News of the finance

Joel Bowman, reporting from Hong Kong, ROC…

“Business is absolutely booming,” Alex beamed, calling the waiter over to order another bottle of champagne. “I’m out with clients four, five times a week and these guys are spending up big time.”

Alex (his western name – we couldn’t pronounce his Chinese one) is in the private banking business in Shanghai. We met him this weekend here in Hong Kong, where you can’t Frisbee a credit card anywhere on the island without hitting at least one finance professional. Private banking caters to individuals investing “sizable” amounts of money. Not unlike fine art auctions and futuristic sports car exhibitions, it’s a bit of a “if you have to ask, you can’t afford it” kind of club.

“Basically I make friends with rich people,” Alex explained. “I advise them on how best to manage their wealth, how to structure inheritance, avoid excessive taxes…that kind of thing.”

The business of other people’s money is keeping Alex and his co- workers very busy these days, despite the global doom and gloom stories. According to luxury publishing group, Hurun Report, China now has more than 825,000 people with more than 10,000,000 yuan (about $1.5 million) at their disposal. Of that number, approximately 51,000 folk have in excess of 100,000,000 ($15 million).

China overtook France on the “most millionaires” list last year and is adding new high net worth individuals (HNWI) at the second fastest rate on the planet. (Top place honors there go to India. Third: Brazil.)

It’s hardly surprising that the east would be outpacing the west in wealth creation. Raw economic growth in the BRIC countries are by far and away outpacing the likes of the U.S., Europe and Japan. That’s not difficult, of course. Merely standing still looks like warp speed from most western economies’ perspectives. Still, the gap is larger than you might have expected.

In Q109 China grew about as fast as the U.S. contracted (6.1% annualized). Since then, most analysts have revised their 2009 GDP projections for China upwards – Morgan Stanley for instance expects a rate between 7-8%. Back in the U.S. meanwhile, talking heads praise the economy for “getting worse more slowly.”

Even worse off is Europe, contracting at an annualized rate of almost 10%. And, if this were an episode of Sienfeld, the character of George would be played by Japan, which is looking at the more- than embarrassing possibility of 15% “shrinkage.”

While they do not tell the whole story, stock markets comparisons between east and west also tend to show two vastly different pictures.

Despite the tremendous rally of the past couple of months, the S&P 500 is still about where it started the year. London’s FTSE is still trying to get back to even and Japan…well, Japan’s Nikkei 225 is still only worth about a quarter of what it was a couple of decades ago. Meanwhile, China’s Shanghai index is up 45% for the year. India’s Sensex and Brazil’s Bovespa are higher by 44% and 38% respectively.

And while governments in the east works to free up their markets (see historic trade agreement between Taiwan and China after a 60- year freeze, among other instances), administrations in the west increasingly clamp down on industry with more and more regulations, nationalizations and generally more promises to “do something.” (See Gordon Brown’s “English jobs for English workers” gaffe and any and all things “C.E.Obama,” among other instances.)

For many investors, it all comes down to a few simple questions:

Do I want my money working for me in a shrinking economy with a pulverized market under an expanding government with epic debt? Or should I stick it in a booming economy with a soaring market working towards freer trade and with most of the world’s savings?

OPPORTUNITIES & THREATS IN DERIVATIVES SHOCKER

 “With Key Mega-Financial Institutions around the World claiming in 2008 that they risked collapse if they were not bailed out, one must ask which ones benefited from the $13 Trillion plus Increase in Gross Market Value of their OTC Derivatives in the six months between June, 2008 and December, 2008 when the Equities Markets were crashing? A logical Conclusion: Key Central Bankers and Favored Financial Institutions of The Fed-led Cartel*, quite possibly including the shareholders of the private for-profit U.S. Federal Reserve”

Deepcaster, May 29, 2009

For investors, both Opportunities and Threats reveal themselves in the recently reported stunning drop ($90 Trillion+) in Total Notional Value of OTC Derivatives Contracts Outstanding worldwide and an equally stunning rise ($13 Trillion+) in Actual Gross Market Value of OTC Derivatives Contracts Outstanding, in just the last 6 months of 2008. (See Chart Below)

Source: Bank for International Settlements

The Total Notional Value of OTC Derivatives Outstanding dropped from some $683 Trillion as of June, 2008 to $592 Trillion as of December, 2008, according to the Bank for International Settlements (BIS – the Central Banker’s Bank – see www.bis.org, Path: Statistics > Derivatives > Table 19) (Ed Note: A Rough “Cocktail Party” Definition of “Notional Value” is “Unrealized Potential Maximum Value.”)

