The Carnage Continues

First, a trade: my worst of the year. I closed NCC at $2.09. No point in holding it any longer, as they got a buyout from PNC worth about $2.20. No point in quibbling over pennies. I'll take my losses.



Second, my theme of foreign currency implosion continues. The government guarantees combined with the current panic are rapidly destroying the world economy. The weak get weaker, and the strong get stronger. In what I believe is happening all over the world, we have a story from Australia: Four Fund Providers Suspend Withdrawals as Redemptions Soar. Everyone is piling into "guaranteed" banks.



We have another reason that currency losses are continuing. The Herd of Lemmings are all trying to hedge their misplaced bets on US Dollar weakness by selling their local currencies at the same time. If they buy swaps, then the swap seller will sell the local currency to hedge.



But this begs the question, Why aren't US dollar reserves held by foreign central banks stabilizing these currencies? Doesn't South Korea have the third largest reserves in the world? In fact, South Korea has more US Treasuries than the Federal Reserve.


The answer is that a central bank holds reserves not because it saved, but because it printed. If it did not print, how would it then hold reserves in a foreign currency? Now, there is not one central bank that did not print more than its reserves. So, selling reserves to buy back printed money is guaranteed to make things worse. The more reserves are sold, the smaller the ratio between reserves and printed currency gets. In other words, if you have $20,000 in the bank and $30,000 in debt, your coverage is 0.67. If your debts go to $40,000 and your reserves go to $26,000 (both up 30%, as in the won's fall against the dollar) you're in trouble. Your coverage ratio has fallen to 0.65. That's bad. Now let's say you have to pay off 15% of your debt because it's due and no one will lend you any more. Now debt is $34,000 and reserves are $20,000. Now you're down to 59%. Uh - Oh. Can anyone see the vicious circle death spiral?


Remember, the hidden truth is that reserves are evidence of currency printing, not savings. Currencies with reserves have been grossly overvalued, and still are. Reserves are a sign of weakness that is not priced in, not strength.


How else do you explain this title: "Russian default risk tops Iceland as crisis deepens."

Kingsmill Bond, chief strategist at Russian investment bank Troika Dialog, said Russia's Achilles Heel is the lack of a proper rouble bond market. This had forced companies to raise half their money abroad, in foreign currencies.

"The consequence is that foreign debt repayment has had a dramatic impact. It has led to a scramble for assets and forced selling of good assets in order to raise cash to pay debt. The only way for oligarchs to raise money at present is by selling their equity," he said. Russia's "unique fragility" is that over $1 trillion of debt needs to financed from a domestic capital pool of $600bn.

What do Russia, Brazil, Mexico, and South Korea have in common? Huge dollar reserves. I rest my case.