"You don’t argue with the King of Pop"

The Telegraph has a news item suggesting that as part of the contract with AEG Live -the promoters of the O2 shows - Michael Jackson required that his personal physician's fees be borne by the concert agency.

The singer insisted the cardiologist be hired as his full-time personal doctor while he prepared for his gruelling comback upcoming tour in Britain.

Randy Phillips, president and CEO of concert promoter AEG Live, said it was "almost a contractual condition" that Jackson have Dr. Conrad Murray at his side in the United States and abroad.

Mr Phillips said Jackson "insisted" on Mr Murray's employment at a "substantial" but undisclosed fee despite being told by AEG officials that "some of the best doctors in the world are in London".

“He just said, ‘Look, this whole business revolves around me. I’m a machine and we have to keep the machine well-oiled,’ and you don’t argue with the King of Pop,” added Mr Phillips.

Apart from the issues I have previously raised about the incorrect description of Frank DiLeo as Michael's "long time manager" - here and again here , there is also the slightly murky status of "the Jackson family lawyer, Brian Oxman" referenced in the Telegraph article. Other reliable sources are describing Mr Oxman as the "former" family lawyer and the attorney has been rather loose lipped about Michael Jackson's dependence on pain killers etc.
In the wacky world of superstar show-business none of this should be too surprising but, I bet, there are plenty more nuggets to come.

Big Issues like global warming and systemic meltdowns - no big deal! - in fact no deal

I would strongly recommend a read of this article by Mike Rorty which tackles the delusional thinking about technocratic solutions to global warming - just one of the "Big Issues" we face.

That said, the thing that worries me about the Cost-Benefit Analysis (CBA) approach to this issue is that there is always an implicit “do-over” cost in CBA. If we start a marketing campaign, hire a new team, or build a factory we do a CBA. If it turns out wrong, we simply stop the campaign, lay off the new team, or dynamite the factory. We eat our sunk costs and are back at square one. Sometimes this is costless, sometimes you have to pay for the dynamite. Indeed estimating the cost of this metaphoric dynamite should be high on the list of the CBA.

Now if 100 years from now, we want to “do-over”, how much will it cost to ‘dynamite’ the previous 100 years of warming? How much of GDP will we have to spend to get back an additional 10-20% of biodiversity?

I have also included a comment of my own on this matter (which was left at Mike Rorty's site), and it touches on a theme which is interwoven through a lot of my recent reflections on the financial crisis and the absurdly complacent manner in which the financial elite seem to believe that "normal service has been resumed."

How much would it cost to put the toothpaste back in the tube after it has been squeezed dry?
Steady loss of bio-diversity is irreversible – there is no basis for even trying to do a CBA on restoring this.
All very worrying.
Jut to show how wrong-headed many technocrats can be on related issues there was a blog article recently that suggested markets need to start “pricing in” the “cost of a systemic meltdown”. Presumably the notion that such a thing can be quantified gives some the illusion that it can then be “dealt with”.
The grand dis-illusion which is coming is that there are no deals to be done to take care of these important crises.

Disentangling the Michael Jackson business web

Yesterday I discussed the re-union of Michael Jackson with his illustrious manager from the 1980's, Frank DiLeo. In the intense media circus now focusing on the Jackson estate, there was live coverage from the Jackson family home (not his rented home but that of his parents and other family members) in Encino, California and references to Michael's manager advising the family about Michael's will and financial affairs. What seems to have been missed in the coverage is any account of the re-union which, based on the time line laid out in the WSJ article I alluded to yesterday in my article, must have been a relatively recent event.

When Jackson and DiLeo split in the late 1980's there was very little explanation provided but the fact that almost 20 years later, ahead of the 50 dates committed to in London, the singer and his former manager reunited seems to be worthy of some discussion to put it mildly.

A cross current that is emerging in the commentary surrounding the superstar's last few days is the very upbeat comments being made about the singer's well being, health and preparedness for the O2 shows coming from those connected to the concert promotion company and production associates, which contrasts with concerns about his health and physical state from a variety of friends and other associates.

One big headache for the Jackson estate will arise from the likely lawsuit that will be arising from Philip Anschutz's AEG Live company, which according to various reports could incur losses of hundreds of millions of dollars from the O2 concert cancellations (and an extended world tour that was also "planned"), ticket refunds and loss of sunk costs. An interesting aside to this is the fact that it appears that Lloyd's of London may not have to pay out on a non-appearance insurance policy if the singer's death can be attributed to drug related issues.

On the question of Jackson's co-ownership of the Beatles copyrights, there were anecdotal reports that Jackson had bequeathed his interest in this extraordinarily valuable music catalog to Paul McCartney but it appears from this report from Bloomberg that SONY/ATV Music have other ideas about its future.

June 27 (Bloomberg) -- Sony/ATV Music Publishing LLC, co- owned by Michael Jackson and Sony Corp., will keep control of Beatles songs following the pop singer’s death, said a person with knowledge of the venture’s plans.

Jackson, who died June 25 at age 50 in Los Angeles, owned 50 percent of Sony/ATV, which holds rights to more than 200 songs written by John Lennon and Paul McCartney, as well Bob Dylan, Neil Diamond and others. His stake is worth about $1 billion, said Ivan Thornton, a private-wealth adviser who has worked with Jackson and his family.

Sony/ATV will continue to hold the Lennon and McCartney catalog, said the person, who asked not to be named because the matter isn’t public. The U.K.’s Daily Mirror reported in January that Jackson planned to leave the Beatles rights to McCartney in his will to heal a rift between the musicians. Jackson paid $47.5 million in 1985 to buy the ATV catalog, outbidding McCartney and Lennon’s widow, Yoko Ono.

“Michael was very proud of this partnership,” Martin Bandier, chief executive officer of Sony/ATV Music Publishing, said yesterday in an e-mail. “For him this was about really honing his business skills in an area that he loved.”

Bandier declined to comment further. Paul Freundlich, the New York-based press contact for McCartney, didn’t respond to a phone call or e-mailed message seeking comment yesterday on the status of the Beatles rights.

“I feel privileged to have hung out and worked with Michael,” McCartney said in a statement posted on his Web site. “He was a massively talented boy man with a gentle soul. His music will be remembered forever and my memories of our time together will be happy ones.”

I suspect that there will be a lot more twists and turns involved in disentangling all of the claims and lawsuits that will arise from Michael Jackson's death. It will also be interesting to see how active Mr. DiLeo becomes in this process.

What keeps President Obama awake at night?

Earlier today I wrote a note on the call by the People's Bank of China for a new global reserve currency. Although the mainstream media pay polite attention to these growing calls from creditor nations for a new supra-national currency there seems to be a certain discomfort or disregard for thinking through the potential implications of such a new unit of account eclipsing the US dollar.

Nouriel Roubini has picked on some of these consequences in this piece.

So the process that will lead - in the medium-long term - to a challenge of the US dollar as the major global reserve currency has started. The US creditors - the BRICs, the Gulf states and others - are becoming increasingly alarmed that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. So they will not sit idly waiting for this to happen: they are already diversifying into gold, into resources (as China purchases mines and energy, mineral and commodity resources all over the world) and into shorter term maturity US Treasuries that have less market risk than longer term Treasuries. With two-thirds of US Treasuries, being held by non-residents and the average maturity of such government debt down to 4.5 years, the risk of a refinancing crisis and disorderly fall in the dollar will increase over time unless the US presents a credible plan for medium term fiscal consolidation.

Even, the usually incisive Mr. Roubini seems to be rather polite in his last sentence as it seems unlikely that near the top of the agenda of the US Administration you will find a plan for medium term fiscal consolidation to avert such a re-financing crisis - and maybe this is what is keeping Mr. Obama awake at night.

S&P reviewing $235 billion of mortghages backed by commercial real estate

This article raises the specter of more big problems ahead for the Fed's balance sheet.

