death of a city - Detroit 2010...

let's go euro let's go!

• 

• FEBRUARY 25, 2010, 8:54 P.M. ET

Hedge Funds Try 'Career Trade' Against Euro

By SUSAN PULLIAM, KATE KELLYand CARRICK MOLLENKAMP

Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis.

The big bets are emerging amid gatherings such as an exclusive "idea dinner" earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. During the dinner, hosted by a boutique investment bank at a private townhouse in Manhattan, a small group of all-star hedge-fund managers argued that the euro is likely to fall to "parity"—or equal on an exchange basis—with the dollar, people close to the situation say.

The currency wagers signal that big financial players spot a rare trading opening driven by broader market gyrations. The euro, which traded at $1.51 in December, now trades around $1.35. With traders using leverage—often borrowing 20 times the size of their bet, accentuating gains and losses—a euro move to $1 could represent a career trade. If investors put up $5 million to make a $100 million trade, a 5% price move in the right direction doubles their initial investment.

"This is an opportunity...to make a lot of money," says Hans Hufschmid, a former senior Salomon Brothers executive who now runs GlobeOp Financial Services SA, a hedge-fund administrator in London and New York.

It is impossible to calculate the precise effect of the elite traders' bearish bets, but they have added to the selling pressure on the currency—and thus to the pressure on the European Union to stem the Greek debt crisis.

There is nothing improper about hedge funds jumping on the same trade unless it is deemed by regulators to be collusion. Regulators haven't suggested that any trading has been improper.

Through small gatherings, hedge funds can discuss similar trades that can feed on each other, in moves similar to those criticized by some investors and bankers in 2008. Then, big hedge-fund managers, such as Greenlight Capital Inc. President David Einhorn, who also was at this month's euro-dominated dinner, determined that the fortunes of Lehman Brothers Holdings and other firms were dim and bet heavily against their securities, accelerating their decline.

An SAC manager, Aaron Cowen, who pitched the group on the bearish bet, said he viewed all possible outcomes relating to the Greek debt crisis as negative for the euro, people familiar with the matter say. SAC's trading position on the euro is unclear.

George Soros, head of the $27-billion asset fund manager, warned publicly last weekend that if the European Union doesn't fix its finances, "the euro may fall apart." Through a spokesman for Soros Fund Management, he declined to comment for this article.

A Greek finance ministry official declined comment. A European Commission spokeswoman said the Commission doesn't comment on market rumors, adding that the EU's executive arm is working toward developing rules to tighten regulation and risk.

Few traders expect the value of the euro to totally collapse, the way the British pound did in 1992 amid a large bearish bet by Mr. Soros. In that famous trade—which traders say led to a $1 billion profit—selling led by Mr. Soros pushed the pound's value so low that Britain was forced to withdraw its currency from the European Exchange Rate Mechanism, causing the pound to drop even more sharply. The euro is an extremely deep market, with at least $1.2 trillion in daily trading volume, dwarfing the British pound's daily trading volume in 1992.

Again, derivatives, known as credit default swaps, are playing a part in the current trading. Some of the largest hedge funds, including Paulson & Co., which manages $32 billion, have bought such swaps, traders say, which act as insurance against a default by Greece on its sovereign debt. Traders view higher swaps prices as warning signs of potential default.

Since December, the prices of such swaps have more than doubled, reflecting investors concerns about a default by Greece. Paulson had built a large bearish position on Europe, people familiar with the matter say, including swaps that will pay out if Greece defaults on its debt within five years.

Paulson since has closed out that position and has taken the other side of the bet, leaving the firm with a bullish stance now, a person familiar with the matter says.

In a statement, Paulson declined to comment "on individual positions," saying it "does not manipulate or seek to destabilize securities in any markets."

Late last year, hedge funds bought swaps insuring the debt of Portugal, Italy, Greece and Spain, and began making bearish euro bets. More recently, the hedge funds have sold these swaps to banks looking to "hedge," or protect, their holdings of European government bonds, traders say.

