Posted on 11/27/2009 4:30:55 PM PST by FromLori
Dubai, being one of the "birthplaces" of an entire category of investment known as "Islamic Bonds", was considered a "new dawn" for finance.
Wednesday evening into today shows four things in stark relief:
"Islamic Finance" is no more of a revolution than is "Western Finance." Indeed, the entire premise of "Islamic Finance" is nothing more than a dodge around a religious stricture of lending at interest. It is still lending at interest, no matter what sort of dodge someone puts into the agreement to make it comport with some claimed religious stricture. Welcome to reality.
Leverage - that is, debt-based financing, is inherently unstable. When that lending growth exceeds growth in actual economic output we are merely arguing over when, not if, the collapse will come. The stupidity of things like an indoor ski resort - in the desert heat - is now laid bare upon the table. How many times do we have to see the same thing happen? How are hair dressers making $8/hour buying $500,000 houses any different? They're not.
When you see things that appear to be insane - like the IRX getting slammed to the floor and the entire yield curve behaving in odd and inexplicable ways - do not accept the "pumpers" explanations that what is quite-reliably a sign of stress somewhere isn't actually a sign of stress. It is. Instead, demand an answer to this question: Who's in trouble and why are you trying to hide it?
We have fixed exactly nothing in the world of finance over the last two years. We have in fact squandered the opportunity to put in place global economic and financial system reforms - enforced mark-to-market, enforced capital requirements (one dollar of capital for each dollar of unsecured lending), enforced leverage limits and ring-fencing governments while allowing those who do dumb things to eat the consequences. We did none of the above and instead played "liquidity games", patting ourselves on the back for having avoided "Armageddon." We in fact have avoided nothing - we, as a world of fools drunk on excessive leverage, grabbed another case of Jack Daniels and downed it as a means of avoiding the DTs of withdrawal - but we're still drunks! Points #2 through #4 are the most important of all, although I'm sure I'll get some hate mail for my "disparaging comment" about Islamic Finance. There are far too many people who have become far too complacent over the last six months. Such as goldbugs claiming "buy now or be priced out forever" at $1195 - who are missing $30 per ounce of their money in a matter of literal hours as margin calls fly around the world. I will repeat what I have said since the breakout at 1060 on the gold futures - there is no safe place to buy during a parabolic move. Yes, today, we stand having lost "only" the last three days of gains. So far. Better think about how you're going to hedge off the next $300 of downside move - if it comes. No, that's not a prediction - but the last two days are a warning that it both can and might.
Nor can you believe that disruption in a middle-eastern nation will automatically lead to stronger oil prices. Indeed, I'm deeply concerned about that chart this morning. A loss of the first red line on a closing basis targets the second - around $65. If you're long oil this is a freaking disaster - a more than 20% loss from the top, virtually straight down. Worse, if $65 doesn't hold we could see sub-60 in a big hurry.
This, in an environment where Iran's nuclear negotiations have been essentially declared "dead" by the UN; a declaration that everyone, myself included, expected would spike oil dramatically. The lesson? Margin calls trump geopolitics.
Point #4 above, however, is the most important of all.
We are fortunate that this is a "little country" with a "relatively small" impact, even if they truly default and cornhole everyone with exposure. Total exposure is claimed to be somewhere around $60 billion - enough to hurt, but not enough to kill.
The dollar carry unwind, along with the other possible disaster scenarios, does not appear to have been triggered by this little adventure - yet.
This should not - and indeed must not, be taken by market participants as a "whew, it's all ok" sort of signal.
This may instead be the last warning we get. The potential for contagion does exist in this situation, and with the markets floating not on fundamental values but rather on Fed-created games and distortions. This in turn has encouraged people to lever up, which means that we are once again exposed to a potential margin call tsunami that circles the globe and takes down all asset classes at once in an uncontrolled unwind.
Is anyone in the "global regulatory community", including most especially The Fed and Congress, listening?
Probably not. Nor do I expect anything but derisive comments to this Ticker - more "you're just a permabear" nonsense, especially given that the /ES futures were down 40 overnight and now are down a "mere" 17.
Just remember that in 2008 we had several near-lock-limit down overnights followed by "dip-buyers" that looked good for a little while, but ultimately proved to be a disastrously-wrong read on the forward prospects for those firms and markets in general.
The point to carefully consider is not whether The Fed has played "shower the world by exchanging dollars for worthless crap", it is whether or not any of the underlying problems that led to the crisis, most specifically excessive levels of debt and leverage, have actually been addressed rather than being hidden and papered over.
Quick! The Government must structure a bailout! Too big to fail! The sky will fall. Artic ice will retreat unless we act now!
Denninger is the best.
“We have fixed exactly nothing in the world of finance over the last two years. We have in fact squandered the opportunity to put in place global economic and financial system reforms - enforced mark-to-market, enforced capital requirements (one dollar of capital for each dollar of unsecured lending), enforced leverage limits and ring-fencing governments while allowing those who do dumb things to eat the consequences. We did none of the above and instead played “liquidity games”, patting ourselves on the back for having avoided “Armageddon.””
I would think that the easier lesson would be not to loan money to Arab countries that have no oil, but nevertheless want to build indoor ski runs and islands shaped like a map of the world.
They are already on it!
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