June 26 (Bloomberg) -- The ratings on $235.2 billion in debt backed by commercial mortgages may be cut by Standard & Poor’s as the ratings company seeks to reflect how the securities would fare in an “extreme economic downturn.”

The possible reductions, disclosed today in a report, follow S&P’s May 26 statement that the ratings of as much as 90 percent of top-ranked commercial mortgage-backed bonds sold in 2007 may be cut because of the changes in how they’re assessed.

If the securities backed by hotels, shopping centers and offices lose their top-ranked status, they’ll be excluded from the Federal Reserve’s $1 trillion Term Asset-Backed Securities Loan Facility, a setback for the government’s efforts to jumpstart lending. S&P expects to finish the review of the debt over the next three to six months, the company said.

S&P wants to be sure that AAA classes can “withstand market conditions commensurate with an extreme economic downturn without defaulting,” analysts including James Palmisano in New York wrote in the report.

Michael Jackson and his (former) manager Frank DiLeo

In the wake of the death of Michael Jackson there is bound to be a lot of financial unraveling to be done as the superstar's estate would seem to be complex and troubled.

There is a fascinating insight into Michael Jackson's financial woes in this article from the WSJ, which appeared just two weeks ago.

The 50-year-old singer's debts now stand at around $500 million, according to three people familiar with his finances. The value of Mr. Jackson's biggest assets -- music copyrights that include 251 Beatles songs as well as his own compositions -- probably still exceed his growing debt, according to these people. Mr. Jackson's manager said the singer wasn't available for comment.

Last spring, Mr. Jackson defaulted on a $24.5 million loan backed by the ranch. Los Angeles-based Colony bought the note for $23 million and put the title into a joint venture it formed with the singer.

As Neverland is brought back to life, concert promoter AEG Live is trying to resurrect Mr. Jackson's music career. He is booked to play 50 shows at London's O2 arena over several months starting in July. If all goes according to plan, Mr. Jackson could make as much as $50 million, according to people familiar with financial details of the shows. Adding dates in Europe, Asia and North America could net him $400 million, these people say.

But Mr. Jackson has already delayed the first four shows in London, citing a need for additional dress rehearsals. In April, he pulled out of a plan to auction most of the personal effects and furnishings from Neverland. And he recently parted ways with Tohme Tohme, a Colony Capital business associate who for several months acted as his manager, striking the deals for the Neverland joint venture, the auction and the London concerts. Taking Dr. Tohme's place is Frank DiLeo, Mr. Jackson's manager from 1984 to 1989. Mr. Jackson didn't offer an explanation for the change, according to associates notified about it.

One of the revealing details from the WSJ story from just two weeks ago is the apparent decision by Jackson to re-engage his former manager Frank DiLeo, who was in charge of the singer's career during the boom years in the 1980's. Indeed Mr. DiLeo was the top promotion executive at Epic Records in the early 1980's, and who was largely responsible for making the Thriller album the most successful record of all time.

DiLeo has also been featured in several movies including featured parts as a music mogul in Wayne's World and his portrayal of gangster Tuddy Cicero in the excellent film Goodfellas directed by Martin Scorcese.

It remains to be seen whether the singer and manager were contractually re-united in any fashion, and whether, in fact, Mr DiLeo will have any role to play in sorting out the many business interests of the singer including his stake, along side SONY/ATV Music publishing, in Northern Songs - which owns the music publishing catalog of John Lennon & Paul McCartney.

Chinese central bank keeps banging on about the US dollar

The Chinese central bank - The People's Bank of China (PBOC) - renewed its call on Friday for the creation of a super-sovereign reserve currency to reduce the dollar's global domination, which it said had worsened the financial crisis.

According to this Reuters report the PBOC, in its annual financial stability report, is now openly calling for an alternative to its dependence on the US dollar as the world's reserve currency

"To avoid intrinsic shortcomings in using a sovereign currency as a reserve currency, we need to create an international reserve currency that is divorced from sovereign states and can maintain a stable value over the long term," the report said.

"An international monetary system dominated by a single sovereign sovereign currency has intensified the concentration of risk and the spread of the crisis," the People's Bank of China said.

"When a national currency becomes the global price-setting currency for primary products, the trade settlement currency and the reserve currency, that national currency has great difficulty attending to both domestic monetary policy goals and the reserve currency needs of various countries.

"And the economic development model of debt-based consumption is most difficult to sustain," the report said.

However, one tries to spin those comments, this is a pretty straightforward rebuff by the leading global creditor of USA Inc. to the manner in which the folks in Washington are handling matters and strongly suggest that China is running out of patience with the status quo of the current global financial architecture.

This may be part of what keeps Mr. Obama awake at night when he thinks about the un-sustainability of US budget deficits. If the reader doesn't want to share in those sleepless nights it's better not to look at the following document from the Congressional Budget Office on the long term budgetary outlook for the US.

The graphs from this CBO document may well become mandatory screen saver images at the PBOC.

Forcing multi-nationals to reveal how much tax they pay in each jurisdiction

This seems like a worthwhile initiative from HMRC as outlined in this piece in the Guardian.

The OECD, the thinktank of leading nations which sets international tax standards, is to take forward measures forcing multinational companies to reveal precisely how much tax they pay in each jurisdiction they operate in.

The move comes after Treasury minister, Stephen Timms yesterday urged 20 of the world's most powerful nations to adopt the accounting standard known as country-by-country reporting which development charities believe would see a huge surge of tax revenues to the world's poorest countries.

Timms, who was attending a meeting of G20 financial ministers to establish progress made on tax transparency since the London Summit, said the idea received strong support from a number of countries including Norway, Sweden, Belgium and Korea.

The OECD will next week discuss initiating a feasibility study into Timms' plan. Speaking to The Guardian, Timms said: "We need the OECD to explore the ins and outs of this."

The move is being hailed as a significant breakthrough towards ending tax secrecy. Tax officials in poor countries are unable to establish precise information on corporate profits and revenues because they lack manpower. But it is estimated that developing countries miss out on £97bn in lost revenue mainly from mining firms reducing the amount of profits they make through intra-group trading otherwise known as transfer pricing techniques.

Finance ministers also discussed speeding up the implementation of tax transparency and possible economic sanctions against countries which do not comply.

Moody's caveats on AAA rating for US

The writer of the following article switches gears quite abruptly after his opening paragraph of unqualified confidence.

No one in his or her right mind really thinks that the United States will lose its "AAA" rating. The U.S. economy is still the world's largest with a GDP of over $14 trillion. The deficit may be rising, but if the recession ends soon, consumer and business spending should rebound. The demand for Treasury paper remains strong and the largest purchasers, especially China, have indicated they are still ready buyers.

Moody's reaffirmed its "AAA" rating on U.S. debt but added a caveat or two. According to Reuters , the future risks the Treasury faces could change fairly fast. A Moody's official told the news agency, "That will happen for two reasons. Either our assumptions in terms of debt reversibility prove to be wrong. That is, in fact the U.S. government is unable to bring public debt back to a downward trajectory," or if the United States' ability to raise a large amount of debt at a low cost were to be put at risk.

Unemployment is probably still the single largest barrier to dropping the deficit. If 10 percent of American are unemployed for any period, the national tax bases will be seriously eroded. It will almost certainly cause a sharp drop in consumer spending, which would, in turn, hurt IRS receipts from businesses.

Treasury yields have only moved very modestly this year, even though American borrowing has moved up by hundreds of billions of dollars. The government's need for capital will continue to be extraordinary as the year passes. If revenue numbers are well below the U.S. budget as the year ends, the Moody's rating will be in jeopardy.

For me the most telling remark in the above is the writer's own admission that Moody's could downgrade "if the United States' ability to raise a large amount of debt at a low cost were to be put at risk" That seems to be more than just a remote possibility and sits very uneasily with the opening gusto of "No one in his or her right mind really thinks that the United States will lose its "AAA" rating."

A peerage for Jim O'Neill - surely it's just a matter of time

The arrogance of some in the financial world never ceases to amaze.
The following are direct quotes from an article written by Jim O'Neill, head of global economic research at Goldman Sachs and featured in the Times newspaper (June 23, 2009)

Remember these are his own written words and not quotes taken out of context.