In the past year, the overall value of swaps insuring against a Greek debt default has doubled, to $84.8 billion, according to Depository Trust & Clearing Corp. But the net amount that sellers would actually pay in a default rose just modestly over the same period, up only 4% to $8.9 billion, the DTCC says. This suggests that banks and others have bought and sold roughly equal amounts of swaps to hedge their positions, traders say.

The bigger bet against Europe these days is playing out in the vast foreign exchange markets, which offers a plethora of ways to trade.

The focus on the euro began on Dec. 4, when the currency swooned 1.5% following a jobs report in the U.S. that buoyed the dollar.

Between Dec. 9 and 11, some big European and U.S. banks made bearish calls on the euro by buying one-year euro "puts." Puts give the holder the right to sell an investment at a specified price by a set date.

The pressure on the euro soon began building. The currency fell another 1.3% on Dec. 16 when Standard & Poor's downgraded Greek sovereign debt. At that point, some large investors including asset manager BlackRockInc. had bearish bets on the euro, believing that it couldn't sustain the levels at which it was then trading and that Europe's financial recovery would lag that of the U.S., according to people familiar with their position.

The concerns about Greece heightened on Jan. 20, when investors began to worry that the country would be unable to refinance its heavy debt load, causing the euro to fall another 1.3%.

On Jan. 22 Greece said it planned a five-year 8 billion euro bond sale in the coming days. To stave off speculators, Greece and its investment-bank advisors limited what could be allocated to hedge funds, said a person familiar with the sale. 

By Jan. 28, the value of the new bond had fallen 3.5%, which left investors unhappy.

On Jan. 28 and 29, analysts from Goldman Sachs Group Inc. took a group of investors on a field trip to meet with banks in Greece. The group included representatives from about a dozen different money managers, say attendees, including Chicago hedge-fund giant Citadel Investment Group, the New York hedge fund Eton Park Capital Management, and Paulson, which sent two employees, say people who were there. Eton Park declined to comment.

During meetings with the Greek deputy finance minister and executives from the National Bank of Greece, among other banks, some investors raised tough questions about the state of the country's economy, according to these people.

At the Feb. 8 "idea dinner" hosted by Monness, Crespi, Hardt & Co., a boutique research and brokerage firm, three portfolio managers spoke about investment themes related to the European debt crisis.

During the dinner—featuring lemon-roasted chicken and filet mignon at a private townhouse in Manhattan—a Soros manager predicted that interest rates are going up, people close to the situation say.

Donald Morgan, head of hedge-fund Brigade Capital, told the group he believed Greek debt is an early domino to fall in a contagion that eventually will hit U.S. companies, municipalities and Treasury securities. Mr. Einhorn, meanwhile, who was among the earliest and most vocal bears on Lehman, said he is bullish on gold because of inflation concerns. Mr. Einhorn declined to comment.

By the week of the dinner, the size of the bearish bet against the euro had risen to record levels of 60,000 futures contracts—the most recently available data and the highest level since 1999, according to Morgan Stanley. The data represents the volume of futures contracts that will pay off if the euro sinks to specific levels in the future.

Three days after the dinner, another wave of selling hit the euro, pushing the currency below $1.36.

In a separate move last week, traders from Goldman, Bank of America Corp.'s Merrill Lynch unit, and Barclays Bank PLC were helping investors place a particularly bearish bet on the euro, traders say.

The trade involved an inexpensive put option that will provide its holder a big payoff if the euro falls to the level of a single U.S. dollar within a year. Known as a "tail-risk" trade because its probability is low, the euro-dollar parity put is a cheap way of ensuring that if the euro sinks dramatically within a year, an investor will generate big returns.

A going price for the bet is around 7% of the amount that a parity-trade would pay off. So, for an investor seeking a $1 million bet, the cost is $70,000. This means that the market currently assigns roughly 14-to-1 odds that parity will be reached. In November, the odds were around 33-to-1, said a person who has seen the trade's pricing.

—Tom McGinty and Jenny Strasburg contributed to this article.

