America for Sale!

Here are some recent headlines and stories. I point these out because I want to start laying a foundation for your appreciation of the global economic situation that exists today and which is moving along a trajectory that will have huge implications for our future.

Citigroup to Take $16 Billion Writedown, Merrill Says
By Edward Evans
Jan. 8 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank, may be forced to write down $16 billion in the fourth quarter and post a larger loss than previously estimated, Merrill Lynch & Co. analyst Guy Moszkowski said.

Citi Loses Almost $10B, Slashes Dividend
Tuesday January 15, 9:38 am ET By Madlen Read, AP Business Writer
NEW YORK (AP) -- Citigroup Inc. lost almost $10 billion in last year's final three months, the largest quarterly deficit in the bank's 196-year history, and slashed its dividend as it recorded a mammoth write-down for bad bets on the mortgage industry.
The nation's largest bank wrote down the value of its portfolio by $18.1 billion. It also boosted loan-loss reserves by $4.1 billion, signaling further problems in its consumer businesses as deflated home prices, high energy and food costs, and rising unemployment weigh on people's ability to make their loan payments.
To cut expenses, it slashed 4,200 jobs in the fourth quarter in addition to the 17,000 layoffs announced in the spring, and chief financial officer Gary Crittenden said during a conference call that more job cuts would be on the way.
Chief Executive Vikram Pandit, who replaced Charles Prince in December, said the fourth-quarter results were "unacceptable", and that he was "not yet finished" in his review of whether any of the global bank's core operations need to be cut or sold.
To bolster its capital, the bank also said Tuesday it has lined up $12.5 billion in new investments from sovereign wealth funds and existing shareholders.
That includes $6.88 billion from the Government of Singapore Investment Corp. for a 4 percent stake. Other investors were Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, shareholder Prince Alwaleed bin Talal of Saudi Arabia and former chief executive Sanford Weill and his family foundation.
The $12.5 billion in fresh equity adds to the $7.5 billion that Citi got in November from the Abu Dhabi Investment Authority in exchange for a 4.9 percent stake in the company.
Over the past several weeks, Asian funds have been buying up the battered stocks of struggling U.S. banks. Early Tuesday, Merrill Lynch said it will receive a total of $6.6 billion from the Korean Investment Corp., Kuwait Investment Authority and Japan's Mizuho Corporate Bank -- in addition to the $4.4 billion it has already gotten from Singapore's state-run Temasek Holdings. Pandit said Citigroup would continue to sell off "non-core" assets. The bank has already sold shares in Redecard, a card business in Latin America, and an ownership interest in a unit of the Japanese brokerage Nikko Cordial it bought last year.

Merrill Lynch to Get $6.6 Billion
Tuesday January 15, 6:45 am ET By Stephen Bernard, AP Business Writer
NEW YORK (AP) -- Merrill Lynch & Co. said Tuesday that it is getting a cash infusion of $6.6 billion from three foreign investment funds.
The Korean Investment Corp., Kuwait Investment Authority and Mizuho Corporate Bank will receive a special class of stock for their combined $6.6 billion investment. All will be passive investors and none will have any rights of control.
Both the Korean and Kuwaiti investment groups are owned by the state governments. Mizuho is a Japanese investment bank.
Working with the foreign investors will allow Merrill Lynch to broaden its relationships and operations around the world, Merrill Lynch's new chairman and chief executive, John Thain, said in a statement. The investors will receive a 9 percent dividend and their class of stock will be convertible to common shares in two years and nine months.
This is the second round of capital raising Merrill Lynch has announced in the past month. On Dec. 24, Merrill Lynch said it would sell a stake in itself of up to $5 billion to Singapore's state-run Temasek Holdings and an additional $1.2 billion stake to Davis Selected Advisers.

Where should I begin? Sovereign Wealth Funds – SWF – get used to the name. This is a euphemism for ‘America is on SALE!’ Simply put, these funds are all the US$$ held by foreign governments after selling us cars, trinkets and oil. Since it has become painfully evident that the dollars aren’t good for long term holding the SWF’s are spending them like sailors on shore leave, buying up tangible US-based assets, including shares in US banks and other financial institutions. I don’t have any disagreement with this activity, it is the marketplace doing what it does best, allocating capital to where it will be treated best. But there are geo-political implications that are apparently being ignored – at best, or not understood – at worst, by the movers and shakers in our government. There are several Trillion dollars held by these SWFs, and that will buy a lot of good ol’ American apple pie. What happens when the foreign owners of these “American” companies start making business decisions that aren’t exactly in the best interest of US citizens? What happens when they decide it is good business, for them, to move jobs out of America? As I see it there are two alternatives, either we let it happen and deal with the new circumstances of life as renters or the US government intervenes to save American jobs and our way of life. This would involve a breach of contract at the very least, and I would expect this to start a cascade of effects that would be unpleasant and most likely even less acceptable than the first alternative. What's my point? Only that you need to be aware this is happening so that you can start connecting the dots for yourself.

One other point, did you happen to catch that part in the Merrill story about claiming “all will be passive investors and none will have rights of control” and then buried a little lower for only the serious reader we find the note that all of this will eventually convert to common stock, which does confer “rights of control”. Make no mistake, these foreign investors will not be satisfied to remain passive. It might not change tomorrow, or next month or next year. But it will change.

One last excerpt from the Citigroup news:
Citigroup's $18.1 billion writedown was significantly wider than the $6 billion writedown it took in the third quarter last year, and bigger than the $8 billion to $11 billion it guessed in October that it would take for the fourth quarter.
Citigroup said as of Dec. 31, it had a total of $37.3 billion in direct subprime mortgage exposure, down from $54.6 billion three months prior.

So, let’s do some math. At the end of September Citi had $54.6B in subprime exposure. At the time they guessed they might lose $8-$11B, turns out they lost $18B. Now they have $37.3B in exposure. How much will they lose over this next 3 months? According to the article they’ve sold at least 10% of the company to foreign entities, several in the Mideast and Asia. This is not over by a long shot. Stay tuned.

Lasting Value

The graphic below is interesting in several ways, but I'll comment on only one feature in this post.



The concept of exchange between items of tangible value, such as oil and gold, initially assumes that the quantities of exchange would be expected to remain the same. But, in the real world things such as supply and demand enter into play and have to be given due consideration. Some of that is evident in this graphic.

The other thing that I see is that there appears to be a baseline "value" relationship between oil and gold, somewhere in the region of 10 barrels per ounce. That is about where we are today. If you accept this notion, then there isn't any cause to complain about the "price" of oil, because it real terms it hasn't changed from its baseline. What becomes clear is that the value of the US dollar has dropped. A rational response to this situation would be to convert all of your US dollars into gold, at least whenever you've accumulated enough of them to make the transaction costs acceptable. Then, whenever you're ready to purchase real commodities you re-convert gold into dollars and make the purchase. Theoretically, at least, your store of gold will preserve its "value" relative to other tangible commodities, independent of the number of dollars represented by the pile of gold.

What do you think?

Stand By

After incessant cajoling from my compatriot I've decided to take pen in hand, figuratively speaking, and become one of the authors on this blog. Stand by for occassional posts as I seen various evidences of this trip we are all making in the proverbial 'handbasket'.

I hope you enjoy my musings.