GEAB No. 20 Breaking phase ahead for the global financial system in 2008

Posted by D.D.Grant at 3:07 AM

GEAB No. 20 is now issued. This is one of the few publications that has achieved a remarkable predictive record on the subprime crisis and the global credit crisis. Although it is a subscription item (I have no financial connection or other connection) there is an informative abstract provided on the site. The following is excerpted from this abstract:

"The rapid aggravation of the global systemic crisis as its phase of impact unfolds (1) has brought our researchers to estimate that the contemporary global financial system will reach a breaking phase in the course of 2008.

Crisis follow-up indicators now show that we should no longer only fear the failure of some large financial institution (and of many small ones) in the US first and the in the rest of the world (cf. GEAB N°19), but that the global financial system itself is structurally hit.

The network of global central banks' repeated incapacity to control the « credit crunch » when the two historical pillars of the contemporary global financial system (a US economy in recession and a US dollar in decay), reflects the growing surge of centrifugal forces within this very system.

Indeed it is no more a matter of competence or of magnitude of the corrective actions implemented by central bankers. These times are over since summer 2007 and, according to LEAP/E2020, we are now witnessing an increasing divergence in
economic interests among the different components of the global financial
system.

The expected failure of the Fed's most recent attempt to coordinate a joint action of the main central banks in order to feed the banks in US dollars (2), is particularly revealing. This action meant to restore confidence in the financial system by two means:

- reinstating the now moribund inter-banking market, by proving the existence of a « joint force de frappe (strike force) » of global central banks.

- enabling large financial institutions in distress to anonymously restock in US dollars, in exchange of their assets being accepted as discount window collateral (i.e.worth their value some months ago, when they were still worth something)(3).

Of course the first goal is predominant, as reinstating of interbanking market is the only means to bailout banks in distress in a sustainable manner. However, it is already clear that the target has failed to be reached (4). The LIBOR (London Interbank Offered Rate), a key indicator of the health of the interbank market, has not moved an inch from its highest levels ever reached (5). “Psychologically” speaking, the global stocks decline recorded after the action of the central banks was announced, proves this if any message went through, it is that the situation for large US banks is even worse than announced in the past months (6).

According to LEAP/E2020 research team, it is already a fact that after it lost control over interest rates (cf. GEAB N°16), the US Federal Reserve has now lost two more of the attributes that characterized the post-1945 global financial system: its credibility as a proactive player capable of influencing heavy market trends(8), and its capacity to organize and drive global central banks altogether along its own rhythm and goals. In doing so, it has just lost the ability to steer by itself the entire global financial system, an ability it has gained after 1945.

Even though today, financial markets are mostly receptive to the loss of the first attribute (9), our researchers estimate that it is the loss of the second attribute (and the impact on the system's leadership) which will result in the global financial system's break sometime in the course of next year, probably by summer, when the effects of the ongoing US recession will start being fully felt and when Asians and Europeans will decisively be compelled to impose their own priorities to the “Fed-pilot”.

In this 20th issue of the GlobalEurope Anticipation Bulletin (December 2007 issue), our team describes in detail the characteristics of the growing divergences between the four main central banks (US Federal Reserve, European Central Bank, Bank of England, Swiss national Bank)."

Global Systemic Crisis - GEAB Update

Posted by D.D.Grant at 2:26 AM

The Global European Anticipation Bulletin No.18, Seven sequences of the impact phase of the global systemic crisis (2007-2009), is now available. This publication offers possibly the finest analysis of the big picture of the economic crisis to be found. Although a subscription item, there's an intriguing extract available without charge.

Here is the full scope of the current issue:

This public announcement provides the full description of the first sequence in addition to the complete list of sequences.

