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Friday, October 31, 2008


anecdotal evidence

via clusterstock:

Time Inc CEO Moore at the ABC Circulation conference yesterday morning (from Folio):

“By this October it was looking like 1931,” she said. “[Time Inc.] has never had so many advertising clients in trouble at the same time. The declines are stunning.”

Moore added that she didn’t care if it technically isn’t a recession. “It is one for us.”

commerical real estate has turned a dark corner in recent months as well.

“With all of the anxiety and uncertainty in the credit market, the conditions are likely to get worse before they get better,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Many architects are reporting that clients are delaying or canceling projects as a result of problems with project financing.”

and to that you can add the comments of san fancisco fed president janet yellen via calculated risk:

... [R]ecent data on the economy have been deeply worrisome. Data released this morning reveal that the economy contracted slightly in the third quarter. For the fourth quarter, it appears likely that the economy is contracting significantly.

For consumers, the credit crunch is one of several negative factors accounting for the decline in spending in recent months. Consumer credit is costlier and harder to get: loan rates are up, loan terms are tougher, and increasing numbers of borrowers are being turned away entirely. This explains, in part, the exceptional weakness we have seen in auto sales. In addition, of course, employment has now declined for nine months in a row, and personal income, in inflation-adjusted terms, is virtually unchanged since April. Furthermore, household wealth is substantially lower as house prices have continued to fall and the stock market has declined sharply.

Business spending, too, is feeling the crunch in the form of a higher cost of capital and restricted access to credit. ... Some of our business contacts report that bank lines of credit are more difficult to negotiate, and many indicate that they have become cautious in managing liquidity, in committing to capital spending projects that can be deferred, and even in extending credit to customers and other counterparties. Nonresidential construction also is headed lower largely because of the financial crisis; the market for commercial mortgage-backed securities, a mainstay for financing large projects, has all but dried up.

for all the political showboating about banks using capital injections to lend, they won't and indeed can't if they want to survive. i don't see the need to pay out bonuses, but neither do i expect any bank to do anything but hunker down. business conditions are collapsing as beleaguered consumers retreat.

evidence is little more than anecdotal at this point. but the economy looks to have hit a wall in september and october, and what will follow in months to come may be brutal.

UPDATE: append the chicago PMI for october -- this is a nightmare report and beyond the worst case scenario. i hesitate in fact to consider the figures entirely valid, given the psychology at the time of its taking.

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btw, your current posts continue to be arguably my most eager reading pursuits, and great writes, too.

and, gm, i've also begun reading your 11/04 archives. your 2004 election posts are eery. God help us if it's "deja vu all over again" and the mccain/failin ticket wins - "against all odds".

because i'm with you - the neocons need a major correction and attitude adjustment via timeout.

not that the dems are angels. i just think after years of "checks", we now need years of "balances". in a 2 party system, it's our only hope.

you know, i've always jested "the only thing worse than a politician is a child molester". it remains to be seen if i shall "reverse" the thinking in that quote.

thanks, always. but mostly for all the reading you have given me between now and the election. it will be like being kept up at night for a good book.

less sleep, holy krap.

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my pleasure, dc -- thanks.

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Thursday, October 30, 2008


just when you think it can't go lower

and no, i don't mean the market.

perhaps it isn't fair to highlight daniel pipes, for he is quite clearly not a balanced mind. as much was apparent years ago as pipes beat the drum for unlimited war. but in case anyone forgot how crazy he is, try this straitjacket on for size:

Barack Obama appears to have personally benefited from funds originating in Saddam Hussein's regime. It's a complicated connection, but one that deserves the consideration of Americans voters.

no, it really doesn't. the spectacular descent of the republican party into comic ridiculousness seems, stunningly, to actually be picking up momentum in the election's waning days. this video of mccain campaign deputy director of communications (and online editor of bill kristol's absurd journal of neoconservatism 'the weekly standard') michael goldfarb being caught in a ridiculous and incendiary lie for the cameras has sadly become characteristic of a political party in what would be, in a just world, its death throes.

meanwhile -- levelheaded conservatives continue to close the door on the GOP and cast it into the wilderness years that it needs so badly to expurgate itself. the latest is the avowedly thatcherite (and best-in-class) magazine, the economist.

The Economist does not have a vote, but if it did, it would cast it for Mr Obama. We do so wholeheartedly: the Democratic candidate has clearly shown that he offers the better chance of restoring America’s self-confidence. But we acknowledge it is a gamble. Given Mr Obama’s inexperience, the lack of clarity about some of his beliefs and the prospect of a stridently Democratic Congress, voting for him is a risk. Yet it is one America should take, given the steep road ahead.

... At the beginning of this election year, there were strong arguments against putting another Republican in the White House. A spell in opposition seemed apt punishment for the incompetence, cronyism and extremism of the Bush presidency. Conservative America also needs to recover its vim. Somehow Ronald Reagan’s party of western individualism and limited government has ended up not just increasing the size of the state but turning it into a tool of southern-fried moralism.

... Ironically, given that he first won over so many independents by speaking his mind, the case for Mr McCain comes down to a piece of artifice: vote for him on the assumption that he does not believe a word of what he has been saying. Once he reaches the White House, runs this argument, he will put Mrs Palin back in her box, throw away his unrealistic tax plan and begin negotiations with the Democratic Congress. That is plausible; but it is a long way from the convincing case that Mr McCain could have made. Had he become president in 2000 instead of Mr Bush, the world might have had fewer problems. But this time it is beset by problems, and Mr McCain has not proved that he knows how to deal with them.

... There is no getting around the fact that Mr Obama’s résumé is thin for the world’s biggest job. But the exceptionally assured way in which he has run his campaign is a considerable comfort. It is not just that he has more than held his own against Mr McCain in the debates. A man who started with no money and few supporters has out-thought, out-organised and outfought the two mightiest machines in American politics—the Clintons and the conservative right.

Political fire, far from rattling Mr Obama, seems to bring out the best in him: the furore about his (admittedly ghastly) preacher prompted one of the most thoughtful speeches of the campaign. On the financial crisis his performance has been as assured as Mr McCain’s has been febrile. He seems a quick learner and has built up an impressive team of advisers, drawing in seasoned hands like Paul Volcker, Robert Rubin and Larry Summers. Of course, Mr Obama will make mistakes; but this is a man who listens, learns and manages well. ...

