The Man Ray Table Asia Topic du Jour ---------------------------------------------------------------------------- ---- News update from Risk Waters Group Ltd. RE: Risk Waters Group's Financial Technology Congress 'Windows on the World', 106th Floor, North Tower, World Trade Center Tuesday 11th - Wednesday 12th September 2001 London: 13th September 2001: On the morning of Tuesday 11th September UK-based Risk Waters Group was hosting a Financial Technology Congress at 'Windows on the World' on the 106th floor of the North Tower at the World Trade Center in New York. The conference opened at 8.30 a.m. To date the company has been unable to contact anyone who attended the congress. We have 221 people on our list of registered delegates, speakers & sponsors. In addition, 16 Risk Waters Group employees were due at the event, making a total planned attendance of 237. Based on advance registration lists & research conducted by the company since the tragedy we have reason to believe that: * 47 delegates and all 16 of our staff attended the Congress. They are currently unaccounted for. * 100 delegates have been confirmed by their companies as not having arrived at the time of the tragedy and are safe. * For the remaining 74 delegates we are still seeking further information. As this was a New York event, the vast majority of our delegates were based in the USA but we cannot determine their nationality. There were a few registered delegates from the UK & Japan. Risk Waters Group staff members attended from both our London & New York offices. 10 are British, 5 are American and 1 is Australian. Peter Field, Chief Executive of the Risk Waters Group said today "We continue to make round the clock efforts to contact staff, delegates, speakers and sponsors who were scheduled to attend this congress. In spite of this we have heard nothing from anyone who was in 'Windows on the World' at the time of the attack. Given the level of uncertainty on the ground about the situation we have not given up hope of finding our friends and colleagues safe & well. We would again urge anyone who is either concerned, or has information about someone who might have been attending the Congress, to contact our emergency help line number in the UK (manned 24 hrs. a day)." Emergency help line telephone number: 020 7484 9700 Any press enquiries should be addressed to: Rory Brown, Marketing Director, Risk Waters Group Ltd. Tel: 020 7484 9765 E-mail: [EMAIL PROTECTED] Editorial Board: Editor-in-Chief: Philippe Jorion, University of California at Irvine Associate Editors: Giovanni Barone-Adesi, USI, Lugano, Switzerland Jacob Boudoukh, New York University Peter Carr, Bank of America Securities, New York Michel Crouhy, CIBC, New York Sanjiv Das, Harvard University Emanuel Derman, Goldman Sachs, New York Robert Engle, University of California at San Diego Helyette Geman, Universite de Paris Lane Hughston, King's College, London John Hull, University of Toronto Robert Jarrow, Cornell University Paul Kupiec, International Monetary Fund Michael Ong, ABN Amro, Chicago Riccardo Rebonato, NatWest Group, London Gary Robinson, Tokai Bank Europe, London Mark Rubinstein, University of California at Berkeley Domingo Tavella, Align Risk Analysis, San Francisco Robert Whaley, Duke University Peter Zangari, Goldman Sachs, New York The Journal of Risk is published by the Risk Waters group. ******************************** This article appears in the Sept. 21, 2001 issue of Executive Intelligence Review: Global Financial System: It Was Bankrupt Before Sept. 11 by Lothar Komp Worldwide, there is a state of financial emergency. In the horrible events in Washington and New York of Sept. 11, not only were an unknown number of currency and derivatives traders killed, but also an important part of the physical infrastructure of the financial system was destroyed. Computer files and hard copies documenting numerous foreign exchange and derivatives transactions of many financial institutions, are gone. Innumerable derivatives contracts, for a value of many billions of dollars, are therefore hanging in the air, because one side of the bilateral agreement, for example in Frankfurt, does not know if the counterparty will promptly fulfill its obligations or if it still exists. Already, the disappearance of one big player could trigger a global chain reaction. Rumors of the illiquidity of big hedge funds are making the rounds. The large settlements systems of international banking concerns are showing signs of malfunctioning. Furthermore, the central banks fear that in the next days or weeks, a dollar panic could break out, which would mean the sudden sell-off of American stocks, and a run on the banks. Among the big financial companies, the hardest hit appears to be Cantor Fitzgerald, one of the leading traders of government bonds in the world. About 700 employees of Cantor Fitzgerald were still missing three days after the terrorist attack. U.S. investment bank Morgan Stanley had rented more office space in the World Trade Center than any other company. According to Morgan Stanley, the "vast majority" of its 3,500 employees got out safely, but several hundreds are still missing. Fuji Bank from Japan has stated that probably 700 of its employees were killed. Many other banks had operations