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Dec 19, 2009

anyone who is arbitrarily declared a "suspected enemy combatant" by the president or his designated minions is no longer a "person"

Here's how the bad deal went down. After hearing passionate arguments from the Obama Administration, the Supreme Court acquiesced to the president's fervent request and, in a one-line ruling, let stand a lower court decision that declared torture an ordinary, expected consequence of military detention, while introducing a shocking new precedent for all future courts to follow: anyone who is arbitrarily declared a "suspected enemy combatant" by the president or his designated minions is no longer a "person." They will simply cease to exist as a legal entity. They will have no inherent rights, no human rights, no legal standing whatsoever -- save whatever modicum of process the government arbitrarily deigns to grant them from time to time, with its ever-shifting tribunals and show trials.'

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Iran is sending a message

Just in from David Bier:

"Iranian forces entered Iraq at dawn yesterday and occupied an oil well in the East Maysan oil field, Zafer Nazmi, a border guard general, said earlier today. The Iranian forces positioned tanks around the well in the al-Fakah region, 450 kilometers (280 miles) south of Baghdad...“The council stressed that the incursion is a violation of Iraq’s border and territorial integrity and called on Iran to withdraw from well 4 and lower the Iranian flag from the well tower immediately,”

COMMENT: Looks like Iran is sending a message to us and Iraq that they can easily occupy Iraqi oil fields (or even those in Kuwait a short distance from Iran across a narrow strip of Iraqi land at the Persian Gulf) and heavily impact world oil prices even without blockading the Gulf at Hormuz. Thus if we use those giant bunker buster bombs, due to be delivered this month to the U.S. Air Force, on Iranian nuclear and missile facilities they could impact our oil supplies in many ways. If the Iranians stay and the Iraqi government attempts to dislodge them (unlikely that the Shiite Iraqi Prime Minister will do that), U.S. forces would probably have to logistically support the Iraqi army and even rescue them. That would mean a firefight with Iran's troops that Iran would trumpet as an invasion and the war would be on. Notice that except for a tiny news scroll item on FOX cable and this Bloomberg article, that the U.S. and world news media have been totally and absolutely SILENT about this obvious and blatant Iranian invasion into the edge of Iraq for almost two days. Heck, even al Jazeera has not reported it. Ain't censorship wonderful? Naturally the news is being suppressed (probably to the disgust of the Iranians who would want this to be visible and challenging) because if it hits the headlines, then somebody has to do something about it. At least the Iranians were smart enough to do this in southern Iraq instead of in or around the Kurdish area or they might have already died as the Kurds are sensitive about protecting their area and don't always consult the Iraqi government before acting. But I bet the Kurds are watching closely to see what Iraq does because a weak response to the Iranians may be encouraging to Kurds who want to occupy Kirkuk and its oil fields as part of Iraqi Kurdistan. Lots of ripples may come out of this Iranian act.

David Bier

Iraq Says Iran Violated Border, Calls for Withdrawal

Update: Iran has rejected Iraqi demands that it withdraw its soldiers from an oil well, the ownership of which is disputed by Baghdad.

Iran's Armed Forces Command issued a statement on Saturday making clear that, in Tehran's view, there had been no incursion into Iraq as the oil well is within Iranian borders.

"Our forces are on our own soil and, based on the known international borders, this well belongs to Iran," the statement said. Read more

China is Running Low on the Dollars it Uses to buy US Treasuries

A must read from Zero Hedge. Excerpt:

“With the entire world embarking on an unprecedented spree of domestic bubble blowing to mask the collapse in global GDP, everyone forgot to trade … with every country intent on merely printing more of its own currency, whether it is to build bridges or to make the stock of electronic book fads trade at 100x earnings, said countries ran out of non-domestic cash. Alas, this is most critical for the United States, now that Treasury monetization is over, as the US needs to constantly find foreign buyers of its debt to fund unsustainable deficits. Foreign buyers who have US dollars. And according to Shanghai Daily, this could be a big, big problem.

“Here is what the BOC’s Zhu Min said earlier:

“‘The United States cannot force foreign governments to increase their holdings of Treasuries,’ Zhu said, according to an audio recording of his remarks. ‘Double the holdings? It is definitely impossible.’

“‘The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world,’ he added. ‘The world does not have so much money to buy more US Treasuries.’”

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*****2010 Food Crisis For Dummies*****

by Eric deCarbonnel - Excerpts:

If you read any economic, financial, or political analysis for 2010 that doesn’t mention the food shortage looming next year, throw it in the trash, as it is worthless. There is overwhelming, undeniable evidence that the world will run out of food next year. When this happens, the resulting triple digit food inflation will lead panicking central banks around the world to dump their foreign reserves to appreciate their currencies and lower the cost of food imports, causing the collapse of the dollar, the treasury market, derivative markets, and the global financial system. The US will experience economic disintegration.

