This economy is a what?
Replaying 1929: Business, Financial, and earth change news
Updated: Friday August 15, 2008 07:55 CDT
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The Great De-Levering, Redux
As I explained on Tuesday, my friend who has written a book has explained in great detail how something called "The Great De-Levering" is taking hold in the world, so as you look at the price of gold which has crashed well under $800 an ounce this morning, it's neither a time for fear, or a time for panic. What's missed by the conspiracy minded is that there has been a tremendous build-up of excess financial leverage in the global economic system and it's in the process of all coming unraveled.
In the detailed explanation this week, the plot line simplifies to this:
As a result, with The Great De-Levering underway, if my serious money-managing friend is right, we should see the propagation of losses across almost all asset classes. Let's check the headlines and see how things are going as the week winds up, shall we?
To be sure, there are a few asset classes which have done better than others. Wheat's outlook is mixed, so it has been in a rally for a few days, but it's not so much that wheat demand is up (it is) or that the world is running out of food (it is)( or that topsoil is disappearing (it is) and that Prince Charles is right about genetically modified foods posing a planetary health risk (they are).
Nope, the reason that grain has been in a short counter-trend rally here is what? The ultra-lemming behavior of the fund managers who play the game of financial pile-on even more tightly regimented that mindless 401(k) retail "investors".
In a few minutes (after our regular 8:00 AM Central positing time, the Industrial production figures will come out. I expect them to be flat to down. Why? Simple enough: Banks are trying to keep lots of cash around to shore up their balance sheets because their holdings of Liar's Paper are looking a little dicey. The Consumer, having burned through the federal tax 'rebate check' likely in a single bank card payment, has been pretty well tapped out.
Those in Washington, who are trying to privatize profits and socialize losses, including almost all members of the Republicorps a Democorps (the two brands of corporatized American corporate governance) are worried as hell about how to stem the free-fall now that it has 'gone circular". They may be too late, but we keep hearing rumbles of another stimulus package in the works. Sure, like money-for-nothing will help. The policy-makers aren't getting it.
And it's not like the circularly referenced Great De-Levering is confined inside the US borders. We read today how Spain boosts stimulus package as growth falters. Spain seems, to the credit of its government, to be one of the first countries to "get it" about the new economic reality. "Spain removes wealth tax to spur growth" makes headlines while they work on smaller cars and more solar installations. Local agriculture is improving says one of our readers there, who's raising bees and putting in a vineyard. Who would have thought Spain would be at the front edge of a paradigm shift? They haven't done that since the 1500's...
A colleague of mine called from Chicago yesterday to ask a simple enough question:
I then patiently explained that we live in a country which has been hijacked by a bad craps game involving hedge funds. Just for example, the big money boyz want Hillary so badly that she's now weaseled a her way into a nomination slot. Big money is throwing all kinds of dough her way because she'll socialize more losses and privatize more gains. What part of the picture is not clear? America has been hijacked by high rollers. How many times did Americans have to say "No Hillary!" and still we're being over-ruled by the hand-outs from the Fat Cats. What isn't clear?
The Fat Cats are also angling to get another War going as soon as they can because that will help their version of "the economy" by boosting defense spending. Which is why Condi Rice and a large naval armada are talking peace but really angling for regional conquest along Russia's southern border. Meantime, the Polish "defense shield" deal has been signed.
This puts a US/Western missile program about 300-miles from the Russian border and right next door to Belarus. How would you feel if the Russians angled to put a missile project in Edmonton, Alberta? That's how close we're talking. So no wonder Russia is pissed.
In this morning's email I received this:
'K, point by point: My friends book is done - ready for print - he's just looking for an agent because he's too busy managing a fund with more zeros than I can count to mess with publishing it himself.
I guess my 'quotable answer" would be this: "Markets always go to extremes. At some point, the price of gold and silver will likely be oversold. The world is also a very dangerous place and we have the potential in Ossetia, Kashmir, and Bushir for direct conflict involving nuclear weapons. I expect one of these two thresholds will be passed before year's end, perhaps before November 1st. A flight to safety from war, or just the mechanics of being oversold might be playable, so I may try.
Once there, because hedge funds are so lemming-like, I a major short-term move up in the metals and that's when I might be in one last leveraged move which would precede a move to government bonds held directly because the middlemen (banks) have become shaky and untrustworthy as I read it. Having a 'split portfolio' of part gold/silver balanced against cash/government bonds held directly, seems to me a reasonable way for a small investor to cover both the possibility of hyperinflation on the one hand and massive deflation on the other.
The game is not about making a killing. It's about not getting killed.
Peoplenomics subscribers may wish to play the gaming scenario I posted back in 2004 again in Peoplenomics Issue #148 "The UrbanSurvival Oil War College" from August of 2004. Today, we seem to be on a mix of policy choices 2 and 3...
I won't tell you where this goes, but one of these weeks I will have to block some more time and build another interactive future simulation like this one. The model (decision tree) exercise is interesting because it's exactly the kind of problems face by the political leadership. You have a set of problem, you implement a policy or make a strategic move, and that then projects out to future consequences.
All of which can be gamed, and off of which have economic consequences that range from assassination of leaders that go down the wrong money policy path (say, this wouldn't refer to Executive Order 11101, would it?), to global thermonuclear war, to a mass die-off from starvation - the whole range of model outputs.
While there is a certain school of thought that goes to good news when Kurzweil's Singularity arrives, all forward progress accelerates to change at blinding speed, the flip side - which doesn't get voiced - is that all possible bad decision and incorrect courses of action will also be taken.
In the end, we're left with either a) a Melt up to a new wonderful world or b) a Meltdown to a destroyed biosphere and mass die-off of humans. Its against this background that we have entrusted our faith to a hijacked political system which is about to run What's-her-name despite the voters will. Some game, huh?
