New Analysis

The thought came to me: If all governments are going to guarantee their own banks, what's the difference between them?

In other words, what does it mean to say, for example, that Australia has guaranteed all debt issued by its banks? Or Korea, for that matter. Let's stick with Korea. They recently announced a $130 billion plan to shore up their banks. According to Bloomberg, "South Korea will guarantee local banks' new foreign debt taken out from yesterday to June 30, 2009." Guarantees are all well and good, but what do they mean? I suppose the Korean government is taking the risk from the banks as well as responsibility to pay for any defaults. But what would they pay with? Won, of course! And that is a problem. The won is a bit shaky. Actually, it is the worst performing currency in Asia, down 30% against the dollar this year. By guaranteeing foreign denominated debt, the government is leveraging the losses the won will take if it continues to slide. There's another thing going on here. Local businesses went from hedging their expenses to just hedging against the dollar going down to taking actual short positions on the dollar. Now they are 30% in the hole. I'm going to bet against the survival of this farce. Time to short Korean banks.

Australia's currency is down 31% this year. How good is their guarantee?

What about Brazil? or Mexico?

Again, in a way, this all goes back to commodities. If they bounce back, they'll probably carry emerging markets with them. A short on South Korea is probably safer than a short on the raw material powerhouses of Australia, Brazil, or Mexico, though. So I think I'll start there.

And while I'm on a roll, this Imarex report from Capitallinkshipping claims that China has stockpiles of 71 million tons of iron ore. Just how much of a supply is that? Well, at $150/ton that $10 billion. Sounds like a lot, but we need more info. Well, this official data puts September imports at 39 million tons. So that's almost two months of inventory. A lot, but not a whole lot. But steel prices have plunged, so future demand will bbe much weaker. It doesn't look like we're at the bottom yet.

Meanwhile, the charts show the market in a tightening pattern, predicting a sharp up or down break soon. Meanwhile there's a story from BusinessWeek that Kirk Kerkorian is leveraged up to his eyeballs and probably will be facing margin calls soon. He pledged 50 million MGM shares for $600 mil in credit from B of A. That was when MGM was worth $53. Guess what? It's worth $14. Kirk has had to put up another 50 million shares. He's only got 50 million left.

Sounds like we've got people lined up around the block waiting for more margin calls, and selling everything they can so they don't get one.

I guess I'm going to play it safe and (possibly) short the MSCI South Korea Index ETF (EWY). Maybe tomorrow. Maybe I'll watch it a little more.