The 2010 Food Crisis Means Financial Armageddon

Over the last two years, the world has experience faced a series of unprecedented financial crisis: the collapse of the housing market, the freezing of the credit markets, the failure of Wall Street brokerage firms (Bear Stearns/Lehman Brothers), the failure of Freddie Mac and Fannie Mae, the failure of AIG,
Iceland’s economic collapse, the bankruptcy of the major auto manufacturers (General Motors, Ford, and Chrysler), etc… In the face of all these challenges, the demise of the dollar, derivative markets, and the modern international system of credit has been repeatedly anticipated and feared. However, all these doomsday scenarios have so far been proved false, and, despite tremendous chaos and losses, the global financial system has held together.

The 2010 Food Crisis is different. It is THE CRISIS. The one that makes all doomsday scenarios come true. The government bailouts and central bank interventions which have held the financial world during the last two years will be powerless to prevent the 2010 Food Crisis from bringing the global financial system to its knees.

Financial crisis will kick into high gear

So far the crisis has been driven by the slow and steady increase in defaults on mortgages and other loans. This is about to change. What will drive the financial crisis in 2010 will be panic about food supplies and the dollar’s plunging value. Things will start moving fast.

Dynamics behind 2010 Food Crisis

Early in 2009, the supply and demand in agricultural markets went badly out of balance. The world was experiencing a catastrophic fall in food production as a result of the financial crisis (low commodity prices and lack of credit) and adverse weather on a global scale. Meanwhile, China and other Asian exporters, in effort to preserve their economic growth, were unleashing domestic consumption long constrained by inflation fears, and demand for raw materials, especially food staples, was exploding as Chinese consumers worked their way towards American-style overconsumption, prodded on by a flood of cheap credit and easy loans from the government.

Normally, food prices should have already shot higher months ago, leading to lower food consumption and bringing the global food supply/demand situation back into balance. This never happened, because the USDA, instead of adjusting production estimates down to reflect decreased production, has been adjusting estimates upwards to match increasing demand from china. In this way, the USDA has brought supply and demand back into balance (on paper) and temporarily delayed a rise in food prices by ensuring a catastrophe in 2010.

Overconsumption is leading to disaster

It is absolutely key to understand that the production of agricultural goods is a fixed, once a year cycle (or twice a year in the case of double crops). The wheat, corn, soybeans and other food staples are harvested in the fall/spring and then that is it for production. It doesn’t matter how high prices go or how desperate people get, no new supply can be brought online until the next harvest at the earliest. The supply must last until the next harvest, which is why it is critical that food is correctly priced to avoid overconsumption, otherwise food shortages will occur.

The USDA, by manufacturing the data needed to keep supply and demand in balance, has ensured that agricultural commodities are incorrectly priced, which has lead to overconsumption and has guaranteed disaster next year when supplies run out.

An astounding lack of awareness

The world is blissful unaware that the greatest economic/financial/political crisis ever seen is a few months away. While it is understandable that general public has no knowledge of what is headed their way, that same ignorance on the part of professional analysts, economists, and other highly paid financial "experts” is mind boggling, as it takes only the tiniest bit of research to realize something is going critically wrong in agricultural market.

USDA estimates for 2009/10 make no sense

All someone needs to do to know the world is headed is for food crisis is to stop reading USDA’s crop reports predicting a record soybean and corn harvests and listen to what else the USDA saying.

Specifically, the USDA has declared half the counties in the Midwest to be primary disaster areas this year, including 274 Midwest counties in the last 30 days alone. These designated are based on the criteria of a minimum of 30 percent loss in the value of at least one crop in a county. The chart below shows counties declared primary disaster areas by the Secretary of Agriculture and the president of the United States...

...Economic Pandemonium


The true financial crisis begins when the world realizes that there are couple months food supply missing from 2010. The last two years were a gentle, mild preview of the real thing.

Total Panic

The sudden, shocking discovery that food supplies are running out will produce total panic. The reaction will inventory building — hoarding –at all levels. Major food producing nation will export bans (India has already banned food exports). Producers, Middlemen, And Households will rush the acquire supplies. All this hoarding will wrosen the crisis by throwing supply and demand further out of balance: export bans cut supply available on international market and inventory building increases demand. Food prices will more than double.