...in the first seven years since I created the acronym, three of the four Bric countries, China, India and, importantly, Russia have all grown considerably more than we had assumed.

I suspect the Bric countries would have formed a club without my intervention. Let's help them, help ourselves and get to a more optimal state of world governance.

A few years ago we created another term, the Next 11, and studied their Bric potential. While none has the potential to be a true Bric, Indonesia, Iran, Nigeria, Turkey and Mexico all have the potential to become much bigger.

I am surprised that the man has not been awarded a peerage by Gordon Brown and installed in the cabinet with his own television show.

Bernanke's box

If the statement from the FOMC sounds too tough on the need to monitor short term rates to alleviate poor Treasury auction anxieties, stocks will slump, if he doesn't bonds will slump.

Doubts about global de-coupling unsettle markets again

The biggest "theme" to yesterday's sell-off was the renewed doubt about the viability of the global de-coupling thesis. The major casualties were commodity related stocks, industrials, shippers, transportation and some of the emerging markets and what might loosely be called the China play . It raises again the questions that many have been asking over the last year especially, about just how much economic growth can be relied upon in the absence of robust demand from those traditional bastions of consumerism - the USA, UK and other parts of western Europe.

Although more and more analysts and investors are coming to the view that the US and other developed economies could be in for a hard slog with a recovery, when it does come, being anemic at best, the bulls have been inspired by the notion that the BRIC countries are sufficiently robust to make it without the "dynamism" of the more advanced economies. The thinking goes that they will be able to withstand the decline in the previously voracious appetite of US consumers by tapping into their domestic markets for alternative sources of consumer demand. The skeptics are quick to point out that there is just not sufficient depth of demand yet within the BRIC economies to pick up the slack left from US/UK consumers that are tapped-out and credit fatigued.

Without doubt, this debate will continue to rage on, but from time to time the over-enthusiasm of some traders in pushing commodities and the re-inflation trade into mini-bubbles will result in the kinds of collapses that some of the decoupling plays experienced yesterday - for example Century Aluminum (CENX) was down by more than 15%, Freeport McMorran (FCX) lost more than 11% and Excel Maritime (EXM) and Dryships (DRYS) were both down by more than ten percent.

In general terms this underlines the potential for serious vacuums to be found below a lot of stocks that have benefited recently from the high frequency rotation and arbitrage strategies being implemented by a lot of Wall Street firms and hedge funds. While these very sophisticated algorithmic strategies can provide the appearance that all is well and the recovery is gaining momentum and foster liquidity (in the absence of committed selling), if there is not a critical mass of fund managers and other vested constituents wanting to preserve the gains of the last three months, the algorithms are abruptly faced with a complete absence of liquidity except on iterating through a series of declining bids.

Questions are now being asked about how large this correction will turn out to be and whether it is now a relatively one way market downwards to a re-test of the March lows.

I would not be surprised to see the S&P 500 drop to a retest of the 875 level where support may well be found from fund managers looking to put some beaten up stocks in their portfolios for the customary end of quarter window-dressing. However my intuition is that July, August and September could prove rather troublesome for global equities in general and it would not be surprising to see the S&P 500 with a seven as its first digit again.

Approaching the more awkward question of whether the March low will hold, my view is that, if further systemic panic can be averted, it is most likely that even if the March low is re-tested it will most likely hold. On the other hand, if the abundance of sovereign debt auctions stretching out into the future as far as the eye can see, should bring forth the shock, that as central bankers begin to retreat from QE policies, there are just not enough buyers who want to be the proud owners of Treasuries, gilts, bunds etc. other than the central banks, then all bets are off. In such dire circumstances the last bout of financial panic could be surpassed by an even more severe version brought on by the realization that all of the aces have already been played by policymakers and central banks.

Moody's looking at downgrade of California debt

The LA Times is reporting that Moody's is anticipating a downgrade of the municipal debt for the state of California.

California, tied with Louisiana for the lowest credit rating among the states, now is in more danger of claiming rock-bottom all for itself.

Moody’s Investors Service today warned that it might downgrade California’s general obligation bond rating, currently A1, because of the state’s "significant budgetary shortfall, impending liquidity crisis, and lack of legislative solutions."

Louisiana also is rated A1. All other states are rated higher on Moody’s scale, typically AA or AAA.

Moody’s shift follows a similar warning on California’s debt rating by its rival, Standard & Poor’s, on Dec. 11. S&P also has California tied with Louisiana for last place on the ratings scale.

California_state_flag Moody’s indicated it’s running out of patience with the state as Gov. Arnold Schwarzenegger and the Legislature fail to agree on a plan to plug California’s massive projected budget shortfalls -- $15 billion in 2009 and $25 billion in 2010.

Even so, some money managers say they’ve been avoiding California’s $57 billion in outstanding general obligation bonds in part on the assumption that the state’s rating would fall further into the basement.

"We see a reasonable chance for a downgrade" given the budget mess, said George Strickland, manager of the Thornburg California Limited Term Municipal bond fund in Santa Fe, N.M. "We sold the last of our general obligation bonds last week."

CMF, is an exchange traded fund which tracks the prices of California debt and it was giving strong technical sell signals earlier this month as referenced here.

Some trophy commercial property prices in London cut in half

According to this article, as a rough guide, one could plausibly take the view that prices on some trophy commercial properties in central London have been cut in half.

June 19 (Bloomberg) -- Billionaire investor Simon Halabi’s real estate companies defaulted on 1.15 billion pounds ($1.9 billion) of bonds backed by nine London office buildings as the recession cut the value of the properties by about 50 percent.

The properties, including JPMorgan Chase & Co.’s offices at 125 London Wall and 60 Victoria Embankment, are now worth less than the value of the loans that back them, loan manager Hatfield Philips International Ltd. said in a statement today.

The buildings were valued at 929 million pounds as of June 8, down from 1.83 billion pounds in October 2006, Hatfield Philips said. Halabi’s companies borrowed against the buildings in 2006. The debt, which was packaged into bonds, expires in October. It’s the U.K.’s largest mortgage bond issue maturing this year, according to Bloomberg data.

Bearer bonds and the currency poker game

There is a great sentence in an article about the mysterious bearer bonds that recently showed up in Switzerland.

If the currency war were the world series of poker, the US and the UK would be holding a pair of 2s and relying on nothing but bluffs to keep the rest of the world at bay.

One of the other suggestions which has been made about the reason behind the existence of these bonds (probably inauthentic, but as the article above suggests, not obviously so) is that a Zurich based bank (not necessarily a Swiss bank) may have wanted to include them on its balance sheet as assets to cover up a gaping hole.

All kinds of "mission impossible" motivations can be attached to this incident but the net effect is to make some people think the unthinkable. How much confidence can we have in paper assets when $134 billion of US denominated "bonds" (even if they are forgeries) can occupy the space available on the top of a desk?

UK politicians having hard time spinning the need for austerity

As reported here the UK finances continue to deteriorate rather alarmingly.

Public sector net borrowing dwarfed May 2008's £12.2bn and was the highest monthly sum since records began in 1993. As the recession hits home, lower tax receipts and higher benefit payments have pushed net debt to 54.7pc of GDP – a vast jump on the 43.6pc only 12 months earlier.

Alan Clarke, UK economist at BNP Paribas, said May's public finances were "every bit as dire as we had been bracing for. To put this figure in context, a few years ago, £19.9bn would represent half of the borrowing requirement for the entire year – and now we are achieving this in a single month," he said.

Mr Clarke said Britain was "well on track to see borrowing for this year at close to £200bn".

May's figures show income tax receipts fell 11pc to £8.55bn, while the take from corporation tax was down 27pc to £636m and VAT receipts were 19pc lower at £4.88bn. Spending rocketed from £43.7bn to £50.6bn.