This first drop in Notional Amount of OTC Derivatives Outstanding in years, mainly reflects the massive deleveraging which occurred during the Fall, 2008 Market Crash.

Perhaps even more stunning was the drop in Notional Amounts of OTC Gold Contracts outstanding from $649 Billion in June, 2008 to $395 Billion as of December, 2008. Yet the change in Gross Market Values of the OTC Gold Contracts outstanding during that period was minimal – a drop from $68 Billion to $65 Billion. We comment on what that portends for Gold below.

In order to determine and evaluate the Opportunities and Threats created by the aforementioned drop in Notional Value of OTC Derivatives outstanding coupled with a dramatic increase of $13 Trillion in Gross Market Values we must first consider a few facts.

To put the Derivatives Monster in perspective, consider that the value of all publicly (exchange-traded) Equities now existing in markets world-wide is “only” about $31 Trillion.

That $31 Trillion is only just over 5% of the still remaining nearly $600 Trillion in Notional OTC Private (i.e. Dark) Derivatives Contracts outstanding. The implications are stunning:

1. If the unwinding of a “mere” $91 Trillion in Derivatives contracts (to bring the Total down to $592 Trillion from $683 Trillion) reflected the Magnitude of the pain that the Fall, 2008 Crash caused, then imagine the Pain which awaits if and when (and probably when) any substantial Portion of the $592 Trillion remaining get unwound.
2. But a substantial portion will likely have to be unwound given that various ongoing Crises have yet to be resolved, and, in many cases are worsening e.g.: Consider:
   1. The U.S. Treasury/Fed etc have already committed some $12.8 Trillion (by one reckoning) for Bailouts, Loans, Stimulus packages and Guarantees, much of it borrowed from, or guaranteed by, U.S. Taxpayers. Yet, clearly, the Toxic Derivatives problem has a long way to go before being solved.
   2. The Fed has moved over $577 billion of U.S. Treasuries onto its Balance Sheet in the short time since it publicly admitted it was monetizing the Debt. (One wonders how many hundreds of Billions in Treasuries were moved (and where!?) before that public admission.)
   3. The Chinese are switching from a U.S. Dollar basis to a Yuan basis domestically.
   4. The Chinese have authorized certain non-Chinese Banks to sell Yuan – based government Bonds.
   5. Foreign Creditors own over half the U.S. Dollar based government and Agency bonds leaving the fate of the U.S. Economy and Security in the hands of foreigners and primarily the Chinese government.
   6. The United Arab Emirates are spearheading plans to launch an Asset-backed (likely with Gold and Crude Oil) Currency, the Dinar.
   7. Germany has reportedly demanded return of all Gold held in custodial Accounts in the U.S.
   8. The Chinese have increased their Gold reserves from 400 Tonnes to over 1,000 Tonnes in the past five years.
   9. The default rate on U.S. Option ARMS recently rose to 35%. There are still some $300 Billion of these loans still outstanding.
   10. The interest Rates on about one Million Pick N Pay loans will reset in the next two years.
3. Clearly, given the foregoing, acquiring Gold and Silver as Safe Haven Assets is the Prudent Course. However, Gold and Silver are subject to price Manipulation by the Fed-led Cartel* of Central Bankers and Favored Financial Institutions as we explain below. But we also explain that there is a Strategy to Profit from these Interventions while acquiring an increasing core Position in these Precious Metals.
4. A substantial portion of the aforementioned $592 Trillion in OTC Derivatives is available to The Fed-led Cartel* to continue to overtly and covertly manipulate the Precious Metals, Strategic Commodities, and Equities Markets.*We encourage those who doubt the scope and power of Intervention by a Fed-led Cartel of Key Central Bankers and favored financial institutions to read Deepcaster’s December, 2008 Letter containing a summary overview of Overt and Covert Intervention entitled “A Strategy for Profiting from the Cartel’s Dark Interventions & Evolving Techniques” and Deepcaster’s July, 2008 Letter entitled “Market Intervention, Data Manipulation – - Increasing Risks, The Cartel ‘End Game’, and Latest Forecast” at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.”
5. And Market Manipulation is an Enterprise with Great Profit Potential. Consider specifically, as of June 2008 the Gross Market Value of all Derivatives Outstanding was $20,353 billion (see chart below). By December 2008, that $20 trillion has risen to $33,889 billion, a rise of over $13 trillion in Actual Gross Market Value of OTC Derivatives. Clearly, some of the Derivatives that were liquidated in the drop from the notional value $683 to $592 trillion resulted in (or, at least, were accompanied by) a very considerable increase in market value (otherwise known as “profits” – whether realized or unrealized) for the Mega Financial Institutions holding them.These remarkable developments reflected in the BIS Gross Market Value of OTC Derivatives figures (below) for period June 2008 through December 2008 prompt certain questions.
   1. First question: which financial institutions in the world experienced an increase in $13 trillions of market value in their OTC Derivatives Positions in the last six months of 2008 while the Equities Market were crashing?
   2. Why do we not see anyone publicizing this information (Tongue-in-cheek-intended) much less the private for-profit U.S. Federal Reserve, which has declined to respond to inquires from Members of Congress about the specific amounts of, or parties to, their transactions and holdings.
   3. Can we not logically conclude that some Mega-financial entities profited immensely from the market takedowns of the Fall 2008 – specifically profiting in the amount of $13 Trillion in increase Gross Market Value of derivatives owned?Consider too that the aforementioned figures were generated by the Ultimate Official Source. They come from the Bank of Central Banks itself, The Bank Of International Settlements, Switzerland, housed in the Tower of Basel.