So Mr Obama ... is a gamble. But the same goes for Mr McCain on at least as many counts, not least the possibility of President Palin. And this cannot be another election where the choice is based merely on fear. In terms of painting a brighter future for America and the world, Mr Obama has produced the more compelling and detailed portrait. He has campaigned with more style, intelligence and discipline than his opponent. Whether he can fulfil his immense potential remains to be seen. But Mr Obama deserves the presidency.

precisely. obama was not my candidate, and he may yet prove some of my longstanding concerns valid. but he really is the only legitimate choice in this election, and has done nothing to disqualify himself from the perspective of a pragmatic voter -- indeed, quite the opposite.


Being outfoxed (no pun intended) by a CNN anchor is not easy to do. That clown from the McCain campaign was caught. LMAO. I guess talking points don't come with rebuttals. I'm shocked...

Almost as shocked as you endorsing a democrat for the presidency gm. If you would have told me this in 1995 I would have never believed this day would come. It says alot for where the neo-cons have hijacked and taken the GOP gm that a conservative of your nature would switch sides. Hard to imagine for me anytime before the last 6 years. I wish more traditional conservatives would look at the GOP with your sharp viewpoint. They really need that if they want to return to any sort of power in the next decade.

In the meantime, people (not the loon conservative talking heads Limbaugh, Hannity and all of the rest) had better keep tabs on the Dems. Power corrupts and they are about to be handed the keys at a critical time in this nations history. I know the Dems might be the lesser of two evils today, but that can change awfully quick, which is why the republicans have to get their house in order in a hurry after this election.

keep up the great work on this insightful read.

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lol -- ccd, i don't have much against the democrats per se anymore. they have their crackpots too, but they've done a far better job of keeping them out of power in recent years. clinton was deficient as a person, perhaps, and his administration overrated in some respects -- but it's hard not to find it quite favorable compared with what came after. makes me pine for the days of bush 41 -- his faults were minor compared to this, though he certainly contributed to the radicalization of his party.

my unvoiced hope in all this, ccd, is for the republican party to schism. the GOP prior to barry goldwater in this country was the domain of kooks and luddites -- it was idiotville. after what has turned out to be an all-too-brief foray into intellectual respectability led by william buckley and others, the party seems to be reverting to the mean.

there's something left to salvage in the GOP, but the denizens of idiotville -- best represented at the moment by the people who seem to think sarah palin should run for the roses in 2012, the success of which would be i might add a dealbreaker for me in the same was as the central european chaos of the 1840s was a dealbreaker for my courageous ancestors -- need to be chucked overboard.

israel, i think, provides something of a model with the defection of ariel sharon and the formation of kadima, the better to isolate the wild-eyed fringe of likud led by beni natanyahu.

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james carville in the ft -- i sincerely hope the republican party listens to what he's saying. delusionally dumping the spectacular manifold failures of the GOP into the "mccain campaign" in an effort to avoid a more difficult but infinitely more rewarding self-examination is exactly what would be necessary to beget an utterly retarded "palin 2012" push. this party badly needs a teardown and rebuild.

but of course many thought the same of the democrats when in 2004 they could not manage to wrest the presidency from an already-dysfunctional bush administration. at that time i thought the democrats badly needed to find jesus and stay near the pragmatic center rather than drift ideologically leftwards. they've done that admirably in my view -- players like evan bayh and tim kaine are playing bigger roles. but many wondered if the party could -- and they did so without melting down.

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this is for the archive on palin. i will be extremely surprised if she has a career in politics when this is over -- if she does, it will only be because there are a lot of grassroots idiots who see her as some sort of celebrity-hero caricature, a right-wing madonna.

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look what i found in some archives:

"then, of course, even if kerry wins, the next important day becomes january 20, 2005 -- for the peaceful transfer of power in an increasingly radicalized society cannot be assumed."

even scarier today, 4 years later, eh, if obama wins?

my fear (and todd harrison at MV): bush and co. throw gas on the fire before they leave. maybe in the middle east?

oh, here's the link for the above quote:

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dc -- glad you're having fun in the archives -- i called that election poorly, though, and should remind myself of the lesson i learned then: polling is not a reliable indication of outcome!

indeed i think every transfer of power from here on out will be something to be watched. i don't think, however, that bush is in a good place to do so -- dictators generally ride a wave of populist demand, a la FDR's third term, and he hasn't even the support of his own party at this point. i cannot imagine petraeus -- whose support would probably be critical for any coup -- supporting it.

but i'll still have an eye open.

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from perrone: GM, did you catch Krugman's rather compelling argument today on why a nasty defeat is less likely to lead the republican party to some salutary soul searching (geez, pardon the alliteration) and more likely to empower the rump-dom wingnuts?

time for you to come on over, amigo -- most democrats have deep respect for the thoughtful, honorable conservatism you espouse.

or you guys should start your own party. three definitely wouldn't be a crowd, in that case. keep everybody more honest, maybe.

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i did, perrone, and here's what i emailed ccd about it:

it's not fair of him to hit at chambliss, who is generally one of the moderate republicans i (and presumably krugman) would like to see survive.

but it's hard not to see this as being the short-term effect. the close and losing races for incumbent republicans are all in moderate districts. it's broadly the fucksticks gerrymandered into airtight districts that would vote for a hitler/mussolini ticket if the GOP said so who are safe.

it took the democrats a good while to adjust to the reagan revolution, which was already a groundswell in 1976. it really wasn't until 1992 that they found clinton, who convincing ran as a new kind of centrist democrat. that's 12, maybe 16 years to clear out the deadwood.

it's taken GWB to push the GOP into the wilderness the way that carter did the democrats in 1980. they may go off the map for a while as krugman suggests, but i'd wager they -- or some kind of centrist conservative party -- will be back in the running by 2020.

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the most important chart in the world

the 2q2008 update of the ned davis research chart that i've previously cited as marc faber's chart 10 and an attachment to frank veneroso's analysis has been circulating -- most notably as an attachment to hayman advisors recent letter. via clusterstock:

if this gets going -- and it does appear that's the likelihood -- what we have in front of us is unimaginable. deflation continues to be very probable from here. if you needed confirmation in spite of crashing prices in assets ranging from houses to financial instruments to commodities, today's 3q GDP report -- with its massive contractions in durable goods, nondurable goods and consumer spending -- demonstrates pretty conclusively that it is well underway.

the question over the likelihood of a policy inflation will rage for some time -- in the latest installment, jim hamilton thinks an extended deflation nearly impossible -- but what is certain is that we have deflation now.