Of course all of this has far reaching consequences on the manner in which politicians of both main parties are desperately trying to figure out ways to spin the debate away from the blindingly obvious fact that a new period of severe austerity lies ahead for the electorate.

Funny, but austerity has never been an appealing message for politicians to sell.

FTSE rallies off key Ichimoku level

The chart for the UK's FTSE 100 reveals a rather useful feature of the Ichimoku charting technique which conforms well with some other more traditional technical analysis indicators. The UK benchmark index settled Thursday's session at exactly 4280. Without wanting to appear too clairvoyant this was precisely the level which I suggested would need to be tested in my Daily Form commentary published Tuesday morning.

The revealing aspect of the chart above shows that the top of the green cloud, which according to standard Ichimoku interpretation should provide an initial support, is also at 4280. Not entirely un-coincidental is the fact that the 50 day EMA for the FTSE is also at 4280!

Across many asset classes, the last few days have seen a probing of major support levels, and longer term direction will remain ambiguous until the outcome of this testing is fully resolved.

As of Friday morning in European trading the FTSE has bounced rather nicely off the 4280 level with an almost two percent gain, which, also shows the benefit of using the Ichimoku levels for identifying key levels at which profit targets and stop-loss levels can usefully be set.

Pricing Armageddon

Prominent blogger Felix Salmon makes an interesting point in relation to the likelihood of another visit to the financial abyss in this article

My view, then, is that tail risk is as big as ever, and that world markets are in something of a state of denial about it. Maybe economic armageddon isn’t quite as terrifyingly incipient as it was in March. But it’s still a real possibility. And it isn’t priced in.

The real question is - If armageddon is not priced in, what price do you put on it?

Could a revamped SDR include the renminbi, ruble and gold?

The saga of what the Russian government "really" thinks about the continued status of the US dollar as the global reserve currency took another twist today. In a report this morning from Vladimir Isachenkov, Associated Press Writer, who was present at the just concluded Shanghai Cooperation Organization meetings held in Russia's Ural city of Yekaterinburg, the Russian president went the furthest yet in calling for less reliance on the US currency as the primary reserve vehicle.

"No currency system can be successful if we have financial instruments denominated in just one currency," Medvedev said. "We must strengthen the international financial system not only by making the dollar strong, but also by creating other reserve currencies."

Medvedev's economic adviser Arkady Dvorkovich said Russia may put part of its currency reserves in bonds issued by Brazil, China and India. He told a briefing that Russia could make the move if the other three BRIC members reciprocate as part of efforts to diversify financial instruments.

Over the weekend the Russian finance minister, Alexei Kudrin, while attending the G8 meeting of finance ministers in Italy was quoted as saying that “It’s too early to speak of an alternative” to the dollar...the fundamentals of the dollar are still in good shape.”

As I noted in a posting yesterday Kudrin's comment was in contradistinction to other recent suggestions from Russian officials which have quite outspokenly referred to their preference for less reliance on the US dollar as the basis for their holdings of foreign reserves.

Returning to the AP report from the recently concluded summit of Asian countries in the Urals, there were also concrete proposals regarding the extension of the basket of currencies that should henceforward be included in the underlying composition of the Special Drawing Rights (SDR's) of the International Monetary Fund.

Dvorkovich also proposed revising the way the International Monetary Fund's obligations are valued. He said the ruble, the yuan and gold should be part of a revised basket of currencies to form the valuation of the IMF's special drawing rights, or SDRs.

Dvorkovich denied any rift on the global currency issue with Russian Finance Minister Alexei Kudrin, who this week helped the dollar rebound in global markets by saying over the weekend that the dollar's status as the world's main reserve currency wasn't likely to change soon.

Dvorkovich said that the emergence of new reserve currencies would be a gradual process reflecting shifts in the global economy. "It can't happen fast, new reserve currencies emerge as economies of the countries issuing them gain strength," he said.

"Least of all now we need shocks at the currency markets," he said. "Any additional shocks are bad during the crisis. No one wants to bring the dollar down."

Upon closer inspection there is a consistent thread to the comments coming from different Russian officials. They do not want to talk down the dollar and would quite plausibly want to see it remain strong as they have enormous holdings of US dollar denominated assets, but on the other hand they want to ramp up the movement towards a viable supplemental reserve currency - based on SDR's but where the constituents of that SDR unit of currency should include currencies from the BRIC economies as well as gold.

All of which strikes this writer as eminently sensible and if implemented (and that is a big "if") would make the global financial system a lot less fragile. As I have previously argued a strong case could be made that the basket of components underlying the SDR should, in addition to including gold, also include other strategic commodities such as industrial metals and energy products as well.

It is not palatable to believe that in the long term the most indebted nation can continue to control the fundamental hub - and single point of failure of the global financial system - the US Treasury market which, in the foreseeable future, is dependent on a Q.E. policy of the Federal Reserve.

Obama - If we do not fix our health care system...the US could go broke

President Obama is facing a stiff fight against the medical establishment in his attempt to bring about systematic health care reform in the U.S. Just as Bill Clinton, with his wife at the time leading the initiative, Obama is finding that the special interests throughout the entire medical/pharmaceutical sector are deeply entrenched in opposition to democratizing the health system.

Addressing the AGM of the American Medical Association Obama confronted a less than enthusiastic reception when outlining his agenda for reform, as most doctors present at the AGM were more concerned about limiting malpractice awards.

The following article captures the mood of the meeting:

CHICAGO (AP) -- President Barack Obama bluntly told doctors Monday he is against their highest legislative priority -- limiting malpractice awards -- and earned a smattering of boos from an audience he was here to court for his health care overhaul plans.

Addressing the doctors in Chicago, the president said for the first time publicly that health care reform, including covering the almost 50 million Americans who have no insurance, would cost about $1 trillion over 10 years.

"That's real money, even in Washington," he said. "But remember: That's less than we are projected to have spent on the war in Iraq. And also remember: Failing to reform our health care system in a way that genuinely reduces cost growth will cost us trillions of dollars more in lost economic growth and lower wages."

To size up the stakes of the battle ahead Obama also made the point

"If we do not fix our health care system, America may go the way of GM -- paying more, getting less, and going broke."

One doesn't have to take a firm standpoint on the medical system overhaul debate either way, to be somewhat galvanized by a President saying that America could go broke.

Awe-Inspiring Image of Mysterious Gamma-Ray Burst

The photograph above comes from a short, but fascinating, article from Wired Science

Gamma-ray bursts are the most massive explosions in the universe since the Big Bang, and yet scientists still know relatively little about them. In particular, dark bursts, such as the one in the center of the image above, remain very mysterious.

This dark burst was first detected by NASA’s Swift satellite and then imaged by the Keck Observatory in Hawaii. The image shows previously unknown galaxies that contain strangely dense clouds of dust that dampen the burst’s visible light, but not the high-energy gamma rays or X-rays.

Gamm-ray bursts are so powerful that they release more energy than stars like the sun will emit during their entire life spans. No true bursts have been detected in the Milky Way, most are billions of light years away from Earth.

Foreign purchases of US securities drops in May

The following report from AP reveals that net purchases of US securities fell by $44 billion from April to May.

WASHINGTON (AP) -- Foreign demand for long-term U.S. financial assets fell in April as both China and Japan trimmed their holdings of Treasury securities.

The Treasury Department said Monday that net purchases of stocks, notes and bonds obtained by foreigners fell to $11.2 billion in April, from $55.4 billion in March.

China, the largest holder of U.S. Treasury securities, trimmed its holdings to $763.5 billion in April, from $767.9 billion in March. Japan, the second largest holder of Treasury securities, reduced its holdings to $685.9 billion, from $686.7 billion a month earlier.

Treasury Secretary Timothy Geithner traveled to Beijing earlier this month to assure the Chinese government that the Obama administration is determined to get control of an exploding U.S. budget deficit, which is projected to hit a record $1.84 trillion this year.

China's holdings of Treasury securities represent about 10 percent of America's publicly held debt.

