Soros Interviews, Inverted Square Root Sign Recovery (Reuters/Tech Ticker, 4/6/2009)

The first interview is via
"I think there's a real danger that people don't understand that the system was fundamentally flawed and there is no return to where we come from"

"I don't expect the U.S economy to recover in the 3rd or 4th quarter. I think we're in for a pretty lasting slowdown."

"In 2010 there might some (recovery)... Whether you have a recovery depends on how deep you go. I think that for the US economy... What I expect is an inverted square root sign. In other words, you hit bottom you automatically rebound some. But then you don't come out of it in a V shape or anything like that, but you settle down.. Step down."

"The banking system as a whole is basically insolvent. The anticipated value of the assets is less than the liabilities. What we've created now is a situation where the banks will be able to earn their way out of a hole, but by doing that they're going to weigh on the economy instead of stimulating the economy. They will be drawing the lifeblood so to speak out of profits away from the real economy in order to keep themselves alive. This is the zombie bank situation"

Bernanke Speech on 'Credit Easing', Balance Sheet (4/3/09)

Here is a two part video of Bernanke's speech at the Federal Reserve Bank of Richmond 2009 Credit Markets Symposium in Charlotte, NC (April 3, 2009). The full script is here. Also to enhance transparency the Fed set up a site providing balance sheet and liquidity program updates.
"As I will discuss further today, the great majority of our lending is extremely well secured. And our programs have been aimed at improving financial and credit conditions broadly, with an eye toward restoring overall economic growth, rather than toward supporting narrowly defined sectors or classes of borrowers..."

"In pursuing our strategy, which I have called "credit easing," we have also taken care to design our programs so that they can be unwound as markets and the economy revive. In particular, these activities must not constrain the exercise of monetary policy as needed to meet our congressional mandate to foster maximum sustainable employment and stable prices..."

"At its December 2008 meeting, the Federal Open Market Committee (FOMC) reduced its target for the federal funds rate close to its lower bound, setting a target range between 0 and 1/4 percent. And, with inflation expected to remain subdued for some time, the Committee has indicated that short-term interest rates are likely to remain low for an extended period. With conventional monetary policy having reached its limit, any further policy stimulus requires a different set of tools..."

"To be sure, the provision of liquidity alone cannot address solvency problems or erase the large losses that financial institutions have suffered during this crisis. Yet both our internal analysis and market reports suggest that the Fed's ample supply of liquidity, along with liquidity provided by other major central banks, has significantly reduced funding pressures for financial institutions, helped to reduce rates in bank funding markets, and increased overall financial stability. For example, despite ongoing financial stresses, funding pressures around year-end 2008 and the most recent quarter-end appear to have moderated significantly..."

Arbinet Insider Buying, Income and Equity Down

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CRB, CCI Commodities Index Gathering Momentum

The Reuters/Jeffries CRB Index and the Continuous Commodity Index (CCI) are both gathering momentum. The R/J CRB Index is the 10th revision of the CCI Index. In 2005the energy weighting increased to 39% from 21.4% while other commodities got cut down (pie chart). Zeal LLC has a bunch of essays explaining the differences. He has charts that show the CRB and CCI decoupling in 2006 due to plummeting oil prices. He believes the old index better depicts the overall commodities market. All here 1, 2, 3, 4). I see this index as a re-flation barometer. If commodity prices catch a sustained bid here it could be planting seeds for a rebound in growth and/or a global commodity inventory/demand balance. Also, global currency dilution could be putting upside pressure on commodities. Monetary inflation benefits those who get the newly printed money first so why not buy commodities on the cheap?

So I decided to chart out both of them and provided the CCI futures curve. It's 5% higher from Cash to August. The charts below are at the close on April 1, 2009. On April 3 the call/put premium ratios were also interesting via For the options expiring 4/9/09 the Call/Put Premium Ratio was 0.07, for 6/12/09 the Call/Put Premium Ratio was 2.11 , and for 8/14/09 the Call/Put Premium Ratio was 2.23. So it looks like sentiment is skewing toward the bullish side but total premium values on Jun and Aug are much lower than April. Très Intéressant!!

From the Charts, the new CRB Index is testing support after breaking the long term downtrend. It's been in a channel since December, 2008. It's also above the 50 day moving average which is positive. Bottom support and the 50 day could provide some bids but if it fails the $200 level looks supportive. RSI looks decent and must stay above 50. As for the CCI, it's also in a channel and is sitting above the 50 day. RSI looks good. This could test resistance levels (382ish) and needs a push to break above that level to set it free. On a technical basis at least.

Yuan Swaps, $UUP $24-25 Puts Open Until June and SDRs.

This continues from my previous post about $UUP April $25 put action after the Fed's decision to buy Treasuries, agency-MBS and agency debt. Now Russia and China are trying replace the US Dollar with a "Super Reserve Currency" (Special Drawing Rights consisting of currencies, gold, baseball cards etc.) to diversify sovereign credit risk. The idea was put off at the G20 meeting because #1 priority was saving the global economy (Reuters). But leaders were definitely tweeting about it probably.

Zhou Xiaochuan, Chairman of the Peoples Bank of China, thought 'Special Drawing Rights' should play a bigger role as a reserve asset. Here are quotes from his speech via on March 23, 2009.

Reform the International Monetary System

Zhou Xiaochuan

I. The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system.

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries' demand for reserve currencies. On the one hand,the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities on the other hand,they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.

When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies. While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.

II. The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.

1. Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.

2. A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.

Here's Geithner's response to his proposal at the Council on Foreign Relations. The White House did come out on 3/31/09 saying the USD would remain the worlds reserve currency (Reuters).

Mark-to-Market Rule Changed, Market Up Big.

This accounting change could boost bank profits in the first quarter. The liquidity problem is the reason why FASB is doing this. Does this ruin transparency and the market healing process? Here's a line from Rick Santelli from the CNBC video below.
Rick Santelli on CNBC: "Changing the rules in the middle of the game makes a lot of metrics that have contributed to healing change very quickly and dynamically and the PPIP fund will be one of the casualties."
Also, world leaders at the G20 agreed to pledge $1 trillion of emergency aid. Market is up 3.8%.