      Indeed we encourage readers to consider the figures themselves, by visiting www.bis.org > statistics > derivatives > Table 19, “Amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument.” Of course, not all “official” statistics are accurate as we demonstrate below. Indeed, some are intentionally misleading.

      But an increase of $13 trillion in gross market value of Derivatives held by major Financial Institutions, is testimony to the Resources and Power of The Fed-led Cartel*. See Deepcaster’s article “Coping with the Superpower-Cartel Threat!” (1/30/09) at www.deepcaster.com.

6. Moreover, Key Statistics continue to be gimmicked by Official Sources much to the detriment of American Citizens and Investors Worldwide.

Indeed, the True State of the Economy is much worse than the Official Figures suggest.

As the Real Numbers mentioned below demonstrate, our ongoing economic and financial crisis is not merely a “normal” business cycle Recession, but a System-Threatening Crisis. Indeed, we have entered into a Depression. (see below)

It is thus another Naïve and False Assumption that the Official Figures accurately reflect the state of the Economy and Markets – - for example, that the current Recession is merely a normal “business cycle” phenomenon.

Making matters worse, Investors and citizens-at-large are misled by Official Statistics which have been gimmicked, as shadowstats.com demonstrates. All of the following Genuine Numbers are calculated by shadowstats.com, which calculates them according to traditional methods used in the 1980s, and early 1990s, before The Political Adjustments currently being utilized began.

Consider the following Real Numbers from shadowstats:

U.S. Consumer Price Inflation (CPI) actually averaged about 11% annualized for much of 2008, rather than the 5% to 6% figures, which have been reported as Official Statistics. Thus, the consumer must cope with diminished purchasing power and the threat or reality of job loss.

Though Official Figures show CPI dropping to 0% in early 2009, the Real early 2009 numbers reveal that CPI was still about 7% annualized.