The administration has said while its aggressive moves to fight the recession and a severe financial crisis will push up the budget deficit temporarily, it intends to reduce the deficit as soon as the economic situation permits.

Don't fight the guys who have the power to print money

There is a very good post from Michael Murphy regarding the psychology of the typical investor in regard to the emergence of bull markets in the midst of widespread skepticism. Murphy is of the view that a new bull market is under way and that the typical punter is going to miss out on it as is usually the case. His characterization of the process is familiar:

As you can tell if you read the comments on Yahoo Finance, new bull markets have a way of keeping undisciplined investors on the sidelines. Near the bottom, the pain gets too great and they sell their stocks to go to cash. As the market starts up, they buy some Ultrashort exchange-traded funds to make back some money when the “little bear market rally” falls apart. After taking a 30% loss on those, they start posting angry messages about how this is a garbage stock rally, a bubble manipulated by the hedge funds or a sucker's rally doomed to fail. They're not going to get sucked in, no siree.

After the market has recaptured some key levels, they decide it looks like the economy is starting to recover, and they would be willing to buy some stocks except that everything has gone up too much from the lows. Their fear of a weakening economy is replaced by a fear of buying too late, and getting caught at the top of a bear market rally. So they wait, hoping each consolidation down is the start of something big that will let them get back in gracefully. They forget that the market's job is not to make us all look graceful, it is to make us all look stupid. By the time they decide this is a bull market, not a bear market rally, and start nibbling, make some money, and build up their courage to get fully invested – the market is ready to top. Happens every time.

One comment which does lend great plausibility to his stance is the notion that one should never fight the Fed or as he puts it "there is no point in getting into a financial war with the guys who have the power to print money."

The moral of the story perhaps is that the long side is the place to be while they are printing money and that applies to equities, and especially to commodities but the long side is not the place to be for US Treasuries.

Credit card write-offs approaching 10%

According to a filing with the SEC Capital One Financial Corporation (COF) revealed the following in its Monthly Charge-off and Delinquency Statistics. These are very up to date numbers as they were compiled as of and for the month ended May 31, 2009.

On their US cardholders the annualized net charge-off rate was 9.41%
On their international cardholders the annualized net charge-off rate was 9.77%

Why don't the rich want to come out and play (in equities)?

The very commendable efforts that have been made in the last three months to lift equity prices and boost consumer confidence, do not appear to be scoring too well with the most important constituency that needs to be convinced about the attractiveness of investing - the rich.

According to a Barclay's Wealth report which is discussed in the following news article

Wealthy investors are sitting on their hands and refusing to commit their cash amid fears that asset prices have further to fall, according to a report .

A survey of the world's richest people found they continue to be nervous about the prospects for most major economies and are ignoring entreaties from financial advisers that asset price falls have bottomed out and bargains are aplenty.

Almost nine out of every 10 investors can see investment opportunities but more than two-thirds say they are still nursing wounds from the fall in the stockmarket and the crash in commercial and residential property prices to start investing again.

The reticence on the part of the rich to come out and play must be slightly concerning to those intermediaries (e.g. Goldman Sachs and JP Morgan), currently warehousing huge inventories of equities and equity derivatives, and who are keen to see them transferred into strong hands for safekeeping. Perhaps retail investors and pension funds will keep buying while the rich sit on the sidelines a bit longer before they decide to join in the sports.
Somehow that's not how it's supposed to work.

Does Russia have full confidence in the US dollar?

After a series of announcements by BRIC leaders that they were looking at diversifying their reserve holdings away from the US dollar there was an apparent volte face in the official pronouncement this weekend by the Russians at the G8 summit of finance ministers in Italy. According to this report from Bloomberg:

Russia has full confidence in the dollar and there are no immediate plans to switch to a new reserve currency, Finance Minister Alexei Kudrin said. “It’s too early to speak of an alternative” to the dollar, Kudrin said in Lecce, Italy, in a television interview today after meeting with finance chiefs from the Group of Eight nations. The fundamentals of the dollar are still in “good shape.”

This follows on from a statement made on June 10th by the Russian central bank that it was planning to move out from some of its US Treasury holdings into IMF bonds.

Apart from the obvious fact that Russia, along with other central banks, is a major player in the forex market there are several ways to interpret this change of stance:

1. The Russians along with the Chinese are realizing that talking down the dollar (or at least not talking it up) will be harmful to their existing holdings of Treasuries and other dollar denominated assets.

2. Tim Geithner's recent visit to Beijing and his "frank" discussions with the Chinese could have caused some alarm about the possibilities of not supporting the dollar during coming months (years) when mountains of T-bonds need to find buyers.

3. The June 10th announcement from the Russian central bank could be seen as part of a ploy to push up yields on the US Treasury notes and bonds issued last week and at the same time pushing down the dollar prior to the auctions. With the auctions out of the way and with yields down and the dollar up the Russians and the Chinese may now be feeling better about their participation in last week's auctions.

4. It is somewhat extraordinary to see how the world's largest debtor (still with a AAA rating) and with the greatest refunding needs, has to tweak its own policy announcements on its currency and monetary policy, to placate concerns of the Russian central bank, which just over ten years ago was defaulting on its debt.

US housing index is weighed down by spike in mortgage rates

The Housing Index (HGX) is one of the "heaviest" looking of the broad sector indices and undoubtedly the recent surge in long term rates and MBS rates is weighing on this market.

The Ichimoku chart reveals the manner in which price action is now entering the green cloud to the right of the chart and the potential for downside follow through if the price drops out of the cloud. Also worth noting is the manner in which the piercing of the pink cloud from below in early April (and annotated with the arrow) was a good buy signal for this index.

Anecdotally the following quote from a Bloomberg article captures the core issue for the mortgage refi market.

“The homeowner can’t handle this,” said Scott Simon, the head of mortgage-bond investing at Pacific Investment Management Co., whose Newport Beach, California-based firm is the world’s largest fixed-income manager.

Higher rates are “really hurting the refi wave,” Buchta said in a telephone interview. “And rising rates are definitely going to hurt home prices. Consumers figure out the payment they can afford and from that figure out how much house they can buy.”

An increase of 0.5 percentage point in loan rates translates into about 5 percent “less buying power,” he said.

It's becoming more obvious to a number of analysts that the Fed is losing control of long term rates, and this point was made quite forcefully by Michael Shedlock in his daily blog column:

Fed Is Out Of Control

What now Big Ben? You've already blown over a third of your $1.25 trillion commitment and all you have to show for it is more garbage on your balance sheet and a locked up refi market.

One thing is clear, Ben Bernanke and the Fed have lost control of the mortgage market (not that the Fed was ever in control in the first place). They weren't. It was all an illusion.

For now, the stock market is shrugging this off. If rates stay above 5.5% for long, don't expect that to last. And it may not last anyway.

BlackRock Global Investors joins the too big to fail elite

BlackRock Global Investors bringing it all together under one roof - surely, yet another contender to join that special elite in modern finance - institutions that are Too Big To Fail and Too Big to Manage .

The following comes from a piece in the WSJ today.

BlackRock reached an agreement to buy Barclays Global Investors from Barclays PLC for $13.5 billion, creating a money-management titan roughly twice the size of its closest competitor.

The price represents a substantial premium to what analysts thought BGI would fetch and underscores how capital markets have revived in recent months. It represents a big payday for both Barclays and some of its executives.

The firm, renamed BlackRock Global Investors, will have more than $2.7 trillion in assets under management. The deal makes BlackRock, already a major player in actively managed stock, bond and alternative-investment products, an indexing giant and the largest U.S. provider of exchange-traded funds.

It is also somewhat curious that Barclays are selling this unit now as they have recently been going to great lengths to protest how well capitalized they are.

Less dependency on US dollar as reserve currency is to be welcomed

The diversification away from dollar denominated holdings by foreign central banks, as being implemented now by Russia and Brazil (with China surely to follow) is actually to be welcomed.