Central bank exodus from the dollar

Every society is just 3 days away from revolution – which is what happens if food runs out or becomes unaffordable.
--
Comment by Oldskeptic

With one out of eight Americans on food stamps, foreign central banks are subsidizing US food consumption by funding the US government with their treasury purchases. Once the food crisis begins next year, they will be faced with the choice:

1) Continue subsidizing US food consumptions as triple digit food inflation ravages their economy and their people starve.
2) Dump their treasury holdings onto the market to rapidly appreciate their currencies, lowering the cost of food imports and preventing widespread domestic starvation.

Not much of choice. China, for example, will drop the dollar peg without a second thought to prevent triple digit food inflation from damaging its economy and causing widespread of social unrest. Chinese exporters will be badly hurt, but that will be a small cost if it can keep food prices down.

In India, the government is ALREADY under pressure to selloff the country’s $270 billion in forex reserves.

Food prices are rising faster than any other commodity and food prices hit the poor the most.

While overall inflation is just 3 per cent,
food prices are rising at unforgivable 17.7 per cent. Prices of rice and wheat have gone up in double digits in one year (10 per cent).


Perhaps the most surprising is that
while food prices are rising, the government seems to be doing nothing, although it is fortunate to have many policy options at hand.

One option is to release food grain stocks [which unfortunately, DON’T EXIST], say analysts. They argue why should wheat and rice prices rise when India has near record stocks of food grains.

The second option that the government has to reduce the inflation in potatoes, onions and pulses is to use some of India's enormous reserves of foreign exchange to import these food items so crucial for the poor.

India today has $270 billion in forex reserves. A small fraction of this could be used to import food and help the poorest.

“But the dollar can’t collapse because there is no alternative to the US dollar for a reserve currency…”

I love the "there is no alternative to the US dollar for a reserve currency" argument. Every time I hear it, I imagine someone standing on the deck of the Titanic on the night of April 14, 1912, and declaring, "This boat can't possibly sink because there aren't enough lifeboats!"

The lack of viable alternatives doesn't mean the dollar can't sink, it simply means that when it does go down, it will result in a tragedy of epic proportions which will be remembered for centuries to come.

Political Fallout of 2010 Food Panic

While a food crisis was unavoidable to some extent because of the abnormal weather and financial crisis, the total panic which will soon grip world agricultural markets is a creation of the USDA and its fictitious production estimates. If not for the USDA's interference, food prices would have risen in the first half of 2009 in anticipation of the 2009/10 shortage. The United States Department of Agriculture, has caused incalculable damage to the world economy by encouraging overconsumption of rapidly diminishing food supplies.

Once the 2010 Food Crisis starts, confidence in the US government will be shattered as a result of the USDA’s faulty estimates. The starvation and misery caused by higher food prices will also create a lot of anger…

Insolvent Midwestern banks

With failed crops, farmers across the Midwest are bankrupt, and so are their banks. This is especially important considering that the FDIC is out of money. Every bank is now being financed with the immediate sale of

Whether the US choose to bail out Midwest banks with billions of emergency aid for bankrupt farmers or finances the FDIC takeover of their banks, the outcome will be the same. The enormous quantity of debt which the US will need to sell to finance emergency aid and resolve bank failures in the Midwest will pressure an already collapsing market for US treasuries.

Panic selling of distressed debt

When the dollar starts rapidly losing value, the flaw in the whole “hold to maturity strategy” will be revealed. Financial institutions around the world will realize that the dollar will lose all value years before their toxic assets ever have the chance to mature. They will then begin dumping trillions of toxic US debt at firesale prices, simply to escape the dollar's devaluation.

Self-reinforcing Breakdown of derivative markets and US financial system

Short term treasuries function as the collateral backing derivative markets and US financial system. When the dollar and treasuries start falling in value with exit of foreign central banks, investors will lose confidence in that collateral and start withdrawing from derivative markets. This will result in a flood of new treasuries coming onto the market as collateral is liquidated, causing further loss of confidence, and so on.


Derivate casino will be bankrupt

Derivates are essentially bets (about future value of commodities, currencies, bonds, etc). Like gambling at casinos, to make money in derivative markets requires meeting two conditions:

1) Being on the winning side of the bet.
2) Being able to collect on the bet.

The point is here is that it doesn't matter how many chips are won if the casino goes bankrupt before they can be traded in.

There is about $14 Trillion collateral behind listed/OTC derivative markets, and this collateral is invested in short term dollar-denominated debt. As the dollar and credit markets collapse, this collateral will lose all value (the equivalent of a casino going bankrupt). Investors trying to collect on profitable bets (ie: call options on gold) will find their derivative contracts backed by insolvent counterparties and worthless debt.