• Sequence 1 - US debts infect the financial planet: A century after the « Russian loans”, meet the “American debts”!
• Sequence 2 - Stock market collapse, in Asia and the US mainly: between - 60% and -30% in two years according to the regions
• Sequence 3 - Bursting of global housing bubbles: UK, Spain, France and emerging countries
• Sequence 4 - Monetary storm: Volatility at the highest / USD at the lowest
• Sequence 5 - Global economy in stagflation: Recessflation in the US, soft growth in Europe, recession
• Sequence 6 - « Very Great Depression » in the US, social unrest and the militaries' growing influence on public affairs
• Sequence 7 - Major acceleration in world's strategic rebuilding, attacks on Iran, Israel on the brink, Mid-eastern chaos, energy crisis

The free extract is titled: Sequence 1 – US debts infect the financial planet: A century after the 'Russian loans', meet the 'American debts' (2nd quarter 2007 – 3rd quarter 2008).

As noted in a previous post, the position of GEAB is that the US is headed for a 'Very Great Depression' as an outmoded international economic order meets condition it was never designed for. Since the prognoses have shown an unusual accuracy to date it is well worth putting this site in your Bookmarks.

Denial Wavering Across The Pond

Posted by D.D.Grant at 1:28 AM

It is remarkable how quickly the euphoria hitherto evident in the UK housing market is showing signs of a definite mood swing. On Apr 9th, Larry Elliott, economics editor at The Guardian was reassuring readers whilst hedging his bets under the banner Britain is not the US, so don't panic - yet, by Apr 21 the 'pink un', the UK's venerable Financial Times, an organ not known for frivolity, finally announced in the measured tones we have come to expect of it, Subprime market in UK 'has parallels with US.'

Before the bombshell of revised UK inflation expectations and the consequent fall in the dollar against the pound, Elliot was assuring his anxious readers with the Halifax, Britain's biggest lender, announcement that house price inflation had broken through the double-digit barrier for the first time in a year in March, (rising to above 11%) and that the Bank of England decided that a raise in interest rates from their current level of 5.25% was not in the cards; "get on the ladder now before that dream home becomes even less affordable," he urged.

Turns out though that the Brits have been having their own subprime party, just that true to form they haven't called it by name, ever wary of the Yankee's tendency to embarrass with straight talk. But whadda ya know; turns out that UK lenders have attracted first-time buyers with low introductory offers, there has been an increase in 'self-certification' (read liar-loans) for those with 'irregular income' (read $100,000 pa 'lawn care specialists'), and in return for a higher interest rate the usual checks aren't done on the borrower's ability to pay. Also lenders mortgages can be had at five times income and the ratio of house prices to income is higher there than in the US. Sound familiar?

I was particularly amused by Elliot's invocation of US "unscrupulous lending practices," not to be found of course among the saintly denizens of Threadneedle Street. Then there's the hoary old myth of land availability in which the US has limitless open space coupled with lax planning laws so when prices increase supply can easily be adjusted, while the UK is a small island where land availability is additionally limited by usage regulations. All this together with a favourable property tax system leads to an inefficient housing market where high demand leads to inflation rather than an increase in supply. The conclusion Elliot draws: UK house prices have an in-built tendency to rise and low quality UK loans are less likely to lead to negative equity than they would in the US. Amazingly, his argument for the strength of the UK economy appeals to the health of consumer spending, financed through, you guessed it, mortgage equity withdrawal! And so it goes.

Enter Jane Croft at the Financial Times less than (an eventful) two weeks later; ""Banks may be "taking on substantial risks" by ramping up mortgage lending to customers with patchy credit histories, the City regulator warned yesterday." It seems arrears in the UK subprime sector are 20 times those on primes. And shockingly enough, rising house prices are leading some high-debt borrowers to take on additional debt by borrowing against the resulting increase in 'equity.' Clive Briault of the UK regulatory Financial Services Authority: "For example, lenders are in some cases taking on substantial risks through a combination of high loan-to- value ratios and high income ratios, in part because borrowers are using additional borrowing against property as a means not only of debt consolidation but also of increasing their debt at regular intervals by taking as much advantage as possible of rising house prices."

On Apr 20 unmistakeable signs of a sea-change emerged with a host of lenders cancelling fixed rate deals already in the pipeline: Lenders pull fixed-rate mortgages. Is a housing market crash coming?

If it quacks like a duck.