Dying Oceans Meme
'We've written before, based on the predictive linguistics, about how the oceans are 'sick' and in the process of 'dying'. Every so often, as the runoff of fertilizer and chemicals goes to extremes the story pops up in the MSM. Take this morning's headline "Ocean 'dead zones" becoming global problem."
News You Can't Use
I had this conversation this week with a friend wherein we were discussing a product roll-out. After having the looong conversation about which markets to test in, sample sizes, and so forth, we got back to the classic b-school question: "What will we do with all this data once we get it? Will it change any of our behaviors or forward actions?" Nope. OK, that simplified things. Round file all the studies then.
I mention this because the ratings pandering MainStreamMedia (MSM) fills your head up on a daily basis with news that is absolutely useless because in hard b-school terms, it's not actionable. Whenever I go through the headlines, I ask myself "Is there a chance that there's anything contained in the story under this headline, or that, which could possibly be useful to the Life of George or Life of Elaine?" Some examples:
Not much actionable there...On the other hand, there are some stories that are genuinely useful.
See? Useful news and useless news. What a fine world we live in.
This weekend, Peoplenomics deals with rationing. No free report Saturday - next update here will be Monday, assuming Pakistan doesn't revolt until late this weekend.
"Impeaching President Musharraf - Destined to Push Pakistan into Crisis and Put the World at Risk" Yeah, we already knew that, and the crisis point around August 17th is something we've been mentioning since when?
Go look at the Google cache of this site for May 24th of this year. Read the part from May that goes:
Life is soooo much easier when you've got even a rickety home-built time machine to guide...skeptics aside. Now, if I could just keep Cliff from getting bummed out by what's coming - and keep Igor from fleeing for a small town, life would be grand. Except for the rationing part, which is why we're going into that in this weekend's report.
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Coping: Hard to Argue Video
Getting almost a quarter of a million plays in 2-weeks, the "Second American Revolution" video on YouTube.
You may have noticed something here: A couple of years back, the linguistics team started seeing "revolution" in America coming on the linguistic horizon. Shortly after that it was the Ron Paul Revolution" and now that he's gone from the fray, video's like this one - and lots of others with the "R" word in their titles - are appearing on YouTube.
Now, go wage something productive....
By the way, Ron Paul's wife is recovering from a third surgery - which apparently has gone better than the first two. A mention in your daily prayers/mediations would be nice.
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13 Acres and Independence Part 7:Robust Home Power
This may be one of those Peoplenomics issues that I should really publish as a book, not just a weekly report. But, since so many readers have been writing in wondering how I did this, or that, I figured it would be a good thing to start from the grounding rod up and go through how to design a home power system that will give you maximum bang for the buck and take some of the fear our of the grid going down. Properly done, you should be able to take a 'system approach' to living and figure out a way to thrive while most other folks are whimpering and complaining about the loss of power.
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Tell Your Friends
UrbanSurvival has a very interesting business model - one that depends on growth. This business model is a lot like capitalism in that growth is required, but of course we won't ever get to cutting down the rainforests. So even if you don't subscribe to our premium newsletter at www.peoplenomics.com, please tell everyone you know about this site. The more this site grows, the more time and content will show up on the free site... Click here to send 'em an invite... Thank you!
"Live on $10,000" Updated
There's now a single-page website devoted to my little ebook "How to Live on $10,000 a year (or less) at www.liveontenthousand.com. Yep - still possible. I also took a bit of additional material that was pertinent from recent issues of Peoplenomics and included them. The whole thing runs about 65 pages, but it gives you a vision of how to not only live on the aforementioned dollar amount, but also how to migrate up the economic foodchain if you make a little more than that and do some active savings... Click here for the page with more details on it.
Thursday August 14, 2008
6% Inflation and Other Matters
The report from the Labor Department this morning is that prices were going up at a 6% annualized rate in the last month...
What the headlines in the MSM won't bring to your attention (so I will) is that the annualized rate of inflation for all items in the past three months pencils out to a 10.4% inflation rate. TYhat should scare the hell out of reasonable people, but since there are none of them left in meaningful policy positions, we're safe on that score.
Other ingredients in today's economic stew are Wal-Mart topping estimates, and US foreclosure filings up 55% in July compared with a year ago. Heck, if this keeps up another year or two (as I expect it will), it will be time for us to start calling the REO (real estate owned) department of local banks to see if we can't set ourselves up with some cheap rentals and do a little backwoods profiteering on this. It's the corptocratic way, after all...
Georgia on My Mind
A couple of readers have asked me to do an assessment of events over the past week in Georgia, and of course by this I don't mean the one of Ray Charles musical fame, or the rainy night in Georgia of Brook Benton fame, but the one Russian troops now in fame. Perhaps a slightly different tune would be appropriate...Devil Went Down to Georgia, maybe?
While I don't think the move of Russia into Georgia will lead to a thermonuclear showdown, until in say mid-December, it is no doubt something of a prequel to the sequels coming fall. A reader's submitted comments seem pretty much on the mark:
From the Russian tactical perspective, we need to recall how key Georgia is in defending Mother Russia's southern flank. Georgia is directly adjacent to North Oseita-Alania (map), a level 1 administrative region within Russia. This last link, to the history of North Osetia-Alania, provides some background of the area just north of Georgia which has been fairly bloody and contentious.
The country of Georgia, which became separate from Russia in 1991 in the wake of their Soviet-style economy melting down in the face of Star Wars and the Western arms race of the 1980's, is being fought because of the spectrums of beliefs at conflict: One group is loyal to Russia, then you've got the Georgia nationalists, and on the north side, a group of separatists who would just as soon do their own thing, along with separatists in Abkhazia to the northwest.