Write to Susan Pulliam at susan.pulliam@wsj.com, Kate Kelly at kate.kelly@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com

One argument for taxing top 1% a bit more (among a sea of WSJ posts against it)

• Dan Foster wrote:

• Message
• Connect

You want to know a BIG reason why a lot of middle class people's taxes keep going up? Because a lot of wealthy individuals and businesses are CHEATING on paying THEIR taxes!

The individuals and businesses who DON'T cheat on their taxes end up paying more for THEIR taxes to make up for the people and businesses that do NOT! Somebody has to pay for the costs of government you know or we end up with these huge deficits and a huge National Debt.

It looks like there's a LOT of tax evasion schemes out there for individuals and companies to take advantage of. I'm sure those individuals and companies feel like they are JUSTIFIED in cheating on their taxes too ... for LOTS of reasons I'm sure.

The dude that flew the plane into the IRS building in Austin, TX sure felt like he deserved to cheat on his taxes ... cuz the government is evil or whatever. That dude was nuts. Who DOES like having to pay taxes? It's the price we have to pay in order to not have lawless "Wild West" chaos.

He's probably right about some of the tax laws being CORRUPT though. It sure looks you're a SUCKER if you or your company haven't found all the sneaky little tax loopholes that are out there. Things like offshore bank accounts at Swiss banks, Panama, Cayman Islands, etc. Tax cheats just LOVE those loopholes!

http://www.businessweek.com/magazine/content/10_08/b4167046022885.htm 

http://www.nytimes.com/2010/02/18/business/18workers.html?em=&adxnnl=1&pagewanted=1&adxnnlx=1266602466-I5FuFzL5z77IfSVPk+0N4Q 

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6999344.ece

This special "carried interest loophole" is the main way that the super rich get away with not paying their fair share of the taxes. Why can't "the little people" making under $150,000 or whatever get away with this like the super rich can?

The 2nd richest guy in the world, Warren Buffett, has been saying for YEARS that the super rich get away with a bunch of tax shelter schemes and don't pay as much on a PERCENTAGE-WISE basis as everyone else. Certainly not the top rates! More like 15% after the tax attorneys and accountants do their magic tricks to turn regular income into capital gains taxed at 15%.

http://www.timesonline.co.uk/tol/money/tax/article1996735.ece

http://www.cnbc.com/id/19483842

Only the "little people" (suckers) that can't afford expensive hedge funds, tax attorneys and accountants actually pay the higher rates you see. Buffett says the SECRETARIES of super rich people often pay a HIGHER income tax RATE than they do.

This is a BIG reason why we have these huge deficits and National Debt. It's a big reason why YOUR taxes will probably have to go up.

http://www.lafn.org/politics/gvdc/Natl_Debt_Chart.html

Start the printing press $200 B please!

By JON HILSENRATH

The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.

...

As of Feb. 10, the Fed had pumped more than $1 trillion into the financial system. That sum had the potential to grow in coming weeks as the Fed completed plans to buy $1.25 trillion of mortgage-backed securities. As of mid-February, the Fed's holdings of mortgage-backed securities stood at $1.025 trillion.

Let's print some money! I'm glad my fixed debt doesn't mature!!

From NYT:

"What does FDIC insured mean any more? 21 billion in the red, I spoke to some bankers in the summer of 2008 about their FDIC insured CDs and said FDIC still faced some risks and only covered <$100k per bank at the time, why not treasuries. Oh I also told Clemens Sialm back in early 2008, do you think the US treasury should be used as the risk-free rate? He laughed, "If the US isn't the risk free rate than what is?" Laugh and sob quietly.

With banks failing in growing numbers, the F.D.I.C. said its insurance fund fell deeper into the red, ending 2009 with a deficit of $20.9 billion. That position was nearly $38.1 billion weaker than a year earlier. The bulk of that decline reflects funds that the F.D.I.C. is setting aside to cope with future losses.

Collectively, banks posted a $914 million profit in the fourth quarter, compared with a $2.8 billion profit in the third quarter.