U.S. Unemployment has (according to Official Numbers) been ranging 4% to 6% from 1995 to 2007, spiking “only” to about just under 7% in late 2008 and 8% in early 2009. In fact, Real U.S. Unemployment in 2009 now about 20% and is still increasing. (shadowstats.com) Thus the consumer (70% of U.S. GDP, we reiterate) is increasingly unemployed, under-employed, and indebted.

As well, the Delusion of Economic Growth claimed by Official Statistics is just that – - a Delusion. Real GDP growth has been negative since 2004. Indeed, in early 2009 GDP “growth” is a negative 5%. (shadowstats.com) Thus the consumer is faced with a deteriorating economy, as well as diminishing job prospects and purchasing power.

As well, the 2008 U.S, Federal Deficit, rather than being about $1 trillion as reported officially, is over $5 trillion if one includes Social Security and Medicare. And, if downstream-unfunded U.S. obligations are included, the U.S. National Debt is about $66 trillion and rising!

Knowing these Real Numbers facilitated Deepcaster’s recommending “Opportunities in the Impending Perfect Storm” – - the title of his early September, 2008 (pre-Crash) Article warning of the impending Crash (available in the Articles Cache at www.deepcaster.com) and his making five short (and subsequently quite profitable) recommendations to subscribers at about that time.

A Strategy for Profit and Protection

Normally, (that is to say, in a Genuine Free Market situation) the go-to “Safe Haven” Assets in times of Financial Crisis would be the Precious Monetary Metals Gold and Silver, as well as other assets such as Strategic Commodities.

We say “normally” because nearly every time yet another Financial Market Crisis has come prominently into the public eye in recent years The Cartel* of Central Bankers has successfully taken down the price of what would normally be The Safe Haven Assets – - the Precious Monetary Metals. A prime example occurred during the much-publicized demise of Bear Stearns in March, 2008, which was accompanied by a vicious Takedown of Gold and Silver. In a non-manipulated Market, given the fact that Bear Stearns reflected great and increasing weaknesses in the Financial System, Gold and Silver should have skyrocketed. But instead they were dramatically taken down.

Yet, the late 2008 – early 2009 Crises appear to be different. Gold launched from the mid $700s/oz. to around $900/oz. during September, 2008, fell back to the low $700s and then launched again toward $900 in December, 2008 and has actually exceeded $900 several times in 2009.

So the question now, near the beginning of June, 2009, is it different this time around? Have Gold and Silver finally thrust off the shackles of Cartel Intervention? Or will The Cartel be able once again to cap and take down the prices of these Precious Monetary Metals and Strategic Commodities? Deepcaster has very recently addressed this question in a Forecast he issued for the likely fate of Gold, Silver, Crude Oil & the U.S. Dollar in the Alerts Cache at www.deepcaster.com.

One thing is certain: The Cartel will certainly attempt again to take down Gold, Silver and Crude Oil at the earliest opportunity because the Strategic Commodities and Precious Monetary Metals are Competitors as Stores and Measures of Value with the Central Bankers’ Treasury Securities and Fiat Currencies.

Yet there is a Strategy which accommodates Cartel Interventional attempts and at the same time provides excellent Profit Opportunities, whether the Cartel Interventional attempts are successful or not.

A major premise of The Strategy is that one can certainly remain a Hard Assets Partisan (as Deepcaster is) while at the same time insulating oneself somewhat from future Takedowns. The following points provide an outline of The Strategy (particularly as applied to the Gold and Silver Markets) and are designed to help avoid Portfolio unpleasantness, or even possible financial ruin, in the future, as well as to profit along the way:

1. Recognize that The Cartel is still Potent, as difficult as that may be psychologically for Deepcaster and other Hard Asset Partisans to acknowledge. The Cartel is still the Biggest Player in many markets and, if the timing and market context are propitious, the Biggest Player makes Market Price. In addition, The Cartel has the advantage of de facto controlling the structure and regulation of various marketplaces and that is a tremendous advantage; just as the Hunt Brothers years ago discovered much to their dismay and misfortune, when they tried to corner the Silver Market.
2. Accumulate Hard Assets near the Interim Bottoms of Cartel- engineered Takedowns.
3. In order to know when one is likely near the bottom of a Cartel-generated takedown, it is essential to take account of the Interventionals as well as the Technicals and Fundamentals. Paying attention to the Interventionals facilitated Deepcaster recommending five short equities positions as of early September (just before the Fall Crash) all of which we subsequentially recommended be liquidated profitably.
4. For example, regarding Gold & Silver, near such Interim Bottoms, accumulate a combination of the Physical Commodity (Deepcaster prefers “low premium to melt” bullion coins) and well-managed Juniors with large reserves. (Deepcaster provides a list of such Junior Candidates in our December 20, 2007 Alert “A Strategy for Profiting from Cartel Intervention” available in the Alerts Cache at www.deepcaster.com.) The “Physical” and “Juniors” are for holding for the long-term as a Core Position.
5. Then, to the extent one wishes to speculate on the next “long” move, one should buy the major producers or long-term call options on them. These latter positions are for ultimate liquidation at the next Interim Top and are not for holding for the long-term.
6. However, there will be a time when The Cartel price capping is ineffective and Gold & Silver make record moves upward. The benefit of this Strategy is that one will likely be long in one’s speculative positions when this happens.
7. Near the next Interim Top, liquidate the long options and majors. Again, in order to know when we are close to the next Interim Top, it is essential to monitor the Interventionals, as well as Fundamentals and Technicals.
8. Near that Top, sell short or buy puts on Majors. We re-emphasize the Majors as preferred vehicles for trading positions because such positions are more liquid and tend to be quite responsive to Cartel moves.
9. Near the next Interim Bottom, cover your shorts and liquidate your puts and go long again to begin the process all over again. We emphasize that it is essential to consider the Interventionals as well as the Fundamentals and Technicals in order to determine the approximate Interim Tops and Bottoms.
10. Finally, Hard Assets Partisans have the opportunity to become involved in Political Action to diminish the power of The Cartel. It is truly outrageous that the average unsuspecting citizen, and prospective retiree, can and does put his hard won assets in Tangible Assets and/or Retirement Accounts only to have those assets effectively de-valued by Cartel Takedowns and other Cartel actions. This is extremely injurious to many average citizens in many countries who are saving for the rainy day or retirement and have their retirement and/or reserves effectively taken from them. In order to help prevent this and similar outrages, we recommend taking three steps:
    1. Become involved in the movement to Audit and then abolish the private-for-profit U.S. Federal Reserve as Deepcaster, former Presidential candidate Rep. Ron Paul, and legendary investor Jim Rogers, all have advocated. The ‘Audit The Fed’ Bill is H.R. 1207 (and has over 180 co-sponsors); and The Abolish The Fed Bill is H.R. 2755.
    2. Join the Gold AntiTrust Action Committee, which works to eliminate the manipulation of the Gold and Silver markets (www.gata.org). GATA is a non-profit organization, which makes a great contribution by gathering evidence regarding the suppression of prices of Gold, Silver and other commodities.
    3. Work to defeat The Cartel ‘End Game.’ Deepcaster has laid out the evidence regarding the Ominous Cartel “End Game.” Clearly The Cartel is sacrificing the U.S. Dollar to prop up Favored International Financial Institutions and to maintain its power. But this sacrifice cannot continue forever. See Deepcaster’s July 2008 Letter in the ‘Latest Letter’ Archives at www.deepcaster.com.

If this aforementioned Strategy is employed effectively, it can result both in an increasing Core Position in Gold and Silver, and in considerable profit along the way.

Additional insights and details regarding this Strategy, which are essential to profiting from The Cartel’s Policies, are laid out in Deepcaster’s article of 3/06/09 entitled “Investor Advantage: Revisiting The Cartel’s ‘End Game’.”

Protection and profit required Proactivity and attention to the Interventionals, Fundamentals and Technicals, not “Buy and Hold.” “Buy and Hold” rarely succeeds anymore as current market conditions attest.