What's at stake in Georgia? I mean besides a Russian desired, stated or otherwise, to prevent a religiously driven border threat along its southern tier. The closest thing I can think of as an analog to the Americentric thinker would be it would be like Quebec separatists posing a threat to Maine, kind of thing.
Russian forces reported have started a pull-out from Gori, but I expect that would be more likely because of the Russian desire not to get mired down in a local war with insurgents (having learned a bit from Chechnya and Afghanistan), rather than any blustering on the past of the West, although plenty of that, too.
Instead, I expect military historian & writer Gwynne Dyer got it right in a March 21 analysis of titled "Abkhazia: Russian Bluff". Slowly but surely, Western allegiances, and NATO membership, is popping up all over in what were once Russia satellite regions. The Soviet empire may be gone, but the Russian mind has long been accustomed to the idea of a buffer zone. And now that both the West and the new version of capitalism growing in Russia are eyeing resources (land, energy, strategic boundaries, and resource in general) the formerly 'soft' regions are firming up. I expect Russia doesn't want to lose much - if any - of Abkhazia, which among other things sports 125 miles of coastline on the Black Sea.
As Seumas Milne writes in the Guardian this morning, "This is a tale of US expansion not Russian aggression." The more we push on these former Russian states to flip over into the US/West/NATO camp, the more resistance may be expected from Russia.
As a marketing guy (which is what I do in real-life) this is an extremely well-crafted campaign. The US/West is painting its motives as 'humanitarian/freedom-loving" while at the same time, sucking Georgian troops into Iraq and now sending US forces into the region, humanitarian aid, of course. There's enough history in the region that a semi-rational argument could be made for either position.
Ultimately, however, Ure's 19th Law of War comes into play: "When borders move, people die." Simple as that. The folks in Gori are/were Russian passport holders, now the West is moving to "free them" as a prequel to our further campaigns "of liberation and anti-terrorism", which no doubt will include Iran, Venezuela, and anywhere else with significant resources.
Headlines that depict "George Bush squares up to Vladimir Putin over Georgia" yet at the same time, Georgia says Russia is sending more troops into the region should suggest to an aware observer of international events that something else is going on..
If I had to speculate, I'd venture that the US and Russia are playing a cat & mouse game designed, on the part of the West, to cause Russia a large enough distraction to keep them 'busy' as the US/Wes moves toward an attack on Iran over its nuclear development as we get into the fall.
While officially saying that the US has no plan for a naval blockade of Iran, I expect that the planners in the Department of Defence (DoD) are anxiously watching the events in the region as an indicator of Russian ability to respond to a military probe. So far, the West is doing very poorly.
If I were running an intelligence operation, I would be looking for evidence of Russia pouring covert resources into Pakistani militants to foment an uprising there, just to keep the US/West off balance enough to prevent an Iran attack - and maybe some stirring things up in Afghanistan as well. Who knows what influence the Russians might still have there; leftovers from their abortive occupation efforts?
We could go on all day in this speculative mode. As it turns out, I expect Pakistan to "go hot" next, and then events in early October designed to whip up tensions in the US and then whatever follows. It's why this weekend, Peoplenomics will deal with the subject of rationing and how to prepare for it, possibly as soon as within the next 6-9 months. Things really could go that wrong, that fast in geopolitics.
While it's not exactly a military target, reports that Russia may be trying to acquire the Hummer brand from General Motors should give everyone pause to think. Would the US consider giving the brand and the designs to North Korea, if they were so inclined (and flush with dough?).
Meantime, in the Other Georgia...
This gets really strange, but then again, 'strange' is the new 'normal isn't it? Tomorrow, there's supposed to be a press conference in Palo Alto with DNA from a supposed Bigfoot body being analyzed. Report says the body was found in the Georgia woods.
Meantime, there's a report of Bigfoot being sighted in Northern Ontario. All just adds to the notion that there's some kind of very shy great ape living in North America that has managed to stay out of the zoology books, except as a myth.
This is Progress? Department
Still, I'm not impressed. Back when I was in the corporate world, I remember most of my coworkers were robots with biological brains, too... Oh, I get it! These can't vote! Maybe it all makes sense now.
But seriously: This gets me off on an interesting track which I'll have to write up in depth in a future Peoplenomics report because the ramifications are quite startling. (Careful, this is dangerous stuff now...) Look, if the labor of humans is taxed (income taxes and such), what will be the tax consequences of automatons with half biological half mechanical innards? I'll give you a hint as to a really cool tax idea: Tax machines at the same rate as if they were income producing humans!
Yup; if it does work that could be performed by a human, tax it at an appropriate rate to set things back on a level playing field between human workers and the job-eating mechanized Golems of corptocracy. Let's start by taxing automated attendant phone systems...You go think about that for a while...
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Coping: Further Adventures of the FCDD Outbreak
A letter from a reader worth sharing:
OK, having discovered FCDD yesterday, I am pleased today to be able to report the cure!
The cure involves having a particular kind of paper and having the right incantations and occult symbols on it. FCDD seems to respond best when treated with this special paper with the legend "Account Balance" on it and with the last line labeled "Current Account Balance". If the number that follows has at least 6 digits to the left of the decimal point, your FCDD symptoms are minimized. On the other hand, if you have seven or more digits to the left of the decimal point, you are virtually assured of no FCDD symptoms.
A note to financial health care practitioners: If there are three (or less) digits to the left of the decimal point, or if the number shown is preceded by a minus sign (-) immediately treat the victim with a dilute solution of alcohol, administered orally. Practitioners in Oregon or California can administer dilute THC via a nebulizer. Symptoms are likely to be severe and recurrent treatment may be indicated.