For all of 2009, the banking industry posted a $12.5 billion profit, far below the $100 billion in annual profits that the industry raked in two years earlier at the height of the boom. Although the financial industry benefited from ultra-low interest rates, most banks also faced record loan losses. Many midsize and community lenders, which do not have big trading businesses, suffered big losses last year. Officials worry that they will be reluctant to lend to small businesses and other customers until they replenish their coffers. “Large banks need to step up to the plate here,” Ms. Bair added."

Indiana's Bayh to Retire From Senate - WSJ.com

It certainly does say something. If a public company has a BoD retire because of ineffective leadership and infighting it is about a good a sign to get rid of that stock ASAP! This seems to be a condemnation of partisanship in general, which is odd b/c it seems that a congress that is more evenly split in power is more likely to work together whereas a lopsided congress turns into gridlock?

Indiana's Bayh to Retire From Senate - WSJ.com: "'It says something that an incumbent senator with $13 million in the bank decides to retire this late in the process,' said Jennifer Duffy, senior editor at the nonpartisan Cook Political Report. Ms. Duffy said as many as seven Democratic seats might switch hands this year, and suggested even more could be put in play if Republicans find strong candidates. An outright Republican takeover of the Senate remains unlikely. Democrats currently control the chamber 59-41, which means the GOP would need to win 10 seats to take over. In a news conference, Mr. Bayh condemned what he called the political bickering and gridlock that prevails on Capitol Hill, saying that his desire to serve 'in Congress has waned.' 'There is too much partisanship and…too much narrow ideology' in Washington. 'Even at a time of enormous national challenge, the people's business is not getting done.'"

But the senator soon appeared increasingly frustrated and voted against some big spending bills pushed by the Democratic majority. In January, he fought for legislation that would have created a government commission to recommend ways to reduce the nation's debt. That proposal won 53 votes, drawing support from both parties, but fell short of the 60 needed to pass.

Mr. Bayh cited the failure of the proposal, as well as the collapse last week of a bipartisan $85 billion jobs bill, as examples of congressional dysfunction.

"All of this and much more has led me to believe that there are better ways to serve my fellow citizens," he said. "I love helping our citizens make the most of their lives, but I do not love Congress."

The New Population Bomb | Foreign Affairs

The New Population Bomb | Foreign Affairs: "One somewhat daring approach to immigration would be to encourage a reverse flow of older immigrants from developed to developing countries. If older residents of developed countries took their retirements along the southern coast of the Mediterranean or in Latin America or Africa, it would greatly reduce the strain on their home countries' public entitlement systems. The developing countries involved, meanwhile, would benefit because caring for the elderly and providing retirement and leisure services is highly labor intensive. Relocating a portion of these activities to developing countries would provide employment and valuable training to the young, growing populations of the Second and Third Worlds."

IMF GDP projections, deficits, productivity, labor cots, lost jobs by sector etc...

Well, that would be interesting to see jobs come back in the hardest hit sectors: manufacturing and construction...it would also help keep young unemployed men from getting too much angrier over their plight. Something's got to give here--this is a huge number of unemployed men.

I hope the IMF is right, these projections look downright outstanding and bright--let's hope this is the end of this depression...do we prefer stagflation?

Incredible how productive we can be when we're forced to work harder...we're going to come out of this leaner and meaner, for sure.

Finally, we see some correction in the deficits, this is great news and I hope it continues to narrow and trade increases overall.

"The central bank [of China] pushed up the reserve ratio by half a percentage point, to 16.5 percent, for large banks, and 14.5 percent for small banks, effective Feb. 25. Small financial institutions that mainly lend to farmers, like rural credit cooperatives, are temporarily exempted from the increase to make sure they can provide loans for spring planting." --Feb. 12, 2010 NYT

This is real life acting like a cartoon.

IMF thinks we should have higher inflation targets! interesting

In a new paper with two other IMF economists, Giovanni Dell'Ariccia and Paolo Mauro, Mr. Blanchard says policy makers need to consider radically different approaches to deal with major banking crises, pandemics or terrorist attacks. In particular, the IMF paper suggests shooting for a higher-level inflation in "normal time in order to increase the room for monetary policy to react to such shocks." Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says.