It will help to move the global financial system away from its current predicament which is that there is a single point of failure - the US Treasury market - in a highly interconnected system.

US Fed has to confront a more hostile monetary environment

The Treasury market will probably have another nervous session today (June 11) as an auction of 30 year bonds has to contend with a lackluster reception for ten year notes in yesterday's auction. As can be seen from the very long term chart shown above (click to enlarge) the 30 year yield spiked up to almost five percent yesterday.

If the yields required to sell all of the long maturity debt do not find some support in the five percent region there would be a plausible case to be made that a confirmed violation of the downtrend through yields stretching all the way back to 1987 creates a hostile monetary environment for the Fed which will "complicate" the rebuilding of confidence in US equities as a desirable asset class.

Beta arbitrage strategies running into Treasury yield "issues"

The two primary (and inter-related) themes that I am currently focused on in the US markets are the big moves upwards in yields at the long end of the Treasury spectrum - to be followed soon by equally big moves at the shorter end as suggested here - and the relative out-performance of the small cap stocks against those in the S&P 500.

Since the March lows the best way to understand the price action in US equities, I would suggest, has been one where macro asset allocators, and quant funds, have been using high frequency and complex arbitrage strategies designed to be relatively risk neutral but with an overall tilt towards helping the US equity market to rebuild its confidence by being long the high beta performers (Russell 2000 index) and short the lower beta stocks (S&P 500).

This type of action is entirely consistent with the overall theme of demonstrating to the mainstream fund managers that it is safe to step exposure to stocks as there is, according to the agenda, a new bull market emerging - indeed it resembles similar the trading activity that was seen during the 2004-6 period.

The unfortunate piece of the puzzle is shown by the rather shocking under-performance, from the perspective of price, of US Ten Year notes - as indicated by the very sharp back up in yields reflected on the relative performance chart above. After a poorly received ten year auction yesterday the yield has effectively doubled since the historic low yields, within a whisker of two percent, seen at the end of 2008.

Beta arbitrage algorithms have certainly succeeded in giving an overall lift to equity prices and in turn improving confidence and sentiment, but the chart should act as a sober reminder that - given the magnitude of the US Treasury's borrowing requirements - the tried and true formula of pumping up prices to create a compelling environment for broader participation in equities may have more surprises to contend with this time around.

Weak Ten Year Note Auction - AP reporter says concern is that debt load is "untenable"

NEW YORK (AP) -- A weak auction of Treasury notes is putting the pressure on both stocks and bonds.

The Dow Jones industrial average fell about 65 points Wednesday after the government sold $19 billion in 10-year Treasury notes. The government had to lure buyers with a higher yield than the market anticipated.

The 10-year note's yield, which is closely tied to interest rates on mortgages and other consumer loans, jumped to 3.99 percent, a new high for the year.

Investors are concerned the government's debt load will become untenable, leading to higher inflation and soaring interest rates. Rising rates could hamper the economy's recovery.[my emphasis]

Not to sound alarmist but the AP journalist actually uses the world "untenable". I cannot help wondering who's going to bail out the bailout.

There are no bad bonds, just bad prices

One of the smartest financial pundits, James Grant, had some great lines during the following clip from CNBC.
My favorite, amongst many others worth citing, was
There are no bad bonds, just bad prices.

Belt and braces for Swedish banks

Swedish banks are well capitalized enough not to require any injections currently but are boorowing 3 billion euros just in case, according to this article from the Financial Times.

Sweden’s central bank on Wednesday geared up for a possible Latvian devaluation by borrowing €3bn from the European Central Bank under an existing €10bn swap agreement.

The move came as Sweden’s banking regulator said that the country’s banks – which dominate the Baltic banking sector – had a strong enough capital base to withstand a financial crisis there but that nevertheless they might have to raise more capital to calm the markets.

The Swedish Financial Supervisory Authority said on Wednesday that, according to its stress tests, the four big Swedish banks did not need to raise more capital at the moment and could absorb SKr150bn (€14bn) in losses over three years in the Baltic states.

“However, in extreme scenarios the market will most likely require a higher level of capital, which can place pressure on financing possibilities for banks that are most affected,” it warned.

One always needs to be wary when bankers protest how well capitalized they are!

Half of all Nevada residents have negative equity

Yesterday I drew attention to the fact that in terms of the geographical distribution of foreclosures and personal bankruptcies in the US the sun belt states are the real victims of the current recession.

Here is an excellent piece which amplifies on that theme and just one quote from the article which is well worth reading will make the point very clearly.

A third of Arizona’s mortgage borrowers are now “under water,” according to the real-estate research group First American CoreLogic—meaning that they owe more money on their mortgages than their houses are currently worth. Florida is in similar straits. And in Nevada, almost half of all homeowners have such “negative equity,” including 55 percent of homeowners in Clark County, which includes Las Vegas.

While real estate prices have declined in most of the US the statistics above - and many more in the article cited - reveal how geographically focused the larger bubbles have been.

No system or network should have a single point of failure.

In the United States there is a centralized financial power structure which has over relied on the perceived worth of credentials per se and has (largely) not rewarded/punished on the basis of good/bad judgment.

While that culture of credentialism and entitlement persists the financial elite is becoming even more concentrated and oligarchical. The lack of culpability shown by many of those responsible for colossal errors and miscalculations and the asymmetric nature of the private profit/socialized losses model is creating such a sense of dissonance and disengagement that the cultural fabric is becoming very frayed and could burst apart at the seams.

Moreover the global financial system has a single point of failure – the integrity of the US Treasury market. A sane financial system or network would never allow itself to have such a vulnerability and a new financial architecture has to be devised with a much greater distribution of risk. The US Dollar is currently too big to rescue, and this seems to be the message that the BRIC countries are sending out and those in the advanced economies should be grateful that they are embarking on strategies to ease their dependency on the US dollar and the market in US debt instruments.

US personal bankruptcies running at 6000 per day

US personal bankruptcy filings rise to 6,000 a day as job losses take toll, according to this report

Consumer and commercial bankruptcy filings are on pace to reach a stunning 1.5 million this year, according to a report from Automated Access to Court Electronic Records.

While well below the record 2 million filings in 2005, the number of filings is up sharply from last year's 1.1 million, says Robert Lawless, professor of law at the University of Illinois.

Bankruptcy filings took a dramatic nose dive after a 2005 bankruptcy reform measure was signed into law to curb bankruptcy abuse and make it harder to erase debts.

"People are coming to us in much worse shape than they used to be," says David Jones, president of the non-profit Association of Independent Consumer Credit Counseling Agencies. "We used to be able to help 20% to 25% of people who came to us, and now we can only help 7% to 8%."

Last month, commercial filings hit 376 a day, up from 255 in May 2008. Hartmarx, which manufactures and markets apparel, and Silicon Graphics, a manufacturer of computer workstations and storage products, were among the filers.

Bankruptcy filings are not climbing at the same rate in every state. Nevada, Michigan and California had the biggest per-capita increase in bankruptcy filings in May, according to AACER.

"Nevada doesn't surprise me," Pottow says. "It is ground zero of the housing crisis."

And California also has suffered from the boom and bust of the housing market. By contrast, Michigan is dealing with the collapse of the auto industry.

The recent bankruptcy filings of Chrysler and General Motors, along with plant closings and job losses, will spark even more consumer bankruptcy filings, Pottow says.

The pattern of foreclosures across the US which is reflected here also shows that the sun belts have been particularly hit in the recession and personal bankruptcies undoubtedly will show some correlation from an economic geography perspective.

Lord Sugar's constructive dismissal

Caroline Flint prepping for reality TV circuit?

Caroline Flint is definitely an attention seeker. After quitting Gordon Brown's cabinet last Friday (the announcement was timed for maximum impact as it came during a press conference that Brown was giving), she is still stirring things up.
She is quoted in Today's Observer as follows:

The former Europe minister, who resigned on Friday saying that she had been used as "window-dressing", launched a broadside against the PM, complaining of "this constant pressure, this negative bullying".