Contraindications: As with all medications, side effects the recommended dilute orally administered alcohol regimen may have side effects including dizziness, vomiting, stomach cramps, diarrhea, dry mouth, slurred speech, flashing blue lights, pregnancy, attorney's fees, and child support. If any of these symptoms appear, retreat at a higher dose. Treatment efficacy with the THC alternative varies by geographical location and side effects may include severe appetite enhancement, a pulsing/strobing visual effect, pregnancy, and heightened appreciation of music. In certain Southern States, side effects may include arrest, attorney's fees, prison time, and probation. However, these side effects are moderated by applying more zero's to any paper used in the treatment process.
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Wednesday August 13, 2008
Cognitive Dissonance & Another Banker Freebie
I assume you were paying attention last week when I explained the names for various Treasury instruments? 10 (years) and beyond is a bond, a Treasury Note is 1 to 10-years in maturity, while the Treasury Bill is a 'short term thrill' being one year or less. I mention this because the T-Bills have usually had predictable maturities. 28-days, 90-days, and so forth.
So when I got an excited call from my commodities guy JB who reported "George, did you see what they just did to the 28-day auction?" I got to thinking "Hmmm...maybe there oughta be a name for this kind of short term bill..." Maybe we'll call these Treasury fanoinks.
Maybe the Fed is just trying to clear the decks so when whatever comes along in early October, they will not have to worry about a 28-day auction. A sort of loan-it-forward kind of move.
The part of the story that I thought captured the essential essence of the current round of de-leveraging induced madness was this part: "It marked the Fed's latest attempt to be innovative in providing the nation's banking system with the cash it needs to combat a serious credit crisis stemming from mounting mortgage loan losses."
Wow! Imagine how bounded the thinking must be in the hallowed halls of bankstering and money-printing when a term "innovative" is applied to something as innocuous as a different maturity date!
Here at the ranch, Elaine has begun to display the early onset symptoms of FCDD - financial cognitive dissonance disorder. The first symptom appeared at about 10-minutes to 5 this morning when she awoke asking "How can we have a 500-year flood a few weeks back and commodities going through the roof, and then all of a sudden everything is just peachy again and 'no worries'. What are they trying to pull?"
She's not the only one noticing; A Reuters post this morning asks "Start of the Games, end of the commodities boom?"
Moreover, with more energy data coming today, the outlook for oil prices in 2009 has moderated -- down to $124 a barrel by a new government forecast --- but we have to be very precise in our thinking about what's ahead for commodities.
Way back in December of 2000, I took some 1998 testimony of then Fed deity Sir Alan Greenspan and began to reverse terms so that when the time came, I'd be able to understand the new 'way things operate' in the world. The article "If the Reciprocal of Good is Bad, then this must be "One over Virtuous Cycle") was an incomplete baseline that I never got back to fully completing, so let's get that done this morning as it's been on my to-do list for almost 8-years now:
What I was (and am still) trying to do is take a speech reflecting ebullient optimism and, by reversing terminology, get some sense of what the 'flip-side' of the coin would be like. As you can see, it's an imperfect effort, but nevertheless instructive in some ways.
We can see this reciprocal of the "virtuous cycle" working its way slowly through the credit markets as explained in yesterday's report. Because credit instruments are of various durations (and now thanks to yesterday's action, we have started a new 84-day sub-cycle in the fixed income markets), the ultimate work-out to a new period of stasis will develop over a protracted period.
I apologize if this sounds a bit erudite. Let me put it more directly: We probably have several years of credit de-levering to work through because in fixed-income land things don't implode fast. Financial implosions last a decade or longer, as anyone who lived through the (first) Depression will attest.
As the Great De-Levering wanders forward, we'll see headlines like "Oil future close lower on demand deceleration" and be forced to begin the transformative process that really takes root in 2009.
Market signals are all over the place for the alert investor, however.
The peak of oil prices coincided nearly to the day with my neighbor buying a new Pontiac Vibe (32 MPG highway) to use for running around trips because his Jeep Commander had been gulping 16½ MPG. I wasn't aware enough to catch it at the time, or I could have made a bundle shorting oil from there. The Universe offers signs and portents all over the place but they're often not evident until you get some distance into the future and have that retrospective "Aha!" moment where the grace of the Universal Design Pattern becomes clear.
All of which doesn't resolve Elaine's FCDD attacks. She's beset by headlines like "U.S. says corn crop will be bigger than expected" but at the same time, ethanol -- once blamed as the 'bad boy' for rising food prices, seems to be having serious problems such as "Biofuel Energy shares fall 60%". Where the dissonance no doubt strikes her hardest is when she goes to the store and visits the meat department and notices meat prices are still going up. But wait! When is this bumper corn crop going to pass through? Something isn't adding up...My response was to quickly put on the coffee and flee to my office because I don't have a simple answer for her.
I had a conversation after the market closed Tuesday with Robin Landry who made an interesting observation: "Most of the time, when there's a bear market going, you'll see the high in August," he began. Even in 1929, the high was in very early September, I remembered reading in the economic history books. Landry then continued, pointing out that the market broke down below the 200-week moving average yesterday before closing at just about that level.
Landry has moved some of his managed accounts to the short side now - and depending on how things look, may move additional funds to the short side today. The way he's reading the tea levels, we're heading very quickly to a showdown at 10,000 and then a test of the 9.700 area, or to be more precise, he's draw the lower support line at 9,747.67. If we have a protracted failure there (a couple of days under) then he's worried next about a squabble possible at 9,300 but ultimately the next major support would be 7,400.
The online mortgage quote service, www.zillow.com, has been keeping an eye on folks who have owned their homes five year or less and on Tuesday they reported this:
At the height of the virtuous cycle, refinancing to tap stored home equity was something of a national sport but those days seem gone for good.