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I'm curious as to your take on Jim Hamilton's arguments?

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here's the comment i appended, hbl:

JDH -- destroying the dollar to create an inflation may be possible, but i think we would discover that it is not the less painful method of correction.

beyond mr. waldman's valid points on specific ability -- let's imagine the fed was successful in engineering rising prices with radical quantitative easing. what it could not do in such a situation would be to compel lending, which is very risky for banks in a steeply rising inflation.

given that, and given what would surely be very high initial unemployment as a precondition of heavy quantitative easing, wages would likely not rise with prices.

i encourage a rethinking of the problem facing the united states along the lines of james livingston's recent essay. this economy suffers from a long-term decline in real wages at a time when consumer growth has become increasingly essential to the economy. levering the consumer masked the effect for 20 years, but now the bill is coming due.

if the fed were to engineer a further decline in real wages by pushing prices higher in a stagnant wage environment, i fail to see how the problem is rectified. indeed, it may be severely aggravated -- to the point where the social fabric may not hold together. this must be a consideration.

deflation, for all its difficulties, can be addressed with compulsory debt forgiveness and debt-to-equity swaps. that may be painful for capital, but results in a workable consumer economy with real purchasing power on the other side, does it not?

to be sure, hbl, i think that hamilton's mechanism works better as an abstraction than it could in practice. waldman's criticisms re: the stability of such a program are salient. and the political will to empower the fed to buy anything and everything unsterilized is likely to be hard to amass - congress and/or treasury could and would step in to prevent it, i'll wager. and then there are the consequences of success.

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I'm a bit skeptical myself. Anywhere the Fed would inject money via buying assets would go to those (banks & the wealthy) with the least propensity to spend or loan the new dollars. On the other hand, new money targeted toward recipients who would contribute to a higher money velocity (e.g., the unemployed) would require Congress and face political limits.

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i think so much time has been spent on the mechanical debate -- modeling how it could happen -- that the essential fact that this is a political question has been overlooked. the question isn't so much could as would, in my view.

i'm naive to the domestic politics of japan post-1990, but i'd be interested to know what role political obstruction played in limiting reflation efforts (which were, as in the 1930s in america, very considerable).

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mccain vs palin

via politico -- the recriminations have started.

In recent days, a McCain “adviser” told Dana Bash of CNN: “She is a diva. She takes no advice from anyone.” ...

Also, a “top McCain adviser” told Mike Allen of Politico that Palin is “a whack job.”

of course she is. but the salient question didn't get past the reporter:

But who chose to put this “whack job” on the ticket? Wasn’t it John McCain? And wasn’t it his first presidential-level decision?


Wednesday, October 29, 2008


CDS funding disaster

recently, the cash settlement at auction of the lehman credit default swaps was received as a piece of good news in an otherwise horrible month. alea went so far as to call it a "non-event".

institutional risk analyst today questions the sanguine view -- and indeed puts unsettled CDS at the heart of the liquidity crisis that has necessitated huge dollar funding lines for europe -- moreover forecasting much worse to come.

The auction process begun by DTCC, by which holders of CDS on bankrupt Lehman Brothers settled in cash via the DTCC's facility, caused many tongues to wag as to the "net" amount providers of protection must pay to holders of CDS. Several members of the media called last week to ask if Don Donahue, CEO of DTCC, was speaking truth when he said that the net payments on Lehman contracts processed by the DTCC's warehouse were a mere $6 billion or so.

Of course Don Donahue is providing the straight skinny on the flow of transactions which have actually participated in the DTCC auction. But consider that other than holders of CDX and some holders of single name CDS not offended by the prospect of cash settlement, there remain a large number of total holders of CDS for Lehman who do not wish to take cash settlement and indeed are expecting to receive the underlying bonds.

Now the apparent non-event from the Lehman CDS auction is a source of media frustration. Wasn't there supposed to be a breakdown in the CDS markets, a dramatic failure event a la Lehman Brothers? But the merchants of doom should take heart.

The bad effect of the CDS market comes not merely from when there is market dysfunction and an individual counterparty fails. That happens often enough, but the prime broker-dealers clean up the mess quietly so as not to roil the markets. Remember, the dealer already owns the counterparty's collateral through the credit agreement, so there is no point forcing the issue with a messy and noisy bankruptcy. Right? This is why the media rarely hears of fails in CDS.

No, as with the repatriation of the Structured Investment Vehicles onto the balance sheets of C and other money center banks, the true significance of CDS comes when the markets function smoothly, as after a default event like Lehman. The trigger event putting a single name CDS contract in the money results in a liquidity-raising event for the seller of protection, who must fund the purchase of the debt at par less recovery value - whether or not the other party actually owns the debt!

This process of funding the CDS is reportedly a factor behind the high rates of dollar LIBOR in London and illustrates how cash settlement derivatives actually multiply risk without limit. Through the wonders of cash settlement, the derivative-happy squirrels at the Fed, BIS and ISDA created a liquidity-sucking monster in OTC derivatives that multiplies risk many times, for example, above the amount of underlying debt of Lehman Brothers. But remember two things: a) In some single-name CDS contracts, the buyer of protection must deliver to get paid; and b) in those contracts, where the buyer fails to deliver, the provider of protection can walk away.

We hear that there are more than a few EU banks which wrote CDS on Lehman over the past several years, CDS which were written at relatively tight spreads. These banks did not participate in the DTCC auction and instead have chosen to take delivery on the Lehman debt, forcing them to fund a nearly 100% payout on the collateral. A certain German Landesbank, for example, took delivery on $1 billion in Lehman bonds that are now worth $30 million, and had to fund same. Does this example perhaps suggest a reason why the bid side of dollar LIBOR in London has been so strong?

As one veteran CDS trader told The IRA on Friday, "It's not that people can't fund, it is that people have got to fund these CDS positions. These banks don't have access to sufficient liquidity internally to fund, so they hit the London markets... The Fed and the other central banks must start to deal with the huge overhang of currently hidden funding needs from the CDS and other derivatives." Another market observer suggests this is precisely why the Fed and other central banks have been furiously putting reciprocal currently swap lines in place.

