Soros: This Is Act 2 of the Crisis

I’ve been a Soros fan ever since reading “The Alchemy of Finance” in the early ’90s and an even bigger fan since seeing him speak at the “Secretary’s Open Forum” at the U.S. Department of State in 2003.  The following is a clear, concise, and up-to-date explanation of his main theories and their implications for financial markets and their participants and regulators.

This Is “Act 2″ of the Crisis
George Soros
2010-6-14

In the week following the bankruptcy of Lehman Brothers on Sept. 15, 2008 — global financial markets actually broke down, and by the end of the week, they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions, which ceased to be acceptable to counterparties.

As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit to make up for the credit that disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and re-establish macroeconomic balance.

This required a delicate two-phase maneuver just as when a car is skidding. First you have to turn the car into the direction of the skid and only when you have regained control can you correct course.

The first phase of the maneuver has been successfully accomplished — a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.

Indeed, we have just entered Act II of the drama, when 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.

Couple of Good Roubini and Einhorn Articles

As some of you know, Nouriel Roubini and David Einhorn are, IMHO, two of the best minds in their fields and I’ve been posting some of their stuff on here since at least 2006 (list of posts here).  Here are their latest articles:

Quick Market Update: NASDAQ and USD Charts

Just time for a quick update on the action that began last month (see previous blog or TwitPic):

• See annotations on the above and below chart for today’s updates.
• My short position this time is double what it was last time (reinvesting profit), but I’ll keep it on a short leash.

What Happens Next to Fannie and Freddie?

Insolvency of the Fannie and Freddie Predicted Two Years Ago. What Happens Next? Or How to Avoid the “Mother of All Bailouts”
By Nouriel Roubini
2008-7-11

A pretty good article from Nouriel Roubini. A choice quote below, then on to the article.

“Privatizing profits and socializing” losses may dominate the policy outcome. Financial institutions love a system where they gamble recklessly, pocket the profits in good times and let the fisc (taxpayer) pay the bill when their reckless behavior triggers a financial crisis; this is socialism for the rich. That is why you already hear the whole Wall Street Greek chorus moaning for a bailout of the GSEs.

The Bellwether — Google Stock — Explodes

First update since this post on November 9, 2007. That post exactly marked GOOG’s reversal off it’s all-time high, after the 3-month relief-rally off the August lows. Today’s chart shows the end of that 40% bloodbath. Same as back in November, Google stock is the bellwether. It tells you pretty much all you need to know.

The other things to watch remain commodities, the Chinese market (and the other BRICS), and the dollar, which I’ve been bearish on since (before) this post on April 6, 2004. Back then one Euro cost $1.22, now it costs $1.59 (30% more).

I actually think the dollar will probably catch a bounce once the Fed makes its final interest rate cut of this cycle. That’ll probably also mark the top of the massive commodity and commodity stock run, as money rotates (see this). We will see. Those are just probabilities and scenarios to watch for. As always, the technicals must confirm and the market is always right (or at least it doesn’t pay to argue with it!).

Subscribe to this blog via RSS or email.

Article Excerpt and Quotes of the Day

First the quotes:

• “Bernanke peso” – New nickname for the U.S. dollar.
• “It may be our dollar, but it’s your problem.” – Former Tres. Sec. John Connelly.
• “The world’s largest banana republic” – The U.S. under Bernanke/Bush/Greenspan policies.
• “The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.” – Thomas Jefferson (3rd President of the United States. 1743-1826)

Now the article excerpt, from MoneyWeek (article by Bill Bonner):

Would You Believe ONE Bank Has $92 Trillion in Credit Exposure and 416x Leverage?

It’s true.

According to the following Comptroller of the Currency report (you can download it below), JPMorgan Chase has $91.7 trillion of total derivatives on $1.2 billion of equity, for a ratio of 416x.

Now, I’m no expert, but this sounds just a titty bit excessive. I don’t think I’m going out on a limb when I say we are well passed critical mass. At this point, it sounds like one of those mountains of sand Mark Buchanan talks about in his book Ubiquity: Why Catastrophes Happen.

Talk about the ultimate Butterfly Effect! This thing is primed and ready. I mean, if anyone even blinks in this Mexican standoff, let alone a major counterparty fails, it’s going to come down faster than Paris Hilton’s panties on a Saturday night. Shit, at this point, something as mundane as a mouse farting in the maid’s room at some hedge fund manager’s leafy estate in Greenwich, Connecticut could trigger the “event.”

