true that the US has a more robust infrastructure for supporting the state economies that make up its currency, as long as it can, California’s budget remains not much better looking than Greece’s. And, as a whole, the US still has roughtly the same overall fiscal deficit as Spain… about 12 percent.

You can read a few more reasons to not count out the euro quite yet at Real Clear Markets’ coverage of how the euro’s not heading to parity.

Best,

Rocky Vega,
The Daily Reckoning

Three Arguments Against a Euro Collapse originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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The Euro Collapse that Won’t Happen

May 26th, 2010
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What a strange pattern we seem to be in the past few days of trading… It used to be the overnight markets would run the currencies up versus the dollar, and the US session would knock them back down… That’s reversed these days. Yes, the overnight markets have been pushing the currencies down, and the US session has been picking them up…

Yesterday, I finished the Pfennig with the euro (EUR) trading down 2-cents… But then along came the consumer confidence report in the US, which along with the PPT (in my opinion) reversed the over 200-point loss in stocks… And with risk assets getting bought again, the currencies rallied alongside.

This morning, the euro is off by about 1/2-cent from yesterday afternoon’s level… Italy approved billion worth of budget cuts. I have to say that given the arrows it had shot at it, the Eurozone is doing a great job of cutting budget deficits… They have lined up, taken their shots, and then gone about doing the right thing. It may take some time for these measures to be seen in the numbers, but, don’t you think that it would be far better to recognize a deficit problem, and then address it with cuts, than to not recognize it, in fact, ignore it, and go about adding to it?

I do, and that’s why I truly believe that those calling for a euro collapse are on the wrong bus… The need to be on the one that takes them to Washington DC!

OK… I’ve had quite a few readers ask me why I haven’t been talking about the Swiss franc (CHF) lately… Hmmm… Good question… I guess I just get so caught up in what Bloomberg TV calls the “Euro Crisis”… So… With no further delay and excuses… The Swiss franc has really suffered alongside the euro recently. There are rumors almost daily about the Swiss National Bank (SNB) intervening to help make the franc weaker. The SNB is cognizant of the fact that there are a ton of geopolitical problems in the world these days, and that normally means a flight to francs… So, by selling the franc, and weakening it, I think the SNB does a fair job of putting fear in investors that would normally flock to francs.

I think the SNB is so wrong here… They are falling into that trap that Japan fell into a decade ago… The Japanese were looking at a semi-strong yen, and a decade of deflation, and thought that if they got their currency weaker, inflation would set in, and they would rid themselves of deflation…

Well… We all see how well that’s worked for the Japanese, eh? So… A memo to the SNB… Don’t go down that road! Deflation is far better than inflation!

I see where Germany auctioned some government bonds this morning, and ran into a buzz saw… The auction was covered, but not by much… Portugal auctioned some government bonds this morning too, and their auction was better covered than the German auction… Of course, Germany’s yields are at least 150 BPS lower than Portugal’s.

And that leads me to this… The US is auctioning another round of Treasuries in the coming week… billion 2-year, billion 5-year, billion 7-year… That’s a total of 3 billion… I know, there will be those that say, “So what? Everyone wants Treasuries these days.” And while that is true, it doesn’t diminish the fact that we as a nation have added another 3 billion to our deficit… And… It doesn’t diminish the fact that the debt service (interest payments) on these bonds will be a HUGE burden of taxpayers.

At the beginning of the year, I wrote an article in my (paid for) newsletter, The Currency Capitalist, and outlined what the markets would look like on a day when a US Treasury auction would fail… I, for one, thought we would see that sometime this year… But, the current debt problems in Europe are taking the heat off of the US and causing another flight to safety, similar to 2008… So… I don’t think we’ll see a Treasury auction problem this year… But, Shoot Rudy, all we have to do is think about next year’s deficit spending and Treasury issuance.

You know… I’ve been a little hard on the Beaver (US Treasury Secretary Geithner) the past few days… But it’s so easy! Anyway… I said yesterday that Geithner needed to go back into the room and remind the Chinese that he wants the renminbi to get stronger versus the dollar, not weaker as it had done the previous night… I guess he got his message across correctly this time, as the renminbi (CNY) gained versus the dollar overnight… I see the Beaver is in the UK now, spreading the gospel…

I’ve been hearing rumors that the Chinese will do a one-time revalue of the renminbi this year… But on the other side I’ve been hearing rumors that the Chinese economy is a house of cards and will overheat this year… So… What’s it gonna be boy? The Chinese wouldn’t or couldn’t allow the renminbi to rise versus the dollar with a one-time revaluation, if their economy is about to go into the dumpster… So.. You have to pick a side to be on, and hope it’s the winning side!

Me? I’m going to be the referee… I’m not going to pick a side, because, I don’t believe in a one-time revaluation, instead thinking that when the time is right, the Chinese will return to allowing a slow, general appreciation of the renminbi versus the dollar.

In the South Pacific, Australia and New Zealand continue to fight for ground that had already been gained. The Aussie dollar (AUD) has bounced over 1-cent from yesterday’s low, while kiwi (NZD) holds steady. Commodities continue to be soft, and when the problems of Europe are added, these two currencies are doing quite well, considering the mounting pressures on them.

I think that the selling in the Aussie dollar is overdone by quite a bit… But, doesn’t that represent an opportunity to buy on the cheap? Folks… These Eurozone budget deficit problems are not on the same level as the financial meltdown of 2008, so there’s no reason to treat the Aussie dollar like it is!

Speaking of commodities… Gold is bucking the price trend of commodities once again this morning adding … I think the geopolitical pressures finally set in and gold really had a strong day yesterday, moving back above ,200… The below ,200 opportunity to buy gold, came and went very quickly, didn’t it? You know… Back when gold was less than ,000, I used to say that I believed it was a bargain below ,000, and that we should look to buy the dips below ,000 and then when it rose to ,100, I said that it was a bargain below ,100, and that we should look to buy the dips below ,100… I guess what I’m saying is that if we see another drop below ,200 I’ll be pulling that “dips” line out again.

The data cupboard today has April’s New Home Sales, and April’s Durable Goods Orders… Durable Goods Orders are expected to reverse March’s -1.3% decline, and New Home Sales are expected to be strong… Again, the new home tax rebate ended in April, so these figures will include the rush to get government money in them…

Then there was this… EconomicPolicyJournal.com has learned that 32 states have run out funds to make unemployment benefit payments and that the federal government has been supplying these states with funds so that they can make their payments to the unemployed. In some cases, states have borrowed billions. As of May 20, the total balance outstanding by 32 states (and the Virgin Islands) is .8 billion.

The state of California has borrowed .9 billion. Michigan has borrowed .9 billion, Illinois .2 billion.

And… Investors “flock to this safe haven”?

To recap… A new trading pattern has developed where the overnight sessions sell off risk, and the US session buys it… Italy has announced billion of budget cuts this morning, as the Eurozone states recognize and address their budget deficit problems, which is far better than what’s going on here! The Swiss National Bank continues their attempt to get the franc weaker to introduce inflation to their economy, and the Aussie dollar looks oversold to me.

Chuck Butler
for The Daily Reckoning

The Euro Collapse that Won’t Happen originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
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