in the Twin Towers and the neighboring buildings that also collapsed, including Merrill Lynch, Lehman Brothers, American Express, Crédit Suisse Group/Crédit Suisse First Boston, Deutsche Bank, Commerzbank, Charles Schwab, Asahi Bank, Sumitomo Bank, Dai-Ichi Kangyo Bank, CNA Insurance, John Hancock, the Municipal Assistance Corp. (Big MAC), Oppenheimer Management, Northern Trust, Citigroup's Smith Barney, and Yamaichi International America. The New York Board of Trade, America's biggest exchange for trade in cocoa, coffee, and sugar, was also located in one of the World Trade Center towers. Another imminent threat to the global financial system is posed by the demolition of the Clearinghouse Interbank Payment System (CHIPS), the private telecommunications system operated by the New York Clearinghouse Association for banks in the New York area. Some of its physical infrastructure was destroyed, so that the whole CHIPS system was non- functional after the terror attack. The dimensions of CHIPS is huge. Its computer system is used to settle the payments of both domestic and international inter-bank obligations. The biggest banks in the world, including Citibank, J.P. Morgan Chase, Bank of America, Deutsche Bank, UBS, and Bank of Tokyo Mitsubishi, own and operate CHIPS. CHIPS transfers an average total value of $1.2 trillion daily-equal to the amount of the total daily value of payments that passes through the entire Federal Reserve System. It clears and handles 242,000 transactions on an average day. It handles 95% of all U.S. dollar payments moving among countries worldwide. Chain-Reaction Mega-Failures All of this has led to very serious worries among central banks about a chain-reaction of mega-failures in the international financial system. In order to prevent an immediate collapse of the system, the leading central banks began pumping massive amounts of liquidity into the system. In an unprecedented, coordinated action, within the 24 hours beginning Sept. 11, they made available at least $120 billion in liquidity for the financial markets. The Federal Reserve announced already on Sept. 11 that it would deliver as much liquidity to the system, as needed. The first step was to open the money faucets, pouring $38 billion into the banking system, about ten times the amount the Federal Reserve normally would make available. The Fed declared, that it had also "substantially expanded" its discount window for further emergency loans to banks. While the Nikkei index in Japan on Sept. 12 fell to its lowest level since December 1983, and in that one day roughly $170 billion in paper went up in smoke, the Bank of Japan poured 2 trillion yen ($17 billion) into the system . The central banks of South Korea, Thailand, Singapore, Australia, and New Zealand, as well as the currency authorities in Hong Kong, made known that they were ready to act in a similar manner at any time. The European Central Bank (ECB) also displayed unusual generosity, making available $63 billion in short-term credits for the banking sector. The Swiss National Bank said that it would also provide additional liquidity, should this be necessary. Furthermore, on Sept. 13, the Federal Reserve and the ECB sealed a bilateral currency-swap agreement in the range of $50 billion. According to the Federal Reserve, the main purpose of the measure is to secure the urgent liquidity needs of European banks operating in America. In summary, leading central banks are preparing for mega-catastrophes in the financial sector, erupting in the next few days. "The real danger lies in the matter of derivatives settlements and counterparties," one London financial source told EIR on Sept. 13. "If settlement problems snowball, this could bring down the whole financial system. The danger is not negligible. That is why you see the central bankers pouring in the liquidity now, to head this off. That is why the U.S. Treasury bond market was opened today. The options are maturing today, and if they had left this alone, that could have led to dangers that would have toppled the whole system." According to this source, "There will be a problem, if the central bankers are not very careful in how they manage this liquidity pumping that they are doing to avoid a seizing up. The danger would be like what happened ahead of Y2K, when the liquidity pumped in, created a giant bubble in the months to come, and put an end to the bull market in equities. There are dangers in creating a bigger bubble now. And, of course, there is the danger of hyperinflation." Governments and central banks of coure were desperately trying to play down the threat of a systemic breakdown crisis. Meanwhile numerous representatives of banks, economic research institutes, and media suddenly discovered the threat of a "world recession." In particular, as their argument ran, the collapse of the stock markets, would shatter the confidence of the American consumers, the last bastion of the U.S. economy, and with this, a worldwide economic collapse would ensue. Collapse In Confidence Was Already Under Way This thesis is completely misleading in a very important point: The collapse of American consumer confidence and its consequences for the U.S. and world economy, was already in process and would have continued, even