Reply #58: Double jeopardy revisited

[54anickel]

http://www.321gold.com/editorials/chapman_d/chapman_d_032706.html

We continue to hold the view that the two biggest risks going forward for global markets are rising global interest rates and an ongoing deterioration in global geopolitics. There is also another issue that appears to be coming to the forefront as well. Protectionist sentiment, always an issue in the USA, is once again on the rise both in the US and as well in Europe. And in both instances the target is primarily China.

snip>

In the interim, however, all signs are pointing to a continued rise in interest rates possibly even beyond what the market is expecting. And interest rates are rising in Europe and Asia as well and therein lies the problem for the carry trades that have helped fuel stock and bond markets for the past few years. Falling interest rates are a boon to the carry trades but rising interest rates are a major problem. It raises the risks that the carry trade speculators will be forced to dump assets. With numerous markets in India, the Philippines, Indonesia, Thailand and Latin America at all time highs the risks are rising as interest rates creep higher.

While record current account surpluses and foreign exchange reserves will probably allow the Asian countries to avoid any meltdown as we saw in when the Thailand Bhatt collapsed in 1997 others may not be so lucky. There are two collapses that bear close watching going forward and their possible impacts on the rest of the world. The first is in the Mid East where high flying markets in Kuwait, UAE, Qatar and Saudi Arabia have suffered sharp corrections thus far this year on heavy volume. This has occurred despite the massive amounts of oil money and strong economies in these countries. The UAE recently lost the US ports deal and a strike has stopped construction on what is to be the world's tallest structure.

The other problem is in Iceland. This is the carry trade nightmare. Icelandic banks borrowed heavily on European markets and invested in high yielding Iceland bonds that were over 10%. In February the Iceland Krone collapsed and interest rates are rising in Europe. The result the carry trades are blowing up. The Iceland banks have debt the equivalent of 150% of Iceland GDP maturing in the next two years. A banking crisis and collapse appears to looming sharply on the horizon. And with it could go the Iceland economy where a country debt default is highly probable given their debt is 300% of GDP. The Icelandic Krone is expected to lose even more in the coming months and in turn that could trigger a bigger global problem. At this stage Iceland is in deeper trouble than Thailand was at the same stage in 1997.

Nor is Iceland an isolated case. The British rating agency Fitch recently warned about a "general increase in bank systemic risk in the last six months". The problem as Fitch warned is the huge build up because of sustained low interest rates of equity and property bubbles. Fitch noted there is now "a high level of vulnerability to potential systemic distress in some countries" noting in particular Ireland, Norway, Russia, South Africa and the aforementioned Gulf states (Executive Intelligence Review March 21, 2006). The property bubble in particular is starting to show signs of stress with new mortgages down sharply from a year ago in the US and recent reports of housing sales are falling below expectations.

snip>

Bush's popularity continues to plummet along with Iraq and Vice President Dick Cheney's poll numbers are in the teens. And for the White House is going to get worse. Last week 8 US House of Representatives joined as co-sponsors of HR 635 calling for a select committee to investigate the grounds for the impeachment of George W. Bush over misleading the public on the need to go to war, supporting torture (Abu Ghraib, Guantanamo Bay) and illegal domestic spying. In the Senate Senator Russ Feingold who introduced a censure motion on March 13 emphasising the alleged lawbreaking over wiretapping is leading the charge. Senator Feingold added "I think we are required to do our job, to live up to our oath of office, and say, wait a minute, there has to be, at least as a first step, some accountability".

more...