... [T]he normal operation of the OTC derivatives markets is creating a cash position that must be funded in the real world and is thus distorting these benchmark cash markets such as LIBOR. This distortion is magnified by the dearth of liquidity due to the breakdown in the rules regarding valuation and price. So far, the Fed and other central banks have addressed the on-balance sheet liquidity needs of global banks. But as retail and corporate default rates rise, funding the trillions of dollars in notional off-balance sheet speculative positions in CDS, which become very real and require funding when a default occurs, could prolong the economic crisis and siphon resources away from the real economy.

i admit to having little knowledge of the nuance of the CDS market; someone better informed than i is going to have to validate/invalidate the thesis.

but if this is so (and if i am reading this correctly) -- that many banks which wrote and sold CDS on lehman are either contractually obligated or can elect to take delivery of the bonds which they insured before paying out -- and that, waiting for the CDS buyers to come up with the bonds, they have to arrange to finance the dollar payout -- it would explain the desperate need of dollars being reflected in interbank lending markets and further the arrangement of dollar swap lines between the fed and european central banks.

as above, the effect is similar to that when money center banks took their SIV structures onto their balance sheets, redeeming their asset-backed commercial paper investors at par with cash borrowed from the markets, leaving the banks with gaping holes on their financial statements.

moreover, as the IRA notes, there is some real possibility that the selling bank will not have to pay out on the CDS if the buyer cannot come up with the bonds. because outstanding contracts are several multiples of the available insured bonds, the banks, by electing to take delivery where they can, would effectively be betting that they will not have to pay in the end.

this would explain rather neatly why net exposure reported from the DTCC settlement auction was so small -- a point taken with relief at the time. it was because a lot of the contracts -- probably including those held in bank or insurer books that were not hedged -- did not come to the cash settlement auction and are holding out for delivery.

keep an ear to the ground on this one. if this is so, the implication for the spiralling corporate defaults and therefore CDS triggers we are sure to see in coming months and years will represent a tremendous threat to the real global economy.

UPDATE: one might further suspect that, in answer to the question posed by the new york times, this is where all of AIG's government loans are going.

UPDATE: more via yves smith.

UPDATE: yet more via jesse's cafe americain on the omissions of DTCC data as related to the synthetic CDO unwind.

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Another interesting nugget to ponder...

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jpmorgan forecast: strong global recession, deflation

via brad setser and the ft -- nouriel roubini cites jpmorgan's newly slashed forecast.

This week instead this JP Morgan research group published its latest global economic outlook arguing that we are headed towards a global recession, negative global inflation and sharply lower policy rates in the US and advanced economies (a 180 degree turn from its previous position). As written in the most recent JP Morgan Global Data Watch:

A bad week in hell

Increasingly, the signs point to a deep and synchronized global recession. Today’s reported slide in UK 3Q08 GDP is expected to be followed by contractions in the United States (next week), the Euro area, and Japan—confirming that the global downturn began last quarter. More troubling is the additional loss of momentum at quarter end, combined with collapsing October survey readings. These developments appear to be part of a negative loop in which economic and financial weakness are feeding on each other, making the prospects for growth in the coming months decidedly grim. Once again we have taken an axe to near-term growth forecasts for the developed world and will likely follow up with additional downward revisions for emerging market economies in the coming weeks. Already, our forecasts suggest that global GDP will contract at a near 1% annual rate in 4Q08 and 1Q09.

It is still too early to accurately gauge the depth of the downturn, as the outlook depends on how well policy actions contain the financial crisis. From a US perspective, our current forecasts place the contraction in GDP somewhere between the last two mild recessions and the deep contractions of 1973-75 and 1981-82. This picture masks the degree to which the pain of the current downturn is falling on households. From the perspective of wealth losses and declines in real consumption, the current recession is likely to prove more severe than any of the previous ten in the post World War II era (see Special report: How deep is the ocean? Gauging US recession contours). For Western Europe, the current downturn is currently projected to look similar to the one in the early 1990s—the last episode in which regional GDP contracted…

Inflation and real policy rates to go negative

With part of this year’s slide in global growth linked to an inflation shock, the recent collapse in global commodity prices should be seen as an important factor cushioning the downturn. In the six months through August 2008, global consumer prices rose at a 5.6% annual rate, prompting stagnation in real consumption across the globe. Based on recent moves in the price of oil and other commodities, it is likely that the coming six months will see headline inflation dip below zero. While this swing will be a plus for consumers across the globe, it is also a development that will promote a significant growth rotation towards the G3 and Emerging Asian economies that were hurt most severely by this negative shock. In the developed world, this backdrop of contracting GDP, collapsing inflation, and financial market stress opens the door to a powerful monetary policy response.

consider that global growth of 3% or so is considered flatline, and a forecast of (-1%) represents one of the most severe global events of the postwar or indeed any era.

roubini also weighs in on the prospects of a policy-driven inflation:

So should we worry that this financial crisis and its fiscal costs will eventually lead to higher inflation? The answer to this complex question is: likely not.

First of all, the massive injection of liquidity in the financial system – literally trillions of dollars in the last few months – is not inflationary as it accommodating the demand for liquidity that the current financial crisis and investors’ panic has triggered. Thus, once the panic recede and this excess demand for liquidity shrink central banks can and will mop up all this excess liquidity that was created in the short run to satisfy the demand for liquidity and prevent a spike in interest rates.

Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.

Third, wouldn’t central banks be tempted to monetize these fiscal costs - rather than allow a mushrooming of public debt – and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers? Not likely in my view: even a relatively dovish Bernanke Fed cannot afford to let the inflation expectations genie out of the bottle via a monetization of the fiscal bailout costs; it cannot afford/be tempted to do that because if the inflation genie gets out of the bottle (with inflation rising from the low single digits to the high single digits or even into the double digits) the rise in inflation expectations will eventually force a nasty and severely recessionary Volcker-style monetary policy tightening to bring back the inflation expectation genie into the bottle. And such Volcker-style disinflation would cause an ugly recession. Indeed, central banks have spent the last 20 years trying to establish and maintain their low inflation credibility; thus destroying such credibility as a way to reduce the direct costs of the fiscal bailout would be highly corrosive and destructive of the inflation credibility that they have worked so hard to achieve and maintain.