Warped perception of risk

Right now, the entire commodity derivative market is built on the idea of no default risk. This is to say, investor are now taking default risks very seriously in the credit markets (after experiencing horrible loses due to financial crisis), but these concerns over counterparty solvency are completely absent in commodity derivatives. When the the dollar, treasuries and derative markets start collapsing, concern investors will start wondering who is on the other side of their commodity investments, and they will be horrified at what they find out.

Deflationary panic in commodity markets

The biggest seller of commodity IOUs are insolvent institutions desperate for funding, who are taking advantage of the warped perception of risk to raise capital cheaply. For example, I am also sure investors in commodity derivatives will also be thrilled to learn that completely-insolvent, taxpayer-bailed-out AIG Financial Product is a key player in commodity derivatives.

AIG Financial Products and it subsidiary Banque AIG have been key players in the development of commodities as an asset class and has been active in this space since 1991. AIG Financial Products provides clients with a full suite of commodity offerings, including OTC derivatives on both individual commodities and commodity indices, structured products, and bespoke commodity investment solutions. As the creator of a leading benchmark for commodities investing, the Dow Jones - AIG Commodity IndexSM, AIG Financial Products helped spearhead the rapid growth of commodity-based investment in recent years and as of the end of the third quarter of 2006, there was an estimated $30 billion tracking the DJ-AIGCI.

Insolvent institutions like AIGFP have been very active and creative in selling all kinds of commodity investments to anyone foolish enough to buy them. Take for example commodity linked structured notes being sold to retail investors, banks, and commodity funds.

...The Federal Reserve will print trillions


If the treasury market collapses, the government will lose the ability to sell debt to fund itself, which isn’t an option. To preventing such a collapse, the Federal Reserve will have to make purchases in the trillions despite already having run out of room on its balance sheet, which means it will have to print money. A massive expansion of the Fed’s balance sheet at a time of when inflation is spiraling out of control will destroy all confidence in the dollar, worsening the currency crisis.

What life looks like during hyperinflation

Below is an extract from Paper Money by "Adam Smith," covering Germany's hyperinflation in 1923, which offers a good account of what life looks like during hyperinflation.

The German Hyperinflation, 1923

Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc, and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914. In 1923, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar, and a wheelbarrow full of money would not even buy a newspaper.
Most Germans were taken by surprise by the financial tornado.

"My father was a lawyer," says Walter Levy, an internationally known German-born oil consultant in New York, "and
he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread."


More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines -- Krupp, Thyssen, Farben, Stinnes -- condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad. Inflation kept everyone working.

So the printing presses ran, and once they began to run, they were hard to stop.
The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."

The presses of the Reichsbank could not keep up though they ran through the night.
Individual cities and states began to issue their own money.

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items -- bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned from cars. People bought things they didn't need and used them to barter -- a pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches' Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old.

The publisher Leopold Ullstein wrote:
"People just didn't understand what was happening. All the economic theory they had been taught didn't provide for the phenomenon. There was a feeling of utter dependence on anonymous powers -- almost as a primitive people believed in magic -- that somebody must be in the know, and that this small group of 'somebodies' must be a conspiracy."

When the 1,000-billion Mark note came out, few bothered to collect the change when they spent it.
By November 1923, with one dollar equal to one trillion Marks, the breakdown was complete. The currency had lost meaning.


But although the country functioned again,
the savings were never restored, nor were the values of hard work and decency that had accompanied the savings. There was a different temper in the country, a temper that Hitler would later exploit with diabolical talent. Thomas Mann wrote: "The market woman who without batting an eyelash demanded 100 million for an egg lost the capacity for surprise. And nothing that has happened since has been insane or cruel enough to surprise her."

With the currency went many of the lifetime plans of average citizens. It was the custom for the bride to bring some money to a marriage; many marriages were called off. Widows dependent on insurance found themselves destitute. People who had worked a lifetime found that their pensions would not buy one cup of coffee.

Pearl Buck, the American writer who became famous for her novels of China, was in Germany in 1923. She wrote later: "The cities were still there, the houses not yet bombed and in ruins, but
the victims were millions of people. They had lost their fortunes, their savings; they were dazed and inflation-shocked and did not understand how it had happened to them and who the foe was who had defeated them. Yet they had lost their self-assurance, their feeling that they themselves could be the masters of their own lives if only they worked hard enough; and lost, too, were the old values of morals, of ethics, of decency."

The death of the “US consumer”

The famous “US consumer” has been the driving force of the global economy for decades. This ends in 2010, as the dollar’s collapse will wipe out America’s purchasing power.

US Economic Disintegration

70% of the US economy is consumer spending, with at least 20% of it directly tied to commercial retail real estate. Less than 10% of our economy is related to the production of basic goods and services. This style of economy cannot handle a pull back in consumer spending.