Margin Call

The problems housing, mortgage and U.S. dollar problems that Cubetrader has been writing about since before the frenzy even peaked are now blossoming in the form of margin calls and forced liquidations at all manner of portfolios around the globe. As we know, forced liquidations happen at distressed prices, which are also exactly the best time to pick up assets for pennies on the dollar, that is provided that your timing is correct.

What happens when these portfolio managers find they’ve painted themselves into a corner and are getting margin calls but can’t sell what they want to sell at the price they want because it’s a fire-sale situation is that they move up the food chain and are forced to start selling their higher quality (not distressed priced) assets. But when too much of that happens, guess what, bids on those assets start dropping, forcing more pain on our hapless portfolio managers.

Eventually, when the cascade stops, we find assets have been transferred from the weak and over-leveraged hands to the strong and bargain-shopping hands. Same as happened after LTCM collapsed. Same as every time. Wash, rinse, repeat. Welcome to the rinse cycle. Cheers!

Click through to read a pretty good CBS MarketWatch article:

Article: Japan’s Boom May Explode Yen-Carry Trade

Article: Japan’s Boom May Explode Yen-Carry Trade

The CurrencyShares Japanese Yen Trust (NYSE: FXY): 3:10 AM NYC time, December 30th: Just a quick post on the new Yen currency ETF. Why should you care about they Yen? See article below. Cheers!

Euro – Dollar Update

The CurrencyShares Euro Trust (Amex: FXE): 11:15 AM NYC time, January 5th: Just a quick update to my 1 December 2006 posting, noting the breakaway gap above 130 and subsequent follow through. After rallying to almost 134, the Euro eased into a tight, downward sloping handle for the next month, which takes us to where we are today: a retest of the 130 level. Aggressive traders could…

Quick Housing / Recession Update

Some grist for the mill:

Dollar – Euro Follow Up

The Euro Currency ETF (Amex: FXE): 6:00 AM NYC time, December 1st: Just a quick follow up on last week’s “falling dollar” postings. What we are looking at is an apparent breakaway gap to a multi-year high. That is noteworthy and something to watch, especially with a recession likely in 2007, as has been discussed on Cubetrader.com for almost a year — remember the…

Euro Breaks $1.30 – First Time Since April 2005

As discussed in my posts going back to November 2004, the dollar has serious fundamental and technical problems. The chart above is the latest manifestation, showing the Euro Currency ETF (Amex: FXE) breaking to a high against the dollar. More problems can be expected over time, though with such as vicious thrashing over the past few days a short-term counter-trend is likely. New positions could be considered on that bounce’s failure. See below for the blurb on CBSMarketWatch.com’s home page today. Cheers!

Waiting on the Fed (and BOB)

Monday was the quietest volume in weeks for the Cubes (NASDAQ: QQQQ) and major stock market indexes, which are all holding their breath for Wednesday’s Fed news, which is expected to bring perhaps the final 1/4-point Fed Funds rate hike. The potentially market-moving part of the show will, of course, be the reading of the minutes and subsequent market reaction (dollar, equity, fixed income).

Some of the slogans going around Wall Street right now are…

Article: Protection from a Falling Dollar

Seems like the recent fall in the dollar has finally gotten people’s radar screens blinking. See the following article from the April 27th edition of BusinessWeek for Merrill Lynch Japan’s doomsday scenario.

Protection from a Falling Dollar
By Jesper Koll

Merrill Lynch’s Jesper Koll argues that Japan, China, and Europe must focus on domestic growth and beat the U.S. at its own game

Growing numbers of analysts and economists worldwide are trying to forecast the fate of financial markets based on predictions about what will happen to economies. Unfortunately, much of this may very well be a waste of time. Often it isn’t what’s happening to economies that explains financial markets. Rather, what’s happening to financial markets is an indicator of what will happen to economies. Specifically in 2006, the issue is not whether the economic recoveries in China, Japan, or Europe warrant a stronger yuan, yen, or euro, but whether enough has been done to cushion against a collapse of the dollar.

Dollar vs. Euro Resfresher Course

From today’s IBD, a good refresher article on the U.S. dollar vs. the Euro and other currencies. Cheers!

Another “No Shit Sherlock” Moment…

This WSJ article comes AFTER a major dollar downdraft and after my most recent Euro vs. Dollar and FXE posts (about 5-points ago). In fact, this article coming now and receiving prominent placement by the WSJ may signal a short-term top/time to take profits and look for the next good entry point. Cheers!

Did You Take Your Second Chance?

As mentioned in my April 8th posting, there was a terrific second chance to get long Euro / Short dollars… Well, today’s almost 2-point Euro rally was your gift if you got in on the trade. Cheers! PS: If you made some money from this and want to say thanks, you can try out the Make a Donation button at the top left of my blog