Fourth, inflation can reduce the real value of debts as long as it is unexpected and as long as debt is in the form of long-term nominal fixed rate liabilities. The trouble is that an attempt to increase inflation would not be unexpected and thus investors would write debt contracts to hedge themselves against such a risk if monetization of the fiscal deficits does occur. Also, in the US economy a lot of debts – of the government, of the banks, of the households – are not long term nominal fixed rate liabilities. They are rather shorter term, variable rates debts. Thus, a rise in inflation in an attempt to wipe out debt liabilities would lead to a rapid re-pricing of such shorter term, variable rate debt. And thus expected inflation would not succeed in reducing the part of the debts that are now of the long term nominal fixed rate form. I.e. you can fool all of the people some of the time (unexpected inflation) and some of the people all of the time (those with long term nominal fixed rate claims) but you cannot fool all of the people all of the time. Thus, trying to inflict a capital levy on creditors and trying to provide a debt relief to debtors may not work as a lot of short term or variable rate debt will rapidly reprice to reflect the higher expected inflation.

short version -- if the united states had a high proportion of long-term fixed-rate debt, needing neither to refinance or access new borrowing, a "capital-levy" inflation might work. but it does not -- and in fact the government aspect of this duration issue is becoming moreso all the time, with treasury skewing recent issuance not to 10- and 30-year bonds but to the short end of the curve, where financing has been far less expensive to obtain. this is one of the most insightful analyses of the inflation-deflation debate i've yet seen, and puts a shot across the bow of marc faber, jim rogers and many others who expect that the united states will be forced to monetize at some point.

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oil production falling away faster than forecast

via paul kedrosky -- the international energy agency (IEA) has leaked its world energy outlook to the financial times.

Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term de­mand. The effort will become even more acute as prices fall and investment decisions are delayed. ...

The agency says even with investment, the annual rate of output decline is 6.4 per cent.

The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say. ...

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

The watchdog warned that the world needed to make a “significant increase in future investments just to maintain the current level of production”.

oil executives themselves have been commenting on the decline of major oil fields and confirming that oil production has peaked. with rates of discovery fading away in spite of american efforts to secure new avenues of exploration, the likelihood of new major fields to replace the dying is miniscule -- and the fallout for oil importers could be upon us quickly even if depression curbs demand in the west.

in the end, new technologies will be required to sustain energy throughput and transition away from oil. let's hope breakthroughs manifest in spite of what may be a difficult economic period for research and development.



bank triage and the flaws of semi-nationalization

via yves smith:

Treasury is focusing its equity infusion efforts on strong banks, leaving the rest to find their own exit strategy.

But this approach is not surprise; in fact, it is exactly what Treasury said it would do in a conference call to analysts exactly a month ago.

and that is bad news for the weakest banks, many more of which figure to either be taken under -- such as PNC bank did national city recently -- or fail.

some form of triage is very necessary here -- banking needs badly to delever and downsize as the credit bubble unwinds, and treasury will waste resources trying to save most banks in their current configuration. many must fail. however, yves makes an excellent point about promoting aggregation.

In theory, this might not be a bad idea. The banking industry needs to be rationalized, since excessive leverage permitted the entire industry to grow well beyond sustainable levels. In 1980, financial firms accounted for 8% of S&P 500 earnings. At the industry's peak, they were 46% of S&P earnings.

However, the way the Treasury is going about this assures that big firms will become even larger. That is not a plus for systemic stability. The only thing worse than firms to big to fail is firms too big to rescue.

more from the guardian. confirming opinion is available at the institutional risk analyst.

Last week, we had a conversation with Josh Rosner about precisely this prospect, namely were the Treasury eventually to take control of JPM, C and BAC, would not the better public policy choice be breaking up these giant banks to help recapitalize, re-liquefy and grow the smaller, healthier survivors? There would still be a large concentration of deposits among the top 100 banks by assets, but the distribution would be more even than today.

Instead of trying to orchestrate mergers of weak regional banks, as Paulson is reported to be pursuing, perhaps instead the Treasury should ponder some creative destruction as and when further equity infusions are required. Such is the magnitude of the peak loss wave approaching the banking industry, in our view, that considering how to resolve fully nationalized money center banks to best recapitalize the industry seems appropriate.

this stems from a desire on the part of treasury to avoid (at least for the time being) the more direct but painful route to banking recapitalization -- nationalization.

the "semi-nationalization" plan of capital injections in exchange for warrants or preferred has two primary flaws: 1) participating banks -- having written down assets not even to the extent that jeopardize capital ratios, much less reflect reality -- will be sitting on capital injections as loan loss reserves for the next several quarters hoping to ride out the storm; 2) participating banks will take capital injections as fuel for acquisitions -- either of well-capitalized smaller banks or of deposit bases out of FDIC receivership -- in an effort to strengthen by preying on the non-participants. (thus far, marshall & ilsley is a non-participant.)

the former is apparently befuddling the easily-befuddled bush administration -- see idiotic white house comments here. expanding lending into a severe contraction is suicidal for banks, particularly when it is already obvious that asset values already on the books will be suffering. nationalization could have addressed this -- by taking over banks entirely, government might have stepped in to force asset writedowns to "nuclear winter" levels and then recapitalized (including forced debt-to-equity conversions to reduce government expenditure) the de-risked banks with a hope toward actually having them lend. but of course that path is economically difficult and (need one say) hits hardest the elite republican constituency -- the predator class. as paul kedrosky pointed out, however, it is still going to happen anyway.

the latter, as noted by the IRA, would also have a solution in nationalization -- and may yet, as the synthetic CDO bomb detonates over the money center banks. but the aggregation of banks into larger banks, despite being a natural result or market forces here, is not helpful. in the short term, a deeply-troubled outfit like huntington bancshares -- one of the participants -- or a very thinly-capitalized PNC may well tie up healthier smaller banks to improve their aggregate condition with the effect of removing the lending power of their targets from the market rather than liquidating their bad assets. this would reduce bank lending, not expand it. and in the long term, there are questions of the desirability of big banks. perhaps the best possible outcome of the bust would be the return of banking to a facilitating role, with a network of stable smaller entities giving the system greater redundancy and flexibility -- much like a utility -- rather than any attempt to return to the center of western economies. that result is most directly achievable first through nationalization, then reprivatizing under a far more comprehensive and powerful regulatory scheme.

here again, however, the path to better functionality is the more painful one, particularly for the predator class -- and it is hard to expect the party that more directly represents their interests to take that path for the benefit of the broader society when they haven't given a damn about broader society except to exploit it from the get-go. i'm left to reaffirm by view that what conservatives should most hope for is a rehabilitation of the republican party by virtue of casting it into the political wilderness for a decade or more.