without the terror attacks against the World Trade Center and the Pentagon. In fact, as a result of the giant economic and financial imbalances, not the least in the United States, the greatest worldwide financial and economic catastrophe in at least a century had already started quite a while ago. This disintegration process-which cannot be stopped unless radical emergency recovery measures, as proposed by U.S. Democratic Presidential pre-candidate Lyndon LaRouche, are implemented-was only further accelerated through the recent dramatic developments. For example, University of Michigan's preliminary index of U.S. consumer sentiment, based on a survey that was finished before Sept. 11, dropped sharply from 91.5 in August to 83.6 in September, the lowest level since March 1993. The preliminary index of future expectations among consumers plunged from 85.2 to 77.2 points. The U.S. Labor Department reported that the number of new claims for unemployment benefits rose to 431,000 in the week ending Sept. 8, the highest level since July. The total number of Americans receiving unemployment benefits in the week ending Sept. 1 rose to 3.35 million, the highest since August 1992. U.S. industrial production fell in August for the 11th consecutive month. Production at factories, mines, and utilities dropped by 0.8% during August, much more than in the previous month (0.1%), and much bigger than economists had forecasted. The string of monthly declines is the longest in 41 years (since February to December 1960). The capacity utilization fell to 76.2% in August, the lowest since July 1983. Also, the crash on stock markets is not a phenomenon exclusive to the post- Sept. 11 world. In the first 12 months after the first quarter 2000, the market capitalization of stocks held by American private households and corporations, has fallen from $20.15 trillion to $14.88 trillion. The loss in value of $5.27 trillion, or 26.2%, corresponds to more than half the American Gross Domestic Product. But in the second and third quarters, the situation worsened. In the last week of August 2001, there was the biggest market collapse in American stocks since the markets began to fall in March 2000. And then, the first week of September turned out even worse. All together, the Dow Jones fell 800 points from Aug. 20 to Sept. 10. On the European markets, too, the month of August 2001 ranked among the worst since the financial storms of Summer-Fall 1998. Some big European firms, including Deutsche Telekom and Bayer AG, experienced the biggest monthly market fall in their history. However, while the German DAX index needed the whole month of August to fall 700 points, it managed to achieve the same amount of collapse in just the first two weeks in September. Printer-Friendly Version EMail this Article to a Friend. ---------------------------------------------------------------------------- ---- Gold and the Dollar, Post-Disaster Overview It is impossible to put aside the traumatic events of last week, but our responsibility is to provide objective analysis of the financial markets and that is what we will try to do. In today's commentary we are going to step back and update our views on the currency and gold markets. In summary, we don't think that last week's senseless devastation will change the direction of the markets beyond the very short-term. We do, however, expect that trends that were already in place will be accelerated and new trends that were set to begin in the near future will be magnified. For example, the Dollar was already trending lower and gold was trending higher prior to 'the event'. Regardless of what happens over the next 1-2 weeks as governments and central banks intervene in the markets in one form or another in an attempt to create the illusion of stability, the eventual drop in the Dollar and the rise in the gold price are now expected to be greater than would have otherwise occurred. Also, it is probable that the coming stock market rally will now be of greater magnitude and duration than we had previously expected. As an aside, when the US stock market re-opens on Monday our belief is that each investor/trader should do what they think is right based purely on financial considerations. This is what the 'big money players' will be doing. Some commentators have implored retail investors to be patriotic and not to sell on the basis that panic selling would hand the terrorists another victory. However, being patriotic and being bearish on the stock market (and acting on that view) are two totally unrelated things, even in the wake of such a disaster. If the selling or short-selling of US stocks is now unpatriotic, then so is the buying of gold or any other actions taken by Americans to protect themselves from the likely depreciation of their over-valued, government-manipulated, debt-based dollars. We don't think it makes sense to sell into any panic that might occur over the next few days (actually, we don't think a major panic will occur), but the decisions of each individual investor/trader should be based on financial considerations only. If the right thing to do is to sell, then calls for the retail investor to sit tight will just help the 'big money players' distribute their stock at a higher price. The Dollar We expect