prudentbear.com
from noland this week...
Interestingly, October was a huge month for the ports of Los Angeles and Long Beach. Combined inbound containers jumped 9% from September to 595,726, a new record (up 43% from strike-impacted October 2002). Combined Outbound containers surged 19% from September to the strongest level in five months. October saw a total of 333,429 empty outbound containers, a new record and 56% of the month’s total inbound containers.
November 25 - Dow Jones (Christine Richard): “Large cash-back payments and other incentives have been driving auto sales in the U.S. in recent years, but besides shifting cars out of the showrooms, these deals are also creating riskier auto loans. That’s because incentives aren’t just being used to discount the price of vehicles. Often, they provide a way to bail customers out of old auto loans, freeing them up to finance new purchases. ‘Dealers are very creative,’ said Bob Kurilko, vice president of marketing at Edmunds.com, which provides research and information on buying vehicles. ‘They do what they have to do to get the deal done.’ Sometimes that means giving a hand to buyers who owe more on their current auto loan than the auto’s trade-in value - otherwise known as being ‘underwater’ on a loan. It’s a surprisingly common problem. According to the latest data from Edmunds, during August, 29% of all trade-ins in the U.S. were underwater, with the average shortfall between the loan amount and the trade-in value standing at $3,700. That’s up from August 2002, when 26% of trade-ins were underwater by an average of $3,280… In California, Texas and Alabama, 40% of all trade-ins were underwater in August. In California, the average shortfall on trade-ins was $4,700, said Kurilko”
...These three anecdotes – “all they can do is limit the yen’s gains” BOJ dollar purchases; talk of speculative dollar sales by Soros and Buffett; and Welteke noting that German companies “have hedged” – go right to the heart of what I believe is an unfolding dollar “problem.” First of all, aggressive foreign central bank dollar purchases have clearly lost their forcefulness. Ballooning Asian central bank and U.S. “custody” holdings are today only keeping the dollar’s slide orderly. And with the ECB (as opposed to the BOJ) not aggressively accumulating dollars, euro sellers are finding it increasingly difficult to find buyers. This is precisely the type of environment that captivates the expansive global speculator community.
Speculative dynamics today find progressively emboldened sellers and discouraged buyers. Things have recently taken a turn for the worst, with this week’s strong data and today’s rising bond yields offering little in the way of dollar support. Such circumstances should have market participants contemplating the unprecedented derivative hedging positions that are accumulating. Recall the surge in derivative activity during the first half of the year. Dollar hedging has quite likely only escalated over the past few months. Surely, German, Japanese and other exposed manufactures have hedged dollar exposure. And, certainly, scores of global speculators and investors have incorporated more aggressive hedging strategies against their ballooning dollar holdings. But who is on the other side of these trades? Is the market to hedge dollar exposure tenable? I have serous reservations.
There is no doubt in my mind that dynamic hedging strategies play the dominant role in contemporary derivatives markets. Sellers of derivative protection incorporate “sophisticated” computer models that are basically trend-following systems “hedging” (buying rising and selling declining markets) exposure on market insurance written. Instead of learning from the 1987 portfolio insurance fiasco, the Greenspan Fed has been the staunchest supporter of the mushrooming derivative markets. But from analyzing the Mexican, SE Asian, Russian, and Argentina currency collapses, we have absolutely no doubt that the combination of runaway Credit excess, rampant global speculative financial flows, and aggressive (speculative) derivative hedging operations create over time acute currency and financial system fragility.
It would appear to me that we are now quickly approaching a critical point where heightened speculative and dynamic hedging-related selling could overwhelm apprehensive global central bankers. That the U.S. stock market at this time seemingly couldn’t care less about the unfolding dollar “problem” is curious. But, then again, the unfolding Mexican, Asian, and Russian meltdowns almost had to hit the U.S. market on its head before there was recognition.
I remember clearly how U.S. financial stocks rallied to new highs in late July 1998, with the Russian and LTCM collapses only weeks away. This, however, is only one of many curious examples of surging markets determined to ignore the inevitable. But, then again, excessive liquidity creation in the face of heightened systemic stress is a most-important dynamic of contemporary (unrestrained) finance. Looking at GSE and foreign central bank balance sheets, both domestic and international liquidity operations over the past four months have gone to new extremes. Accordingly, speculative excess, both domestic and international, has gone to new liquidity-driven extremes. Greater dollar liquidity is only Compounding The Problem. And when the next crisis does arrive, the old “fixes” won’t get the job done. |