Indeed, the Key Point of the Strategy for Protection and Profit is careful attention not only to the Fundamentals and Technicals but also to the Interventionals. These Overt and Covert Cartel-generated Interventions have the power to move markets as those who study the matter can attest.

Thus, the Key to Profit and Protection is a Strategy: Successful Investors must become Long-Term Position Traders, with their trading choices informed by the Interventionals, as well as the Fundamentals and Technicals. Moreover engaging in the Actions suggested above can help prevent The Cartel’s obtaining Superpower status, and aid in achieving wealth protection and profits as well.

Deepcaster

May 29, 2009

DEEPCASTER LLC

There is a story in Greek mythology about the 50 daughters of Danaus who murdered their husbands by order of their father. As punishment, they were required to fill a bathtub by carrying water from a well using a jar that leaked… a task that could not be ever completed.  It seems that this psychological  (and fitting?) punishment is also the lot of today’s business leader.

As companies strive to create value, most leak value away at a rapid rate. Unlike the mythical daughters, it is within the rules to plug the holes.  It is just that most leaders choose not too.

With lean thinking, value is define in activities, services and features for which customers are willing to pay.  The net value a company creates equals value created minus value destroyed.  Yet most business strategies focus only on one part of the equation namely value creation; such as designing new product features or new service offerings, and strengthening their brand.  Of course, companies do focus on cost but cost is not the same as value destruction: it is the price of value creation. Seldom do business leaders explicitly identify and address the causes of value loss.

Value can be lost or destroyed in many ways:  through customer attrition, process waste, inefficient value creating teams, hidden defects, rework etc.  Poorly designed IT systems, overprocessing of quality checks, customer unpaid work all drive value loss.

Consider the following 3 examples of value destruction drivers:

Process inefficiency – processes in service industries typically are 95% waste i.e. only 5% adds the value.  This level of waste not only increases costs, but drives customer and employee frustration – a triple attack on value!

Defect Ignorance –  In service industries, the defects are seldom defined in a useful way.  An inbound call from a customer asking for clarity on terms and conditions is a defect.  The activity is a waste for company and employee.  The terms and conditions are not clear enough and are defective.  Very few define defects in such a way.  Unbelievably, some companies even claim that defective inbound calls are opportunity to cross sell.

Customer attrition – very rarely do companies perform deep dive root cause analysis on customer complaints and attrition. There may be reports on number of complaints and attrition numbers grouped into categories.

It is essential for businesses  to focus on the value destroyers. This has a huge impact on the bottom line. So why is so little attention given to value loss?

Would the situation change if annual reports included a ‘lean’ P&L statement?  - a chart showing company revenue minus items such as:-

• Cost of inefficient processes
• Cost of non value added time of front line team
• Cost of customer attrition
• Cost of not understanding value
• Cost of lack on empowering employees
• Cost of lack of collaboration between departments
• Cost of too many meetings and emails

Executives owe it to their shareholders, customers and employees to seek out and address value destroyers. Leaders need to be role models.  They need to put  value loss onto the agenda. As a start they should ask their managers what their 5 largest sources of value loss are and what they are doing about it.

There are then 5 tactics to consider:

1. Redefine defects – make any activity caused by company imperfection be reported as defects.  Insist on action plans for rectification
2. Learn to manage horizontally – much value is loss due to hand-offs between departments.  Assign end to end process ownership for key processes and review process improvements
3. Deep dive on complaints and attrition – deep dive on root cause analysis – ask why five times on complaints
4. Identify value creators and design for them – align the company – be sure you understand you adds the value in your company.  Make sure they are equipped, enabled, empowered and engaged
5. Align measures and targets accordingly

In times like these, value creation is tough.  Eliminating key value destroyers should become an increasing focus for companies. Otherwise business leaders may be joining the daughters of Danaus in their impossible task of filling the bathtub.

(CFD.net.au – Contract for Difference, Share, Forex, ETFs, Commodities Traders) – Two cash machines have been blown up overnight on the New South Wales central coast. Read the rest of this entry »