What the People's Economist would logically expect to see happen is that retail sales should begin to fall. Because home equity loans (HELOC's, et all) are trying up, there should be declining sales, according to my "impeckerble" logic.
But wait! Would that necessarily be the case? The two flies in the ointment are (fly #1) the impact of the free money/tax rebate checks and (fly #2) the impact of retail price inflation.
The underlying conundrum is whether we should look at retail sales in terms of dollar volume or unit volume? Where economics gets all wonky, in my view, is that there's an inordinate focus on dollarized thinking while unit volume thinking has been banished to the dungeon.
Let me explain what happens as a result: Say you are set about the task of analyzing milk sales. If you look strictly in a dollarized way, you will be able to report "Milk sales are up 5% compared with last year." Milk was $5.00 a gallon last year, in this example, and is $5.25 this year. "No biggie, just normal price inflation..." you'd be thinking. But, this is dead wrong.
The truth could just as easily involve two variables, not just the one. The unit volume of milks could have dropped 10% an double digit inflation could be at work. Say last year you had 1,000 gallons of milk sold at $5 for $5,000 in sales. But, what happens this year is unit volume was only 950 gallons of milk? You'd still look at $5,250 in receipts for milk, but the price per gallon could have been $5.52 for 950 units, yet as an economist, you could report with a straight face that milk says were up 5% while the unit price was up 10.4%! Ain't life grand?
Now let's pencil out the impacts: You pay 10.4% more for milk. A couple of milk truck drivers get laid off. The dairy herd shrinks, and the government reports a 5% increase in milk sales! No wonder I don't go shopping with Elaine. I'd be overwhelmed with Financial Cognitive Dissonance Disorder, too.
Knowing this, let's look at the retail sales report Census published today, the first downer for this stat in 5-months:
I can hardly wait to see how the hucksters spin this up as 'good'.
WW III Lite
The death toll is up to 20 in the Kashmir region of India as the Line of Control is looking a lot less like a like and for sure a lot less controlled.
Meantime, the Pakistan Parliament is moving to impeach president Musharraf, but since he's tied in to the West so deeply, I'd expect him to try and dissolve parliament and then for the revolution there to go live. Says so, right here in my libretto... Oh, and that bombing of an air force truck in Pakistan this morning is just one more step along the way, killing 14 last I heard.
Blind Justice Department
Another conflicting headline: "ACT scores down, but more students college-ready". Huh? You mean like they're dumber so they're ready for college, maybe?
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Coping: Call The Divorce Lawyers
Here's a dandy in the British press this morning - and it could be a break-through economic event. It turns out "The Pill may put you off smell of your man and ruin your relationship." In other words, if a female was taking "The Pill" her judgment about a man might have been impaired.
I can almost smell the mass legal actions that could result. "I married this woman, and then she stopped taking the pill, started running around, and then divorced me taking me for every dollar I had..." could begin a plaintiff's lawsuit. Or "I was taking the Pill, married this guy, and then when I had my third child and had my tubes tied, I figured out that I wasn't having post-partum depression - the guy's a lazy no-good couch potato jerk...I don't even like red-headed men!" could begin another. Oh yeah.
That of course means "can't remember sh*t" but note to be confused with this definition of the day from the UrbanDictionary folks:
See? All this time I thought it was CRS Disorder
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Tuesday August 12, 2008
With gold pushing down toward $800 an ounce, and perhaps only days from testing that level, a lot of the discussion can be found on the internet discussion groups that goes to the idea that there is some mysterious group of ultra-rich who manipulate the price of this thing, or that, in order to screw the vast majority of folks out of their retirements and small life savings. But, is this a credible view, or is there an alternative explanation; one that's every bit as real - and achieving the same thing, but more in keeping with the notion of a rational marketplace?
As luck would have it, a few weeks back a friend of mine for many years sent me a draft of his new book which is an insider's account of what is really going on in the market from the professional standpoint.
Now, when I say professional, I really mean it. Although I can't use his 'name, my friend Mr. X. actually invented some of the types of debt instruments that are in the process of either blowing or, or just being 'repriced', depending on how much you know. He was one of the players who brought PC's to Wall Street and used them early on to get a leg up on bond trading. And yes, he knows a lot of the players mentioned in "Liar's Poker". Most would know his name, too.
His book explains in great detail how things work in financial markets. I don't mean how things kinda work, I mean how things really work right down to which hedge fund managers hang out at which bars in Greenwich, which as it turns out, is more the center of the financial world lately because it's mostly from there that the US-run private fundsoperate without transparency from offshore places like the Cayman Islands.
We were talking this weekend about how low this commodity, or that, might go, and my friend was explained how the real world worked and I made some comment, which was interrupted with a stern admonition: "Will you stop thinking about fundamentals?" Not wanting to appear an idiot, I shut up and listened.
"There are two chapters in my book that explain exactly what's going on in the financial markets today and it has almost nothing to do with fundaments," he began. "You really need to read the two chapters called "The Great De-Levering" and "Invisible Leverage". You can even paraphrase some of it on your site, but I'm still looking for a literary agent for the book, so no exact quotes because I'm still working."
Let me sketch out where we are at the moment. We're in a world awash with excessive leverage and the world has to "de-lever" in order to get things back in balance in the world of high finance. Think of it this way: When times are good, a high quality securitized bond can be had for as little as 2-cents on the dollar. That's 49 to 1 leverage. More typical was the slightly lower rated securitized assets where leverage was a more modest 19 to 1, but still, that means putting 5% in to control the position.
What is happening with The Great De-levering" underway is actually a double whammy. First, the value of the securitized assets is dropping, so instead of a tranche being valued at 100-cents on the dollar, it might drop to perhaps 92-cents on the dollar. And then, to make matters worse, the lenders were (and are) demanding the hedge funds have more 'skin in the game'.
