BIS

Last night, the BIS released its latest quarterly review, as always chock full of useful information. The one major item that caught our eye was the updated exposure toward the PIIGS countries by various foreign banks. And specifically the brand new category that had never been disclosed before by the BIS, namely the "other exposures" category, which per a rather closeted footnote is defined as: "other exposures consist of the positive market value of derivative contracts, guarantees extended and credit commitments." This is exposure that appears for the first time in an official BIS document. And it is sizable: while total foreign claims stood at $2,281 billion, the newly disclosed category accounts for a whopping two thirds of a trillion: $668 billion. How generous of the BIS to share this data which as recently as 2 years ago may have been considered as material, and these days is merely dismissed with a laugh. After all who cares unless the potential loss has at least 12 zeroes in it. Yet what is most significant for the US taxpayer, who is now dead set on proving that St Sebastian was an amateur when it comes to (in)voluntary martyrdom, is that US exposure to the P(I)IGS (Italy excluded, for the time being - give it a few months), has just tripled as a result of this revelation. While before it was "common knowledge" that US banks have nothing to lose should Europe go down the drain, it has now been revealed that US banks actually have $353 billion in exposure, of which $233 billion is of this newly revealed "other category."

In an interview with Dow Jones, William White, who previously was an economic adviser to the Bank of International Settlements, and prior to that spent 22 years at the Bank of Canada, warned that the "massive infusion of credit" accompanying the sudden and dramatic ramp up in the printing of new money as a policy response to all problems, both within the developed and developing worlds, is now "manifesting itself in the sharp rise of asset prices in large developing economies, which could potentially become another bubble that will burst with disastrous consequences for the global economy." He added that the global economy is in a 'particularly dangerous' position that can only be corrected if the currencies of developing countries strengthen relative  to those of developed countries, according to William White, one of the few policy makers to correctly predict the onset of the financial crisis. Of course for that to happen, the much fabled decoupling needs to finally manifest itself, and for Jim O'Neill to be finally proven right. Of course, that won't happen. Which is why we ask, the next time there is a systemic wipe out, in addition to naturally eliminating the Fed, can the terms BRIC, N-11, and all other such ridiculous acronyms, please be banned from usage in perpetuity?

The compare and contrast between Japan and the rest of the developed world is a topic that will only get more and more attention as increasingly more pundits debate America's plunge into a deflationary spiral (sorry, with $2.1 trillion in shadow debt evaporating YTD, it is inevitable. It is the economy's reaction to the Fed's response, i.e., the nuclear option, at that point that is the topic of most contention - whether it will rekindle hyperinflation or have no impact on the deflationary collapse into a Keynesian black hole). The latest to chime in, interestingly, is the all important Bank of International Settlements, recently best known for promoting the regulatory farce that is Basel III. A just released paper by Shinobu Nakagawa and Yosuke Yasui looks at the nuances of Japanese household debt, and how its build up, concentration and composition is uniquely Japanese, and why Japan, unlike the US, has traditionally had the capacity of falling back on its domestic population to bid up its sovereign bonds (which is all in flux currently, as the Japanese savings rate is plunging, as the demographic shift so well covered in the past by Dylan Grice is currently taking place). Here are the findings of the BIS economists, which may provide some insight on how America's upcoming fight with deflation could proceed. Of particular note is just how skewed US society (based on GINI scores and the distribution of net worth) is compared to Japan. It also explains why America is now a democracy only on paper, while in fact it merely caters to the interests of the top 1% of the population.

Well, at least Ben Bernanke will never be able to conduct sworn testimony claiming nobody warned him about the adverse side-effects of ZIRP. As part of its 80th annual report, the BIS has dedicated an entire chapter to diagnosing Ben Bernanke's terminal Keynesianism, entitled: "Low interest rates: do the risks outweigh the rewards?" The openly negative, and borderline critical narrative, coming from the central banks' central bank, adds yet more fuel to the rumor that there is an open schism developing between the BIS and the Fed, with the IMF's increasingly fiat-y SDR likely to suffer as a result. Whether the BIS is planning the creation of some non-fiat currency, as some have speculated, is unknown at this point.

After surviving the start of the Second Great Depression, and living in its first great bear market bounce/short squeeze, where now all the attention is focused on a collapsing Europe, many could be wondering how, if at all, it would have been different to have lived through the first Great Depression. Luckily, courtesy of the recent release of the BIS's full annual reports, history buffs can now replay, year by year, the events in world capital markets from 1931 onward. We have put particular emphasis on the dark days of the 1930s. Below we present the first several such years as seen from the perspective of the BIS. Note the endless similarities - in fact one could say the only difference between then and now is the lack of "liquidity providing" algos (soon, there will be an iPad app for that) to front run slow and stupid retail/pension/mutual fund money. Pay particular attention to the role of gold in the crisis period, the amusing reference to FDR's confiscation of gold in 1933, and how the mood of insecured optimism shifts to one of endless gloom, and ends, as everyone knows, with World War 2.

Few papers worthy of your attention.

The EURUSD broke through 1.3000 to 1.2996 and the BIS (yes, that BIS) immediately stepped up its buying to prevent a full blown rout of the Euro, or so the rumor goes. Check to you, Viceroy of the West Indies Bernanke. We have the QE2 press release all, pardon the pun, queued up, for your approval.