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Tuesday, October 28, 2008


caught short!

the NASDAQ gapped up at the open 50 points to open at 1552 (yesterday's close -- 1506), some 3% higher, only to close the gap back to flat into 11am new york time. a tentative rise then found spurs at 2pm and the index is currently around 1650, up about 9.5%.

this will quickly bring to mind october 13, though the extent of the gains (considerable though they are) are not quite of that size.

i was caught short in a small way by this fierce rally -- position sizing saves the day, where a stop-loss would have been appropriate but wasn't left in the system.

all is not necessarily lost here, though. while this should be close to a 90% upside day and is quite possibly the start of a more significant rally from a very oversold technical condition, this study from quantifiable edges suggests a high probability of at least a partial retracement over the next few sessions.

Typically when the market gaps up by massive amounts it tends to pull back at some point in the next few days. Below are listed all instances where the SPY gapped up by 2% or more. In 19 of 20 cases it posted a close below the gap open within the next 5 days ...

so look for a close in the next few days below NASDAQ 1552.

similarly, the NASDAQ 100 opened at 1210, up from 1170 or 3.4% -- and is closing about 1297, up nearly 11%. again, a close back around 1210 would be typical.

SPY closed yesterday at 83.95 and opened this morning at 87.34, gapping up 4.0%. they are closing 93.97, up 11.9%. one would expect a retracement then corresponding to approximately 870 in the s&p.

UPDATE: markettells had this to offer back on october 13:

"Monday's 11% move represented the sixth largest rally, but what's particularly interesting is that 17 out of the 20 largest gains occurred between 1929 and 1933. That's food for thought from a long-term perspective. It will be particularly noteworthy if we see another 7%+ up day at some point in the coming year. If and when that does occur, it would suggest we're in another 1930's style environment, which would certainly not be a positive sign. A cluster of unusually large percentage gains reflects treacherous volatility and most likely lower stock prices over the long haul. Consider that from 10/30/29, when the first big percentage gain appeared, to 7/24/33, when the last big percentage gain appeared, the S&P500 fell over 60%. And don't forget there were fifteen other 7%+ up days during that roughly four-year period, most of which proved to be selling opportunities."

now that we've got another, what does it say?



consumer confidence record low

the conference board reported this morning that their measure of consumer confidence notched its third-steepest one-month fall on record, and fell to an all-time low in october.

this is not the godawful news it might be construed as. of course it isn't good -- low confidence means low spending means slowing monetary velocity. but perhaps one can look through the current situation to some extent.

i track the differential between the future expectations component and the current conditions component to get a feel as to how things might play out. normally, economic downturns are presaged by the expectations component falling significantly beneath the current conditions for some duration -- as explained here, usually readings of (-20) are prelude to mild recessions, (-50) to more severe strains, frequently with a lead time of many months to a few years. this led me -- along with a then-inverted yield curve -- to begin pondering recession back in 2005.

but the converse is that when future expectations brighten and start to outpoll current conditions, the groundwork is being laid for a recovery. we can see in tracking the differential that we've resolved from an anticipation of a severe recession back in march 2007 to an essentially neutral condition -- where both future expectations and current conditions are reading all-time series lows, to be sure, indicating that the united states is in the teeth of recession.

at some future point, the outlook will start to brighten and the differential start to post meaningfully positive readings as it did first in november and december of 2002, then more persistently in mid-2003.

it is worth noting that the current component will naturally lag recovery and particularly the stock market -- it put in its cycle low last time in september 2003. moreover, the future expectations component is notoriously volatile -- it seemed to be improving from a cyclical low point by march 2002, reaching up to 110 that month. subsequently the measure crashed to a cycle low of 61 in march 2003. it's only really in taking the two together that there seems to be much anticipatory power in the series.

to be sure, this neutral condition can last for quite a while. it's also possible for future expectations to dig lower and return the differential to a deeper negative reading. so this is no surefire buy signal quite yet. but that day will come, and when it does it should prove harbinger of a sustained economic (and equity market) upturn.

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trade finance shutdown

this bit in the financial times seems like the arcana of rogue states until one looks into what is happening.

Thailand on Monday said it planned to barter rice for oil with Iran in the clearest example to date of how the triple financial, fuel and food crisis is reshaping global trade as countries struggle with high commodity prices and a lack of credit.

The United Nations’ Food and Agriculture Organisation said such government-to-government bartering - a system of trade not used for decades - was likely to become more common as the private sector was finding it hard to access credit for food imports.

take context from yves smith, who has been on top of the seizing up of letters of credit for weeks. first take this offering, which relays the views of UBS macro analysts.

... I have been banging the drum about slowing demand in emerging Asia being the principal cause of almost all the macro economic dislocations we are seeing at the moment - but even I must admit that I have been surprised at the scale and the pace of this apparent fall in demand. And that's because I think I was missing something. In two of my more recent notes, I have pointed out some of the oddities of the commodity markets such as the essential futility of the cost of production argument to support prices and the systematic way we seem to have over-estimated demand during the up run in the cycle. I would now suggest that the BDIY [baltic dry, mentioned here -- ed.] is now sending us a similarly muddled signal, namely that while apparent demand has collapsed, real demand has been much less impacted and that what we are actually seeing is a huge run down in stocks.

The cause is the break down of the world commodity trading system
. For the past few weeks Andy and I have been reporting in our respective dailies on the difficulties being faced by importers and exporters of basic materials in getting access to bank finance to fund trades. For example, Andy wrote about South Korea's request for immediate aid support from the US to fund food and fuel imports, I discussed how the lack of trade finance was reducing the volume of coal shipments into Rotterdam and was affecting the volume of US grain exports. When you come to think about it, if banks are reluctant to lend to each other because of perceived counter-party risk, why are they going to lend to a small trader from Asia, Africa or even Europe. We know of banks that have rejected letters of credit from other banks - and we are aware of banks that have simply refused to pay out on letters of credit because they claimed they did not have access to the funds. Without a working trade finance system the global market is going to break down……… eventually.