So say you had a MBS (mortgage backed security) that was valued at $1.00 and held with 49 to 1 leverage. Your hedge fund puts up two-cents for each $1.00 controlled. Just add zero's to the concept and you're there.
Next, because of foreclosures and jitters, you get "the call" (a telephone call that's a margin call) from your banker who's been putting up the 98-cents as a loan. The call goes something like this:
"Hi, George? That $1.00 MBS is no longer going to be marked to model. Instead, we are marking to street price and that's now 87.5-cents. And, because capital is getting more dear, we're also going to increase your margin requirement to 5% from the current 2%."
Look at what this has done to my hedge fund P&L: I used to show $1.00 of assets on the strength of my MBS but since it has been repriced, This asset just dropped 12½%/ And now, to stay in the game, I will need to put up 5% of the 87.5-cent asset or 4.375-cents instead of the two-cents I had in earlier. My hedge fund sudden looks like a poor lending risk - and that would trigger more margin calls in itself. Yikes!
Now, you need to ask this simple question: "How many hedge funds can lose 12½% and more than double their actual cash in the game to hold that position? Answer: Effectively None.
Placed in this position, the hedge fund, which has been enjoying great profits from this trade before repricing, now finds that they are upset down, so the only way to get out of the trade is to sell the repriced assets into the market to liquidate the position, but that sale will happen at the new lower price. And then, if there's any kind of gap left, they will have to sell off other assets, too. Things become self-reinforcing on the downside.
You can see what happens now, right? One asset class going toes up means that assets that were maybe just fine (and fairly priced) have to be sold off to balance the books. And because that asset is sold at a discount (like gold contracts, or silver, just as a hypothetical) those prices begin to move down.
My friend's book explains how on March 16th of this year, one of the lenders, Bear Stearns, got into trouble because so many hedge funds were trying to get so many dollars out. Being crafty folks, some of the smart folks involved noticed the Bear was bleeding and decided to lay on some serious put options betting that Bear shares would go down.
Although there are lots of headlines around this morning asking "Who bought $1.7 million "Lottery Ticket" on Bear Streans collapse?" like it was some kind of 'inside" job, there were ots of people on the Street who sensed what was happening and could have placed off-setting bets. And this one happened to pay off - BIG. To the tune of $270-million.
The reason the bankers and government (Fed/Treasury) had to bail out Bear was that as one of the largest market makers of Credit Default Swaps (CDS) if Bear hadn't been saved with your $30-billion of taxpayer bailout, we would be in the midst of the Second Depression right now today. As it is, the slower unwinding may be a little more easy to deal with and it will keep at least most of the 'blood' off the hands of the oil party. We're years from this being over.
Most taxpayers aren't going to 'get it' and will be quick to adjudge that if someone who's smart can make a quick $270 million, how come we're getting stiffed for $30-billion? Ignorance has its price.
The really knowledgeable players already knew who the key fund lenders were - and because of Bear's key role, the funds were watching and knew when the withdraw money, so I'm not inclined to think criminal conspiracy so much as think it's a more or less natural outcome of "The Great De-Levering." Smart folks make money, dumb folks lose and sheep get sheared.
So how far is down? My friend, who's background in finance qualifies him to answer the question better than 99.9% experts, isn't sure. He's looking for it to continue on for probably a couple of more years and in that time, we'll go through episodes of relative quiet (like now) or we will hit another downdraft, by my reckoning perhaps this fall.
"We've got about $500-trillion in synthetics to de-lever, but some of that is double-counted, and some is counted four times, but it's still lot of money," he explains. "And the hedge funds only have about a trillion to play with. So you can see there's a lot of downside potential."
As good as my confidant is at running numbers out, there's no way to tell when it will all stop. But if you're looking for a wild-*ss guess, try this observation: "There are about 9,000 hedge funds out there right now. I wouldn't think the de-levering is over until maybe 6,000 of them have gone broke...and the 3,000 that remain will be a mix of winners and those barely hanging on..." That's only a guess. No one knows for sure.
What's going on right now in the markets - and it's spreading across all kinds of commodity markets and resulting in massive price deflation -- is also pushed along as the result of what my source calls "Invisible Leverage."
Here's why it's going on even as we speak. If I give you $200 to invest in stocks, and you put $100 on each of two stocks and one doubles, while the other falls to half its value, how does your return look?
The answer is the first $100 goes to $200, while the other goes down to $50, so at the end of the day, your stock picks are worth $250 - or a hefty 25% return, even if you get only 50% right. Sweet, huh?
Since stocks can make a great return with 50/50 odds on the upside, the hedge traders make their long side bets in the stocks, but because the odds of success run more like 25-1 against you on the long side of bonds, they make their bearish bets in bonds... they couldn't do this until the CDS (Credit Default Swap) market developed, which allowed traders to "go short" in the credit markets.
What was developed to be a hedging product turned out to have such a good risk/return profile for bears that we now have the weird situation where the short-side bets against some bonds can be 10 to 50 times the size of the bond issues themselves. It is the limited capital needed to enter the CDS that gives the market its "invisible leverage" -- the cash market is only allowing 1-1 or maybe 3-1 leverage (look at CDO sale to Lone Star with financing by Merrill), but CDS protection buyers (the bears) can still get 19-1 leverage . JP Morgan got a nice 29-1 leverage from the taxpayers on Bear Stearns' mortgage portfolio, but that's another story...
There's a lot of 'pile on' in play, too. The lemming-like behavior of the retail customers is apparently nothing when compared to the lock-step behavior of hedge funds. All it takes is a word here or there at those particular places in Greenwich, and 'poof!' A whole asset class gets whacked, and thanks to the circular nature of the game, everything else de-levers to some extent as margin calls come in for the players 'caught out'. A failure here, means pressure there, kind of thing.