At a 4% inflation rate, Mr. Blanchard says, short-term interest rates in placid economies likely would be around 6% to 7%, giving central bankers far more room to cut rates before they get near zero, after which it is nearly impossible to cut short-term rates further.

Mr. Blanchard argues that there isn't much difference in maintaining inflation at 2% or 4%. Tax brackets could be adjusted so that higher inflation, by itself, doesn't push taxpayers into higher tax rates. Inflation-adjusted bonds could protect investors.

The new paper, titled "Rethinking Macroeconomic Policy," also recommends that central banks use regulatory weaponry try to prick asset bubbles before they grow dangerously large. Relying exclusively on raising interest rates to do such work risks damage to the broader economy, an argument that Federal Reserve Chairman Ben Bernanke has made.

"If leverage appears excessive, regulatory capital ratios can be increased," the paper says. "To dampen housing prices, loan-to-value ratios can be decreased; to limit stock price increases, margin requirements can be increased."

wouldn't a surge in manufacturing base be a nice surprise for the US?!

February Economic Report

by Simon Hunt This will be a shortened version of our usual monthly economic reports, since we have posted several short notes on the economic and financial markets. This year is likely to be a year of surprises. Global economic growth will disappoint. The intrusion of governments into all matters financial, economic and even personal is a cause for uncertainty associated with policy risks; and markets hate uncertainty. It is these policy risks which could have the biggest impact on the potential global recovery in the economy and financial markets. 2010 should also be the year when many countries from the USA to the UK to China will experience the first moves towards policy tightening and the gradual withdrawal of financial and monetary stimulus. Moves by China to begin tightening monetary policy, even though they are only tinkering with the problem of excess liquidity, are a leading indicator to world markets of this changing environment. The consequences of this tightening are not yet visible, but could well become far reaching. One outcome of China's fiscal and monetary largesse has been growing consumer inflation, whether fully seen in official data or not. What has been experienced on the ground by exporting companies, as we have been warning for several months, has been an increase in wages because of a shortage of skilled workers. Many never returned to their factories after last year's CNY. One factory reports (to a friend) that they are short of 17% of their normal labour force and this sort of rate is probably indicative across many coastal exporting companies. The impact has been twofold: production has been hit and wages have had to be increased. Yesterday, Jiangsu province raised its monthly minimum wage by 13% to RMB960 (US$140). Wages for skilled labour are rising far more. This move by the province is an official recognition of what companies have been experiencing for many months. The plight of exporting companies has consequences, too, for the RMB. China is under pressure to revalue its currency. Exporters are suffering from severe margin pressures. They are experiencing rising wages, rising raw material prices and increases in electricity and water rates etc. At the same time, credit for many of these companies remains exceptionally tight, so much so, that exporters are asking their foreign customers to open LCS, not at point of shipment, but at point of order placement. There are a number of consequences resulting from the inflation of costs being experience by exporters. First, there will be the political result. Beijing will resist foreign pressure to revalue its currency - the earliest would be the second half of this year. Second, exporters will be raising their prices after the CNY, on average by around 10%, but for some goods substantially more. Third, buyers of Chinese goods knew well in advance that prices would be rising; they knew too that freight rates were being raised; so they have probably bunched orders up before prices rose. This dynamic together with the modest inventory replenishment being seen in the USA (though not yet evident in west coast US ports) and elsewhere has been the reason for higher level of Chinese and other Asian export business. There is also another dynamic at work here. Across many manufacturing sectors in Asia business has been boosted by the need to replenish inventory within the supplier chain. This had been rundown to almost zero levels for balance sheet reasons in 2008's 4th quarter and last year's first quarter. This round of inventory replenishment has about now run its course. What lies behind this development will determine the course of the global economy in the first half of this year. From what we hear, the news will not be encouraging. China's industrialisation has been nothing short of miraculous - stunning - yet there remain many pitfalls ahead. It has successfully, at least in the short-term, grown its economy whilst most of the rest of the world has suffered the pains of recession. However, by throwing so much fiscal and monetary stimulus at the economy, it risks seeing rising inflation to levels above those of official forecasts (3-4%). Inflation in the Austrian sense is already rampant. Average land prices rose by 106% last year, though