Asked if Brown had a problem with women, she retorted: "I don't know. It would have been nice to have had more conversations about the policy areas I was involved with. But we didn't, so I don't know that. You've only got to look and see where women are in cabinet and where they aren't: and they aren't in positions of power, they aren't running spending departments. There's only Yvette [Cooper] now who's actually running a spending department."

She gets my Attention Seeker of the Day award (who knows it could become a regular feature). Clearly she would be great on the reality TV circuit and I am sure she is sorting out an agent. Perhaps even Max Clifford will recognize that X factor prerequisite - the love of seeing your own image in the media.

I just wanted to show that it's not all gravitas here.

Did Bernanke blink first last week?

In Friday's trading the tension between the short end and long end of the US Treasury spectrum saw some rather dramatic adjustments Surges at both the long and short end were seen but it was the two year note which was the biggest surprise as it jumped almost 30 basis points. The chart above is an ETF which tracks the prices of 1-3 Year Treasuries (SHY) and the large gap down in Friday's session indicates the magnitude of the surge in yields.

There were also indications from the Fed Funds futures that traders are now factoring in increasing probability for rate hikes from September onwards.
The moves of last week were addressed in my Daily Form commentary last Tuesday and in particular in the comments on the Five Year yield (second item)

There is one theme which I am confident about which is that, unless we get another major leg down to the rolling financial crisis, the bull market in US Treasuries which carried from the October 1987 crash until December of 2008 is over.

Yields on the five year note saw the largest relative jump yesterday and I would expect that as long as traders in equities and commodities continue to push the reflation agenda the market’s focus will move increasingly towards the shorter term securities, in particular 2 year notes.

Re-reading that comment today (June 7th) it would seem that the reflation traders are winning and that in fact the Fed blinked first, and it was revealed in Bernanke's remarks in Washington last week. Whether things will continue to play out well for the reflation traders and badly for those hoping to refi mortgages is less clear and it may be that the Fed (and equity markets) will decide that even if emerging markets deserve a bid the US consumer is still tapped out.

President Obama avoids Nicolas Sarkozy

The following is quoted verbatim from an interesting piece regarding Monsieur Sarkozy's efforts in vain to bask under the Obama halo during his trip to France.

Before President Obama’s arrival in Paris on June 5, French president Nicolas Sarkozy offered him a formal airport greeting ceremony, an elegant dinner at the Elysée Palace and an official Saturday morning reception followed by a televised press conference -- all part of the “extraordinary welcome” that Sarkozy promised the American president.

The surprise is that Obama declined these protocol-rich invitations. Although the Obamas were photographed on Saturday being welcomed in Normandy by Sarkozy and his wife Carla Bruni-Sarkozy, he planned to spend most of his two-day visit back in Paris without publicly fraternizing with the French president, even though the Obamas are staying at the U.S. Ambassador’s elegant 19th century residence just 200 meters down the posh Rue du Faubourg Saint-Honore from the Elysée Palace residence, where Sarkozy and his wife stay most weekends.

The French media noted the embarrassment for Sarkozy, observing that Obama has kept to a “bare minimum” his interactions with the French president. The official explanation is that the Obamas will be enjoying personal time in Paris, which includes a dinner out, and a celebration of Sasha’s 8th birthday on Sunday. But the French media have noted the embarrassment for Sarkozy, observing that Obama has kept to a “bare minimum” his interactions with the French president who would be glad to wrap the extremely popular U.S. president in a bear hug.

French commentators and Sarkozy’s political opponents are wondering how Sarkozy might have provoked this perceived "snub". Was it the tactless non-invitation to Queen Elizabeth II to the D-Day commemoration? Or Sarkozy’s attempt to snag credit for collective solutions at April’s G20 meeting on the global economic crises? Or perhaps it was Sarkozy’s snide off-the-record comments a few months back that Obama was inexperienced and unpreparation on issues such as global warming?

But on President Obama’s side, there is a sensible answer that has less to do with personal pique and more to do with politics: the French go to the polls on Sunday, June 7, to elect representatives to the European Parliament. Campaigning ended June 4, as part of a traditional “cooling-off” period, but Obama’s visit happens just as voters, concerned about la crise economique, are deciding who they will vote for, or whether they will vote at all, given that many in France aren’t particularly clear on what the EU parliament actually does.

Labour's political calculation - good and bad news for Gordon

My suggestion is that there is both good news and bad news for Mr. Brown in the current state of play (as of lunchtime on June 5th)

I'm not normally terribly interested in British politics but here are my ten quick thoughts on the matter.

1. Brown, as part of his Cabinet re-shuffle, wanted to replace the current Chancellor with Ed Balls for many reasons but one of which may have been to get another stimulus package in ahead of an election. Darling was too frugal and Balls would have obliged

2. Purnell's resignation and the fact that Darling said he did not want to be moved raised the risks for Brown that putting Balls in as a replacement could have seen Darling drift away from the Cabinet and, even if not overtly critical of Brown, Darling's silence would be another awkward issue(amongst many) for Brown.

3. Lord Mandelson didn't get the job he wanted as Foreign Secretary and although he is a positive spin doctor of the first order he will resent that fact.

4. The appointment of Lord Sugar (as he will soon be known) as Enterprise Tsar is a supreme act of the desperate spin and cynicism from a Prime Minister that most Britons now despise. Just like his YouTube appearance Brown continues to show that he has zero media savvy.

5. Grass roots Labour MP's and constituency faithfuls are probably calculating that an election soon would be 100% disastrous whereas they can pray for green shoots and should they really start to bloom, an election next June may only be 90% disastrous.

6. The other calculation is that if the green shoots are performing their magic - kicking Brown out next spring with a new broom (i.e. Alan Johnson) would make more sense than kicking him out now.

7. Only if the backbench Labour MP's can get enough signatures together will Brown have to face a formal showdown soon. But the backbench MP's know that they could not get away with another unelected leader of the party for long so a general election would have to be called soon which puts #5 back into play.

8. The Conservatives would much prefer to fight Brown at an election but they also have to keep an anxious eye that the green shoots aren't too healthy, as Labour under a new leader with economic tailwinds could put Cameron to the test.

9. Brown is very vulnerable but he just may survive in the foreseeable future.

10. The electorate will get angrier and more resentful and it would be almost certain suicide to have Brown at the helm at the time of the next general election - whenever it comes.

Latvia - spillover possibilities.

The Polish government is becoming concerned about spillover effects from the Latvian financial crisis according to this report .

"There is a threat that the situation in Latvia may spill over into the region," Dariusz Filar, a member of the Polish central bank's Monetary Policy Council, told reporters on the sidelines of an economic conference in Warsaw. "This situation is a challenge that requires a reaction on a broader scale than just Latvian, there is a need for more international assistance."

US rail freight volumes still trending lower

The following chart is included with this comment at FT Alphaville.

Freight volumes are still trending lower. The year-on-year deficit has widened from minus 14 per cent at beginning of March to minus 18 per cent at the beginning of Apr, minus 21.6 per cent at the beginning of May and and then minus 23.5 per cent at the start of June.

Latvian T-bills - outlier events can take center stage rather quickly

It's always a good idea to keep an eye on outlier events which are off most people's radar screens. As I noted in a posting on May 29th Danske Bank drew attention to possibly disturbing consequences from the collapse in retailing in the Baltic states and the precarious state of the finances of some of these recently inducted EU states.

After a failed auction in Latvia yesterday it seems that nobody wants to buy their T-bills and that overnight rates are sky-rocketing. This is also having noticeable effects on the Euro and the Swedish kroner in today's session.

Here is the Reuters report on the failure to sell the T-bills taken from the FT Alphaville story.

RIGA, June 3 (Reuters) - The Latvian treasury failed on Wednesday to sell any of the 50 million Latvian lats ($100.7 million) of various treasury bills offered for sale on Wednesday, the stock exchange said.

The failure to attract offers for the paper came as the Latvian market remained frozen due to worries about the currency, which some fear faces a devaluation, and amid central bank buying of the lat to keep it within its peg to the euro.