You won't get to see all this working out in real-time, though, because the offshore funds don't have to report like the regulated players in the US, even though many of the plays are phoned in from Connecticut.
Right now, I'm trying to bottom fish a few $17.50 December commodity call options for my personal account. I think the predictive linguistics have laid out a pretty good scenario for what may happen, and if they're right, a quick flight to hard assets might come about before Thanksgiving due to Middle East events to come. But, if it doesn't, I wouldn't be surprised by that outcome, either. I think of it as a $1,500 scratch ticket.
As my friend's book points out, there's nothing wrong with leverage at modest levels, like the 20% down conventional loans to buy a home - that's still a great use of leverage. But 2% (and less) to control huge financial abstractions? That's coming to an end. Painfully.
What's hard for people to conceptualize is that a sell off of one commodity (or stock) generates margin calls in others, which in turn drives selling in non-related markets, and those in turn cascade in slow motion which might more properly be called a "Crashcade" although I haven't spied that term (or "Debtberg" in my friends book, yet.
But, before the Second Depression becomes apparent, I'm betting the Oil Party will start another international distraction going and we'll all be blaming some group in another country and getting all whipped up into a frenzy to carpet bomb there. Late October, maybe?
The distractions to come may serve to blame-shift, but I think you can see now that the "PowersThatBe" might readily be described as hedge fund managers reacting to market forces at work.
If you're a literary agent (or know a good one) send me a note because my friend doesn't have time to place the book with a publisher himself; he's too busy trying to navigate a very large portfolio (with more zeros than I can count) of assets through a Great De-Levering happening right now in markets near you.
You know that 'de-levering' we were talking about? Look at oil, down to $113. Repeat after me: "de-levering".
Getting our Berings
A US ship is headed for the Arctic to define US territory there. Why? Well, duh. Oil, of course.
Tax Man Missing
Here's a headline that will not surprise you: "Most companies in US avoid federal income taxes". Gee, who would have thought?
Balance of Trade
The Balance of Trade Report is out this morning and it is much better than expected:
No, this doesn't mean we are running a positive trade balance (surplus) but it does mean that the consumer pulling in their horns a bit (because of inflation elsewhere, most likely) has slowed the demand for offshore goods a small bit, and that slows the rate at which we dig ourselves into the ground a bit.
No snip and save section this morning - due to time on the background for this morning's report.
Around the Ranch: Stormin'
Not only was my high speed connection to the internet down this morning, but thanks to the thunder and lightning overnight, I didn't sleep worth a darn. Parched East Texas got some rain last night, though, and no doubt a lot of farmers will be happy because most have only gotten one cutting of hay in so far.
One of my consulting clients sent me a gift recently - an electric radio-controlled model airplane.
Not one of the cheap $39 dollar ones, either. A BIG one. Returning the gift, I've gotten two onboard video cameras that are ultra light weight - one for my plane, one for his. Not exactly a high end UAV, but come hunting season, it will let me launch a video platform to go check out hunters and such...next technical issue is how to extend the range of the camera, likely the best option will be a directional antenna on the receiver. That would give me about a quarter-mile radius of "air cover". Sort of like "Flight Simulator" except for real...
Monday August 11, 2008
So far, this week's major decision has been what mix of coffees to brew up. Settling on a half-measure Arabica mild roast mixed with a half measure of Kona dark roast, it occurred to me that people don't take much time to contemplate the larger contexts of life, nor savor the important decisions.
Today on the calendar, for example, it says August 11th. But, to the more aware this is indeed an auspicious day because it marks the end of the "dog days of summer" - so named as since July 3rd, the Dog Star (Sirius) has been extremely bright in the skies:
To be sure, the present rally didn't get going until the short-term bottom put in by the market on July 15th, but if there's any correlation between the stars the markets, "as above, so below", then I wouldn't hold out much hope for a rally continuation for more than another 10-12 days.
If Dog Days are really 'evil times' then a rally in this period may hold a cosmic hint about paper assets.
Of course, there's also every chance that the Bowser Rally will be toast this week on its own. Already, the Chinese markets, tired of Olympic hype, have hit a 19-month low over economic concerns. Then again, the Chinese have always been much better that calendar correlations than their Western counterparts. This being the "Year of the Rat" the Chinese likely smell one...
Despite the fact that China posted a July trade surplus of $25.3 billion dollars, the laughable absurdity seen by aliens watching Ant Farm Earth is that we have a country with 300-million clamoring for consumer goods and in their desperation for self-indulgence, have been printing up pieces of paper with various inscriptions on it - no doubt with occult meanings and incantations inscribed thereon - and have convinced the normally intelligent Chinese to accept this 'paper and ink' in exchange for real tangible goods. So much so that "China to overtake US as largest manufacturer."
Here at the ranch, Elaine and I have been busily trading as much of our 'paper' for things of real value (like the solar power set-up described in technical terms for Peoplenomics.com subscribers in this week's report) because it has struck me, too, that trading paper for useful items like rum, steak, and diesel has to be the best scam ever, but can't last forever.
Even the weekend's "micro-war" in Eastern Europe and the bombing of a major gas pipeline hasn't dampened the frenzy to trade paper for things of value. The price of gold (at writing time) was up less than $3 an ounce and the price of oil, while up to only $117 on the heels of the conflict-- hardly what I'd call panic driven; remember before the Dog Days started that we were worried about $150 oil. Today, we're worried about $100 oil. Manic, huh?