even more in many large cities; the stock market exploded; investment in commodities soared, not just by merchants, but by institutions and individuals; and manufacturing, caught in this speculative frenzy, started to produce for inventory. Certainly, our observation from visits last year was that China's economy had far too much speculative froth; that too much of the fiscal stimulus and bank lending were directed into speculation and not into the real economy; and that the seeds were being sown for a nasty reaction post 2010. We also noted, confirmed by discussions which our associate had with senior people in Beijing that economic success was breeding arrogance in the country, a theme which we have found also. In its dealings with foreign countries, China has become far more assertive, stretching from US arms sales to Taiwan, to the disputed borders between India and China, to its "obstreperous stance it took in the Copenhagen climate change conference last December", to its truculence over the alleged hacking of Google and other foreign companies and to trade issues. The real question is whether these are tactics of divergence from the government's real problem of how to take the speculation out of the economy in order to create the foundation for sustainable growth, in other words to cause some domestic pain. We don't buy that argument. We suspect that China has grown sufficiently powerful through its trade, through the rest of the world's perception that the world depends on China's economy and because of its huge foreign exchange reserves for it to finally ditch Deng Xiaoping's words, "Keep a low profile and hide your claws" whilst building up your strength. The West's response to China's undisputed rise in power and influence will be all-important. The history of empires suggests that America will not allow its global superpower status to be handed over willingly. There are bound to be geopolitical clashes over the coming decade, whether over the Middle East, Taiwan, Japan etc. These will be an intrinsic part of the global transition from a unilateral world to a world dominated by two powers. In the meantime, trade will be the central issue, a theme which we have focused on for a long time, so will not express again our thinking beyond concluding that the trend is now towards manufacturing being based close to points of final consumption, rather than in some distant country or region like China and Asia. This is both a political and economic conclusion. Pete Peterson, for instance, calls for business leaders to re-enact the non-partisan Committee for Economic Development that was formed in the midst of WW11 by folks like Paul Hoffman, Bill Benton and Marion Folsom, or something along those lines, in order to try and solve the nation's structural problems, ranging from rising budget deficits, the $60 trillion in unfunded government liabilities and promises, to the growing intrusion of government into business and finance. Part of this coming revolution will surely be to bring back within American borders much of the manufacturing capacity needed for its own economy, rather than having that capacity located offshore. Government has begun this process by wielding a stick, threatening to curtail many of the financial benefits and tax breaks that US companies currently enjoy from their offshore operations. The next stage will be to offer the carrot - by granting tax and other incentives for US multinationals to make that move. This relocation of capacity will not happen on its own: it will be an integral part of the US using its scientific and engineering prowess to produce state-of-the art products, whether by the development of intelligent cars, telemedicine, smart robots, artificial intelligence and other devices. In short, it will be a combination of America's power of technology and the political and economic forces pulling manufacturing back home which will revolutionaries the global economy with similar developments to be seen in Europe and Japan. It will not be just competition by price, but competition by quality and design which will allow America to reemerge as a dynamic economic power sometime by the end of the 2010s. First, though, there must be the Schumpeterian destruction of outdated plant and the financial system which then allows a return to traditional ratios of capital structures with a focus on long-term investment. It is this destruction which always occurs in the Winter of the K-Wave, probably starting around 2012/13 in a succession of down-waves which don't terminate until circa 2018. This does not mean that the entire period is one long depression, but that recoveries are relatively short within an overall downturn. In summary, global economic recovery will disappoint as set out below:- Growth will slow in the first half of this year It should recover late this year with a modest recovery likely in 2011. The seeds of the next credit crisis have been sown by soaring government debt and monetary largesse. It may well be the need for a huge issuance of government loans that will cause the next credit crisis, starting around 2012 and reaching its apex in 2013. A new global recession, part of the ongoing depression, will begin that year and last at least two years. The world is unlikely to begin a new period of sustainable growth until 2018 at the earliest. Until then markets will remain volatile and should be traded rather than now making long-term investments.