Sovereign wealth funds: debt-for-equity swapping

A $20 American Eagle gold coin from 1914

Bill Bonner, reflecting on news from the International Herald Tribune such as this, notes yesterday that sovereign wealth funds are taking advantage of the falling dollar to buy US assets:

As the dollar goes down, Americans become poorer…and their assets become cheaper...The foreigners have huge piles of dollars which are losing value... Doesn’t it make sense for them to use the dollars to buy American assets?

The Arabs must think so... They [are] making offers on the Nasdaq…the London Stock Exchange…and the Carlyle Group, a US buyout firm.

China , meanwhile, recently took a big stake in Blackstone, another big corporate chop shop. Buying up the buyout firms is a particularly important omen, we think. It allows the foreigners to take up more and more US (and UK) assets without getting their name in the paper. And it allows Anglo-Saxons the soothing flattery of thinking that their assets are becoming more and more sought after…it takes their minds off the sour news, that foreigners are using their mountains of trashy dollars to get control over genuinely valuable assets…and that Americans will increasingly be working for foreigners…

A potentially dangerous form of debt restructuring is in progress. As small businesses yield to huge corporations, increasingly foreign-owned, could Big CEO become the new Big Brother? Will the excesses of consumerism end in our descendants serving in a modern version of bonded labour?

No easy bounce back this time, says Marc Faber

Marc Faber, quoted in The Daily Reckoning Australia on Thursday but writing in late August, anticipated the Fed's strategy of interest rate cutting, and thinks it won't work.

Unlike all the Wall Street strategists who compare the current credit crisis to the credit crisis of 1998 (Long Term Capital Management), I believe that the ongoing credit problems will be far worse and of a longer-term nature. This will make it difficult for the market to reach new highs in the near future. Moreover, even if the 1998 comparison were to hold, we would still be looking at a much deeper stock market correction than the 22% sell-off we saw in 1998....

...even if the Fed were to cut rates massively now, it is unlikely that it would stimulate credit growth, which, as I have explained repeatedly in the past, must continuously expand at an accelerating rate in a credit- and asset-driven economy in order to keep the economic plane from losing altitude. Accelerating credit growth is most unlikely now, because I cannot see how financial intermediaries will ease lending standards any time soon after the losses they have recently endured and following their dismal stock performance...

The crises that build up in international financial structures always ricochet from country to country….

...For the last several years, investors have enjoyed a massive global boom. But they should not rule out a massive global panic.

A layman's guide to economics

Outburst

From the Royal Palace of Westminster

This isn't quite on theme, but I turned on the radio for the four o'clock news in time to hear our new Prime Minister's latest proposal: a motto for the country, to show our "values". He is pretending that it has escaped his notice that we have one: Dieu Et Mon Droit. All part of airbrushing out the Monarchy, I assume. What is his suggestion - "In Gord we trust"?

Here's my suggestion: stop indulging your Ruritanian fantasies and do something to restore the economic stability of this once-great country. You've had ten years as the de facto general manager of Great Britain plc, with what results? A social security system that we can't afford and the claimants can't understand; an industrial base that is shrivelling like shrink-wrap on a bonfire; and a demolition derby of a democracy, in a country that mothered many other democracies and paid heavily in blood and gold to save Europe from fascism - twice.

All aboard

Dow 9,000 update

Dow currently 13,839.54, gold (10.03 am NY time) $736.30. Adjusted for the change in the gold price, the Dow would be worth 12,175.15, or down 10.55% since July 6.

Putting it another way, gold has risen 13.67% against the dollar in 77 days; that's getting on for 90% annualised. Is this lift-off for Doug Casey's trip to the moon?

And so say all of us...

Investment experts Jim Rogers and Marc Faber agree with Jim Puplava that (a) the US will try to reflate out of its troubles, and (b) cutting interest rates to achieve this, will lead to worse trouble.

According to Bloomberg today, "Rogers said he is buying agricultural commodities and recommended investors purchase Asian currencies including the Chinese renminbi and the Japanese yen.

Faber, publisher of the Gloom, Boom & Doom Report, said he is buying gold."

DOW 9,000 update

At the time of writing, the Dow stands at 13,493 and gold at $713.70/oz. Adjusted for the change in the price of gold, the Dow has fallen by just over 10% since July 6.

Puplava: this isn't the big one

I'm a bit behind on my listening to Financial Sense Newshour, but as ever, the issues we're talking about aren't momentary. Jim Puplava's view (8 September) is that this crisis isn't the big one: the US will reflate its way out. It can't do that on its own without sacrificing the dollar, so (as has been happening for a long time) there will be cooperation with other nations' central banks. In effect, we are in an international currency inflation cartel, since no trading nation wants a hard currency that leaves its industries high and dry.

But, says Jim, the next recovery will be shorter, and the next fall back much worse. He sees this as happening around 2009/2010, which coincides with the time of Peak Oil, in which he is a big believer. That's when he feels the energy and credit crunches may come together. He sees gold and silver soaring to levels that currently seem fantastic.

For us ordinary people, that may be less interesting than the effects of energy shortage on our daily transportation and domestic heating.