We may not be the only folks seeing the absurdity of the paper-for-real goods: Henry "Paulson says won't stay at Treasury past January." Honestly, if I had a few bazillion, I guess I'd want to take the rest of my life off, too, and work on the fine art of spending. He's welcome to come by for a beer, when he gets time. Heck, I'd even open a bottle of Remy & break out the cigars for him...although there'd be a few questions to be answered, for sure.
Speaking of things canine, as we are today, Pakistan's president "Musharraf vows to his back ruling coalition's allegations" that have been dogging him. The clock is ticking there, however, since linguistically, Pakistan's near-term future has much in common with a train wreck. Hounding me for details? OK:
The tensions with India in the Kashmir region continue to intensify with two people killed in a march at the line of control (LoC). Perhaps we should change that spelling to Kashmire? Maybe a new breed of border calling...
The week ahead should give the market some direction: Imbalance of Trade tomorrow, Retail Fails on Wednesday, Consumer Price Ignorance on Thursday and the capper Friday, Post-Industrial Production.
And so, the Dog Days of Summer draw to a close, with the alien's laughing about the 'paper-for-goods' disease they've incited through their proxies and which has driven most of the planet's inhabitants to rabidly BARK'ing at any possible trade of paper for goods.
Thing is, only the aliens , and just a few aware humans are cognizant that in one Earth tongue, BARK'ing means Binär Aritmetisk Relä-Kalkylator, Swedish for "Binary Arithmetic Relay Calculator". Siriusly. We've screwed the pooch. It's just not obvious to ev eryone, yet.
The weekend "instant micro-war" between Georgia and Russia lingers on this morning after reports that the Russian "Georgia Moves fails to halt raids"
The most interesting reports of the morning, at least to me, are: 1) "Stratfor acknowledges Russia defeated US, not Georgian army in South Ossetia" in Pravda's English pages, and 2) the Iranian Press TV report that "Israel 'has a hand in S. Ossetia war" based on a year old report that up to 1,000 Israeli military advisors have been commissioned to train Georgian troops.
A reader asked me about economic fall-out I'd see from this. None. Eventually gas passes. Revenue is such an incentive. Which is why what happens in October will be orders of magnitude greater. BARK. Get it?
Stop Howling Department
The New York Times has noticed that "Media Outlets Losing Money from a Lack of Auto Ads" which are busily fleeing print for online outlets."
We're anxiously awaiting coverage of the world being discovered to be round.
Here's my back-of-the-envelope analysis:: "No: Google makes money..."
New Game Show? Freezer Roulette
"Fred Meyer joins ground-beef recall." This gives me one of those million dollar ideas. A new game called "Freezer Roulette". Buy and assortment of goods at the store, pop them in the freezer and give them 6-months before eating, just to see what's recalled in that period...
RBS Seeks $8B
Dubai Mercantile has sold 20% of itself to Goldman. Will they rename their exchange Goldbai?
Story Cluster: Buses
"Third bus crash in three days injuries 20" reports CNN. Always been intrigued with how common events seem to 'cluster' like this.
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Coping with AmRev 2: A City in Lock-Down
You may not know Helena-West Helena Arkansas...yet, but I expect you will shortly. Since last week, there have been things going on there that would make a civil libertarian go nuts. The Mayor of the town, James Valley, has ordered a round-the-clock curfew in part of the city because of gunfire, loitering, drug dealing and general mayhem." And, it looks like that part of the city could continue under lockd0wn until a council meeting on August 19th. Key quote:
This is not a 'big city' by any stretch of the imagination - in fact, only about 15,000 in 2000 according to research. So, if you ever thought that small towns in America would not, or could not, impose 'house arrest' in small town America, guess again.
What makes this such a fascinating story is that it is happening in what's a small town, and even more amazing, the whole country isn't up-in-arms about it. In fact, it is so much of a yawner that when I checked Arkansas Online, which is associated with the Arkansas Democrat-Gazette this morning, the lead local story was about the state crime lab adding staff.
Moreover, I haven't heard a peep about this in the MainStreamMedia.
Above all, what's amazing to me is that at a time when an oil-rich offshore fund is looking at buying blocks of foreclosed upon US homes, we see a small town in America with some of its citizens under lock-down and there's no sense of outrage at the stomping of what's left of due process and Constitutional law.
Not to sound alarmist here, but just as the Russian invasion of South Ossetia is a warning of what's to come, I would read the police state situation in Helena-West Helena, Arkansas with equal concern.
It's been said that when fascism takes over America that it will come with a Bible and wrapped in a flag and will be saluted and praised as the right thing. It has arrived quietly in Arkansas.
Where to Live
Some follow-up to the question of best places to live:
Send snip and save comments to firstname.lastname@example.org
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Note to Reader
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Before the chart, a little background:
Once upon a time, a long while ago, I observed during my quest for 'truth' in economics, that the PowersThatBe, the talking heads on the teeve, and the other information sources that actively engage in the programming of humans not to think, had conveniently swept several trillions of dollars that disappeared in the Internet Bubble's bursting (since spring 2000) under the rug. Surely, it wasn't unnoticed by the thousands of people who called brokers and said "Where is my money?" "Gone, but hang in there as you're a long term investor!" was about all they heard back.
But, the truth of the matter is that this chart shows what your account would look like if you have taken a few thousand dollars and invested equal amounts in the Dow, the S&P 500, and the NASDAQ Composite in the waning days of 1999. It's not a very pretty picture, and it sort of gives away the other side of the story. You know, the one that no one has an interest in telling, because it's a truth which shows the amazing coincidence of the timing of 9/11, the disappearance of naked shorting evidence and all, along with the impact of The Wars which have managed to keep the economy out of an earlier depression than the one expected by me by late 2008.
No, it's not a perfect replay of 1929, but history doesn't repeat exactly, it only rhymes. So think of this as the rhymes and the crimes chart:
Write when you get rich,
George Ure, The People's Economist
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