The treasury, which carries out its auctions via the stock exchange, had offered 20 million lats of paper maturing in July, 10 million lats in September, 10 million lats due in December and 10 million lats maturing in June 2010.

Also worth looking at is the following angle on the story from Zero Hedge.

The lesson to be learned from this surely is that the Latvian government has to get with the times and introduce its own version of QE and get its central bank to buy its T-Bills. You know it makes sense.

A Brown-Balls agenda could add to S&P's concerns about UK fiscal outlook

Things are getting very messy for Gordon Brown and he may not survive the week.

Previously its editorial policies have been basically supportive and friendly to Britain's Labour Party, but this morning's main editorial in The Guardian calls for Gordon Brown to step aside - "It is time to cut him loose."

Many commentators are now seriously doubting whether Brown can survive the next few days, with a catastrophic showing in European and council elections to be held Thursday (June 4) almost inevitable. Brown seems to believe that he may be able to hang on in the wake of a re-shuffling of his Cabinet which could come as soon as this Friday.

Let's assume that Brown can carry on and appoints, his chum, Ed Balls as new the Chancellor. A lot of attention in the UK media is now being focused on why this will be very antagonistic to the residual bad blood between Blairites and Brownites etc.

But this seems to be missing the Big Picture and has all of the appearance of being a parochial Westminster village issue (which is not to say that it could not prove to be yet another knife in the back for Brown inflicted from within his own party).

Let's consider a Brown-Balls axis in the light of the recent S&P negative outlook and the fiscal problems facing the UK and how markets might react if Ed Balls is appointed as Chancellor.

My suspicion is that the real reason for Brown to appoint Balls would be that Brown and Balls together want to have another go at being really generous with taxpayer's money and to fund another stimulus before Brown has to face an election. It has to be called within the next year.

With Balls controlling the purse strings of government, as opposed to the more frugal Mr Darling, and with Mr Brown in such a desperate bind that a cynical spending spree could be the only thing to save his career, it would not be surprising if markets were to once again focus on the concerns expressed by S&P over the credit outlook for the UK and the need for fiscal prudence.

A Brown-Balls fiscal agenda would not be constructive for gilts, sterling and possibly not even for the FTSE either.

US 2-YR, 10-YR Yield gap hits record wide at 277 basis points

As reported by FT Alphaville citing Reuters as the source.

US 2-YR, 10-YR YIELD GAP HITS RECORD WIDE AT 277 BPS IN THE WAKE OF STRONGER-THAN-EXPECTED HOME DATA

Amidst the general confusion about direction in various asset classes there is one thing that I am confident about which is that, unless we get another major leg down to the rolling financial crisis (which is becoming more unpleasant to contemplate each day that the disconnect from mounting debt problems persists), the bull market in US Treasuries which carried from the October 1987 crash until December of 2008 is over.

Yields on the five year note seen in the chart above saw the largest relative jump yesterday and I would expect that as long as traders in equities and commodities continue to push the reflation agenda the market’s focus will move increasingly towards the shorter term securities, in particular 2 year notes.

Perversely the rates on short term bills are declining significantly at present - which I don’t believe is a positive for those claiming boldly that risk aversion is behind us.

Hong Kong index ends at exactly 38% retracement of swing high/low

The chart above is a weekly chart for the Hang Seng Index in Hong Kong. Superimposing a fibonacci grid over the historic high from October 2007 and the most recent lows seen last October, and more or less revisited in March, it can be seen that the closing price in Tuesday’s session (June 2nd), which registered a 2.6% decline, is almost exactly at the 38% retracement level of the swing high/low.

While the momentum traders will want to keep pushing further ahead, it would be very surprising to see this index slice through the 50% retracement level in the neighborhood of 21,200, at which there is clear price congestion, without a corrective episode.

Replacing the US dollar as global reserve currency - just a pipe dream, right?

One blogger this morning raised the following issue

The world is not organized for nor does it exist for the convenience of America's self indulgent and self obsessed governing elites---- but our Government is so busy talking and posturing that it refuses to listen much less hear.

Perhaps the US administration should be paying closer attention to the possibility of a replacement global currency as it appears to be on the agenda for a forthcoming summit of BRIC nations as outlined here

The leaders of the world's biggest emerging markets may discuss the idea of a supranational currency this month when they meet for a summit in Russia, President Dmitry Medvedev's spokeswoman said on Tuesday.

"I do not exclude that the Russian president's idea about the creation of a supranational currency and the rouble as a (world) reserve currency will be discussed," Medvedev's spokeswoman, Natalya Timakova, told reporters.

Should we be taking this seriously...well I certainly think that it would be smug and ostrich like to ignore it.

It concerns me (perhaps due to my naivete) that even as smart an observer as Simon Johnson, whose opinions are always worthy of close attention, seems to dismiss such a possibility of a dollar replacement as a "pipedream".

For what it's worth my own view is that, in the aftermath of the demise of supposedly rock solid institutions like AIG, Lehman Brothers, Fannie Mae, Freddie Mac, Citigroup, General Motors (no need to go on about it!) we should continue to contemplate the unthinkable.

So to use a quaint old expression perhaps we should put that in our pipe and smoke it.

Distribution at work in the wake of market's recovery

The following news item illustrates classic distribution at work as the recovery continues.

The wealthy Persian Gulf investor who bought part of a £7 billion ($10.4 billion) stake in Barclays PLC last fall has decided to cash in his stock, almost doubling his investment thanks to the company's stock-price rise.

Sheikh Mansour Bin Zayed Al Nahyan, a member of Abu Dhabi's royal family and the chairman of Abu Dhabi's International Petroleum Investment Co., was part of a controversial capital raising last fall that Barclays pulled off against investor opposition. The other Middle Eastern investors were from the Qatari government.

The investors were portrayed as long-term partners of the bank at a time when the bank was seeking to avoid turning to the U.K. government to meet capital requirements.

Now, Sheikh Mansour will dispose of 1.3 billion Barclays shares that he obtained through the convertible notes he bought as part of the plan, Barclays said Monday.

This quick rotation from Barclays equity to cash (it is not as though the Sheikh needs the cash) underlines my concern that the holding of assets predicated on increasingly high frequency rotation and pure market timing, is the new bubble. Value is not created by market timing, I would maintain, only transferred.

The Sheikh seems to be implementing the simple rule of Lord Rothschild - it's better to sell too early than too late.

Selling too early

Reviewing many charts from yesterday (June 1st) I was reminded of the counter-intuitive remark of Lord Rothschild when asked to account for how he had made his fortune.

He is reported to have said "I always sell too early."

US foreclosures could hit 2.4 million by year end

This brief posting from FT Alphaville makes for very sobering reading

According to the Center for Responsible Lending in the US, the number of home foreclosures so far in 2009 has just topped 1m.

The lobby group even has a handy ticker, so you can watch the tally rise in real time:

The current rate of growth is 6,600 homes a day, or one every 13 seconds. But, as 24/7 Wall St points out, we’re only just getting going here.

The CRL reckons foreclosures will hit 2.4m by the end of the year, while by 2012 the ticker figure will have grown to a total of at least 9m.

The full bill in terms of house value destruction? $1,900bn, the CRL says.

High frequency thematic rotation is the new bubble.

The major lesson that big financial players learned from the meltdown of October 2008 is that systemic illiquidity is extremely perilous and has to be avoided at all cost.

As machine based trading predominates - with ever more complex algorithms being created - the key to keeping markets liquid is to create the conditions for, both encouraging and exploiting, constant disagreements about the dominant theme or interpretation of the macro-environment.

We should expect rotation through sectors (geographical and economic) and an ongoing propagation of the inflation/deflation dichotomy to drive continuous asset allocation shifts and in turn foster market liquidity.

High frequency thematic rotation, and the holding of assets predicated on this form of pure market timing, is the new bubble. Value is not created by market timing, I would maintain, only transferred.