to see a rebound in the Dollar if, as anticipated, the US stock market does not plunge after trading re-starts on Monday. However, we think that any strength in the Dollar will be fleeting (lasting anything from a few days to 2 weeks). Here's why. One of the US economy's major weaknesses has been the reliance on investment capital in-flows to offset current account out-flows. In order for the foreign exchange value of the Dollar to hold its ground it was necessary that the US not only attract foreign investment, but attract it at the rate of more than $1B per day. However, the recent disaster is going to increase the perceived risk of investing in the US at a time when the potential rewards will be seen to have diminished. For example, both economic growth and short-term interest rates will be lower for at least the next 2 quarters than would otherwise have been the case. (Take no notice of any statements to the effect that this disaster will somehow provide a boost to economic growth. Re-building something that has been demolished cannot possibly cause real economic growth.) Going into last week we were expecting some near-term firmness, or at least stability, in the Dollar prior to a resumption of its decline. Tuesday's events clearly altered the pattern and we now expect a Dollar rebound over the coming week or so. As mentioned above, any strength will most likely be short-lived as the events of last week will have the effect of accentuating the downtrend that was already in force. Gold and Gold Stocks Below is a long-term chart of the gold price. The chart data has not been updated since Sep-10 and the chart therefore does not show the upside breakout above the 5-year downtrend that occurred last week. We were expecting a gold price rally to begin during the second half of this month and that a break of the downtrend would lead to a quick-fire move to resistance in the 315-325 range. However, as is the case with the Dollar the events of last week have changed the expected pattern. If the Dollar strengthens over the coming week as we expect then the gold price is likely to consolidate its recent gains, but any counter-trend reaction will probably be short-lived. We strongly believe that the events of last week will increase the investment demand for gold. The consensus view seems to be that the gold price will quickly fall back to its pre-crisis levels and stay there. This view ignores the fact that gold-related investments have been trending higher since November of last year and that, prior to the events of last week, the evidence pointed towards a continuation of that trend. Even if we assume that there will be no additional crisis-related buying of gold, it is almost assured that the yield spread will continue to widen and real (inflation-adjusted) short-term interest rates will continue to fall as the Fed pushes rates lower and forces liquidity into the system. It is difficult to imagine a more bullish environment for gold and gold stocks. As such, any near-term weakness in the prices of gold and gold stocks should be used to add to positions. Amongst other things, gold is a hedge against the loss of confidence that occurs as a result of inflation. Prior to last week's events we had assessed the probability of the US experiencing deflation at any time during the next 12 months to be so close to zero as to not be worth considering and that the probability of Dollar depreciation due to inflation was very high. The probability of deflation is now even lower (if that is possible). Many people automatically associate falling asset prices with deflation, but such thinking is flawed. The linking of falling asset prices and deflation caused many analysts to conclude, during the Asian financial crisis of 1997-1998, that the "tiger" economies of South-East Asia were experiencing deflation. This was a complete misread of the situation. The countries involved in the crisis, with the exception of Hong Kong, experienced rampant inflation during this period (their money supplies were expanding at a rapid pace). The effects of this inflation were not evident in the prices of assets, but they were evident in the prices of gold and other commodities in local currency terms. The prices of assets are determined by the investment demand for those assets and a change in the money stock is only one of the influences on that investment demand. An inflation policy was pursued throughout South-East Asia despite the fact that a lot of the region's debts were denominated in US Dollars. Inflation, in this case, was therefore unable to provide even temporary relief since it acted to increase the debt burden (as the local currencies depreciated the US Dollar-denominated debts presented an even bigger problem). The US of today, however, has the advantage that its debts are denominated in a currency that can be manufactured by its banking system. As such, inflation might provide temporary relief. At least, that is probably what those responsible for framing monetary policy will think. Regular financial market forecasts and analyses are provided at our web site: http://www.speculative-investor.com/new/index.html One-month free trial available. Copyright 2000 speculative-investor.com Printer-Friendly Version EMail this Article to a Friend.