And that's where we are at the moment. The reason that spot iron ore prices in India have collapsed - more than halving in three months, is because Chinese demand has vanished but it has vanished because of a combination of real demand destruction and apparent demand destruction caused by the inability to finance cargoes. Its the same for other bulk commodities, industrial metals, coal, oil and even food. The slump in global demand for basic materials is real but it is not as bad as the BDIY would make you believe.

For now the gap between the real and apparent demand destruction is being filled by running down stocks. Now this can last for a while both because stocks were, I believe, generally larger than the market perceived and because investment stocks of commodities are being returned to the market and because lower real demand means lower consumption. But in the end, stocks will become exhausted and then we face a binary option. If the trade finance markets remain closed than manufacturing around the world will start to shut down and the world will fall into a depression. But if trade finance resumes then commodity prices should stage a spectacular dead cat bounce as stocks get rebuilt.

The former case is too dreadful to hope for so I must assume that in some way finance resumes and the markets bounce.

yves then further offers this from john dizard at the ft:

The government and banking leaders might think that those clerks and computers will have been reassured by the business cable channels telling them that things will be fine. Well, it hasn't happened yet.

Some critical institutions were caught in the middle of this. Wachovia, as I mentioned last week, did a lot of letters of credit for the Latin American trade. Royal Bank of Scotland has huge exposure to shipping. The line people working on trade finance need to be told that it is okay for them to take these risks, that they won't be laid off if they make one good-faith mistake.

Maybe secretary Paulson could go down to the docks in New Jersey, Norfolk, Long Beach, or Jacksonville to symbolically sign some documents. I know, it's the unfamiliar real world of production and transportation, but the pain of walking around the Port Newark-Elizabeth Marine Terminal will be over quickly.

... As one ship broker told me: "Values are down by half within the past six months, but nothing is actually being sold right now. The problem isn't with a single trade route. It's global."

This better be the next fire that's put out.

the thailand/iran barter deal is accompanied by others, and can be seen as a result of an inability to utilize normal credit and clearing functions of the global financial system as regards trade. this leads me directly to the doorstep of michael panzner. economist greg mankiw writing in the new york times rather circumspectly questioned the fundamental presumption of many economists -- that is, that we have learned so much since the 1930s about economics that we will not repeat the mistakes that led there. but panzner has made a living recently out that highlighting that the problems facing the global financial system are -- as is the system itself -- far more complex and difficult to intervene in than anything faced by policymakers then. his thinking of course echoes that of nassim taleb and benoit mandelbrot. the international trade finance shutdown -- almost completely unremarked on and indeed probably unnoticed by policymakers and financial press alike, yet vital to our national survival and a direct unintended consequence of the financial crisis -- is an example of such complexity at work.

what's more, the stakes are higher -- as i've noted here before, this overoptimized system of financial, economic and social intermediation has widened the collapse gap. if this is in fact the collapse of the american empire, events may spiral further out of control more quickly than anyone in the united states imagines or perhaps can imagine -- manifesting our failure of imagination in the most awful ways.

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ok, gm. just finished your last 3 posts re: bartering, galbraith and the republican party. great writes all of them - you're off the hook with my ben stein reponses as i type much slower than he talks.

oh, and i have nothing to add as they were excellent discussions for which i cannot improve upon.

i do have one question though. in the comments for:

is your link for "these idiots" correct or erroneous?

regarding your same comment query there, i suspect my answer is:

there are a horrifying multitude of "these idiots" (skinheads and such) throughout our great nation. and they are a force to be greatly feared. (and if you have a bunker consider yourself lucky.) because "these idiots" may very well satisfy your speculation, gm, "[that it is] likely that obama's biggest tests will come not from without".

frustration and desperation - often correlated with poverty - has many different faces. and it is not confined to urban areas. it is rampant and common throughout america. and we both know it is growing.

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lol -- totally erroneous -- this is the link i tried to put in there.

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testing galbraith

jamie galbraith has written what i think will be one of the seminal books of the oncoming sea change in american public perceptions of the role of government and its relationship with business. this interview with bill moyers highlights all the major points of that book as well as galbraith's views on how to remediate what is now obviously the worst financial crisis since the 1930s with the damaged but still rehabilitatable institutions of the new deal.

as a philosophical conservative, i find much of what he says to be very compelling. the truth is that the post-reaganite vision of "conservatism" in the united states is really something of a radical departure from what i would call burkean conservatism -- indeed, should not be called conservatism at all but rather perhaps regarded as a form of corporatism (to borrow a term from mussolini). many of the social aims that a christian moral philosopher like john locke or a bourgeois trustee like edmund burke would have espoused are found nowhere in the increasingly brutal republican party platform but are instead on the tongues of men like galbraith and economic historian james livingston -- who correctly divine the prosperity and indeed integrity of our society to be endangered by the abuse of government in channeling of wealth into the hands of a predatory few looters, and seek proper political, legal and economic redress to stave off disaster. one of the eventual outcomes of this financial collapse will be the revelation that the program of the republican party since goldwater -- shifting the tax burden from capital to labor, deregulation of enterprise accompanied by restrictions on trade unions -- was in fact an slow-burning economic disaster for a consumer economy, though one disguised for some time by the lifting of regulatory limitations placed on indebtedness which had been enacted following the collapse of 1929.

but i hesitate at that point of praise, for -- as the following exchange with moyers illustrates -- galbraith takes almost as an article of faith the supremacy of the american dollar, and from that point of departure prescribes a massive reinvigoration of government without worry as regards the lack of domestic savings in the united states, which requires us to continue to borrow very heavily from savings-rich developing nations like china.

BILL MOYERS: But, you know, you and everybody else have been reading or talking to or calling for more spending, more spending because that's the only way you say to get capital into the system. But where's that money going to come from, Jamie?

JAMES GALBRAITH: The government has no problem with money. What we're learning, first of all, is that the dollar remains the anchor currency of the world. The euro is the one, is the currency that's collapsing right now, not the dollar.