America is facing a terrifying future. As the dollar loses most of its value, America’s savings will be wiped out. The US service economy will disintegrate as consumer spending in real terms (ie: gold or other stable currencies) drops like a rock, bringing unemployment to levels exceeding the great depression. Public health services/programs will be cut back, as individuals will have no savings/credit/income to pay for medical care.

What has already happened in the last year offers a good preview of what to expect in the next:

'tent cities' are growing all around the country
California is experiencing a meltdown
Police cars are being repossessed due to falling tax revenues
Major retailers, hotel chains, and theme parks are going bankrupt
Loan quality at American banks is the worst in at least a quarter century and is deteriorating at the fastest pace ever
The victims of this financial disaster don’t have the money to bury their loved ones.
US states have started printing their own currencies
Recession has put a major strain on social security trust fund
US Contract law torn apart

Given the food shortage in 2010, there is also the Potential for Famine in the US

The US will not fall alone

With the freefalling dollar spreading doubt about all paper currencies, and countries with weak financial health will join the US in hyperinflation. Two countries which will follow the US into economic oblivion are Britain and Japan

Britain is probably the only country worse off than the US, and they know it. Privately, something close to desperation is starting to develop inside government, with cabinet ministers being quoted as saying things such as. "The banks are f***ed, we're f***ed, the country's f***ed." The last time Britain built up this much debt was when it was fighting half of Europe.

Japan meanwhile is facing a demographic collapse and its debt to GDP is approaching 200%. The dollar’s collapse is going to wipe out the value of Japan's foreign reserves and destroy the country’s largest export market (the US), heavily damaging the economy. The yen, like the pound and dollar, will not survive.


Financially Surviving 2010

Here is some investment advice for surviving the 2010 Food Crisis.

Avoid all commodity futures!

DO NOT BUY agricultural futures! While it might be tempting to buy futures contract for soybeans and other agricultural commodities, this is a mistake. Look at the backwardation which happened at the end of August this year: shortage sent cash price of soybeans over $13 while futures contracts hovered around $11. Futures contracts missed out on most of the price spike by nearly 25%.

The 2010 Food Crisis will send futures into permanent backwardation. In other words, shortages will send cash prices into steep backwardation, and then, when the dollar and treasuries collapse, defaults fears will cause that backwardation to grow. Fears that CME might collapse could easily lead futures to trade at a tiny fraction of the commodities they track.

Avoid all other derivatives

It is impossible to hedge against the dollar’s fall with derivatives! Since global derivatives markets operate on the assumption of the stable value of the dollar and short term US debt, Using derivatives to bet against the dollar is NOT a good idea. The panic in 2010 will see the majority of derivatives end up worthless.

Avoid all US debt

The biggest buyers of US debt, foreign central banks, are about to become the biggest sellers. Get out while you still can!

Avoid all investments dependent on US consumer

The dollar’s collapse will rob US consumers of all purchasing power, and any investment depend on US consumption will lose most of its value.

Avoid investments in oil (at least for the next year)

While I am bullish on oil for the long term, there are several reasons to be underweight oil in the near term:

1) There is a supply glut (volumes of oil products stored at sea have risen to more than 90 million barrels.)
2) The dollar’s collapse wipe out a huge amount of demand for oil. While demand from emerging economies like India and China will replace this lost demand, it will take in one to two years.
3) Higher food prices will hurt demand for everything else, including oil.
4) There is a very high the entire Strategic Petroleum Reserve will hit the market next year after the treasury market collapses and the US government is desperate for cash.

Investments in oil won’t be complete disaster as the dollar’s collapse will generate a lot of demand for “real” assets, but I do expect oil to be the worst performing commodity in 2010.

Avoid Margin Accounts

If your broker fails, you are virtually guaranteed to be left with nothing.

Invest in Physical gold

With the Gold Market already Reaching The Breaking Point, the 2010 Food Crisis is guaranteed to trigger a gold banking crisis. Those who own physical gold (and not some paper derivative) will do well.

Invest in agriculture sector

Anything (non-derivate) related to agriculture is going to have a good year. The stocks of fertilizer and seed producers should do well for example.

The best investment in agriculture is to buy farmland in countries which don’t subsidies their agricultural sector (subsidies for their booming agriculture sector is the first thing cash-strapped governments will cut).

I am moving to Russia later this year and am moving forwards with setting up a fund to invest in Russian agriculture. Russia is one of the only country with a significantly underdeveloped agricultural sector, as the world fertilizer consumption graph below suggests. Please Email me if you are interested.... Read all