Uncle Sam's credit is excellent. Uncle Sam can borrow short term for practically nothing these days. Everybody wants to have Treasury Bills and bonds because they're safe. Uncle Sam can borrow for 20 years at 4.3%. That's the same rate that the United States could borrow at for 20 years in the last month of the Eisenhower administration. So from our point of view, we're actually well placed, I mean, as the government of the United States is well placed to take the lead in pulling the country and the world out of this crisis.

BILL MOYERS: But even Barack Obama's website calls the deficit America's "Domestic Enemy." Even he's aware of the fact that the deficit's beyond sight.

JAMES GALBRAITH: Well, the deficit isn't beyond sight. The deficits in the Bush administration in relation to the size of the economy were never all that large. They were certainly larger than they were under Clinton, but that was in part necessary because of the changed economic situation, the collapse of the dot-com bubble in 2000.

The United States government's credit is good. The deficit is a financial number that people are going to have to get used to because there is no way in these circumstances of avoiding an increase in the deficit. One of two things can happen. The government can take action and help stabilize the economy in which case we will have more spending but also more employment.

Or the government cannot take action and let the economy collapse in which case we will have much less tax revenue. The deficit is going to be larger either way. There is no way of avoiding that. The only question is do you work to have a good economy or do you accept a terrible economy?

BILL MOYERS: What are the negative effects of a soaring deficit?

JAMES GALBRAITH: Well, the one thing I would have worried about is that we might not find lenders who are willing to provide funds to the U.S. government, that the Chinese or the Japanese might decide that they would rather be in some other currency and that we'd then have trouble with inflation. But that's not going to happen.

It's not going to happen because, as it turns out, the major alternative, the euro, simply isn't viable as a reserve asset for the rest of the world. It's the dollar or nothing
. So the United States basically can finance itself to the extent necessary to deal with this crisis. And I'm right now quite sanguine about that, quite confident that we won't face a problem.

galbraith makes many good points, but his view of the state of vendor finance is i think too narrow and fundamentally backward-looking. government deficits were in fact pretty significant, but were only a fraction of total financing needs and so don't take the full dimension of dollar-based indebtedness. interest rates have been low; does that imply that they will remain so? if it truly is "the dollar or nothing", why do we discount the idea of nothing -- or rather, different denominating currencies in different spheres of activity?

the united states has an official debt of $10tn -- only $6tn or so is actually borrowed, the remainder being an internal transfer between the general fund and social security -- and $3tn of that being drawn on foreign creditors.

now, the united states is faced with attempting to draw, on the estimation of deutsche bank, in excess of $3tn more in the coming fiscal year -- much of it inevitably from these same foreign creditors, though the domestic flight to safety will surely abet the funding of the treasury for some time. and they will be attempting to do so at a time when global trade is collapsing, likely resulting in much narrower current account deficits for the united states and a much lower flow of vendor finance (indeed, if any at all, for china will soon have concerns at home which it may employ savings to address). this is enough to spark discussion of quantitative easing in the united states. indeed john jansen probably summarizes the expectations of many bond market operatives:

Simply stated, the profligate spending upon which the government has just embarked will cost the taxpayers dearly.

i sincerely hope galbraith is right, because we are calling plays out of the keynesian playbook even now under the management of treasury secretary paulson (though he carefully directs the benefits like the predator he is). if the direction of the obama administration under the advice of paul volcker continues down this same path -- and if galbraith is wrong -- we will create a dollar crisis, the effects of which will make the credit crisis we have seen to date seem child's play.

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from perrone: you know, GM, as much as I've tried to get all terrified about a looming dollar collapse, the prospect just ends up seeming counterintuitive to me. when the pound lost its standing as the reserve currency, it was because the dollar was there to take its place. what's there to take the dollar's place, really?

and then you've got another fairly monumental barrier to inflation --credit's gone, so the global money supply is fucking collapsing.

know what I mean?

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hi perrone -- check out the comments put forward by nouriel roubini today.

i completely agree that there's utterly no threat of inflation on current data. just the opposite! what's happening to credit is overwhelming every government effort. indeed the dollar might continue to strengthen -- as we're finding, the dollar like the yen became a carry trade funding currency as greenspan held rates low.

there is a prospect, i think, out in the future of the united states desiring more financing than it can procure as its current account deficit narrows with the contraction in global trade. and there would be some temptation to monetize in that event. i don't subscribe currently to a "hyperinflation" scenario, but it could happen.

roubini, however, makes a solid intuitive argument against it. and there are other avenues besides monetization to secure financing. for example, the US could borrow in other currencies to attract reasonable terms (a la carter bonds).

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Monday, October 27, 2008


hope for the republican party

for quite a while now, i would have struggled to find anything sensible written at the national review worth a link. and it is still mostly trash. but -- of all people -- david frum (among others) has started to make some small amount of sense as the republican party blows itself apart. to wit:

If I understand it correctly, the Blankley/Rush argument goes like this:

1) Reagan-style conservatism remains wildly popular with the American people. It was the "blueprint" for winning landslides between 1980 and 1994, and it remains the blueprint today.

2) Yet for some unaccountable mysterious reason, politicians are ignoring this blueprint! There is not a strong elected conservative voice in the country today.

3) So obviously what we need to do is return to the politics of the 1980s - and sit back and collect the rewards.

This argument raises one big question:

Could it be possible that the reason that we lack Reagan-style conservatives in elected office today is that they are having trouble getting elected? ...

Take a look at this poll from Stanley Greenberg. (Yes Greenberg's a Democrat - but he's long proven himself a realistic analyst of American politics. Greenberg is the guy who identified Macomb County, Michigan, as the heartland of the "Reagan Democrats" - and warned Democrats that they were losing both Macomb and the nation.)

While a sizeable majority of voters say Republicans have lost in 2006 and 2008 because they have been “too conservative,” a sizeable plurality of Republicans say, it is because they have “not been conservative enough.”

Over three-quarters of Republicans say Palin was good choice, while a majority of the electorate says the opposite.

Two-thirds of Republicans say McCain has not been aggressive enough, but a majority of voters think they have been too aggressive.

Looking to the future, a large majority of Republicans say the party needs to “move more to the right and back to conservative principles,” while an even larger majority of all voters say, it should move to the “center to win over moderate and independent voters.”

When Rush and Blankley tell us the blueprint is there, if only we would follow it, they are telling us something that is not true. They are offering flattering illusions when we need truth. They are leading us to disaster - and beyond disaster, to irrelevance.

and to frum's pragmatism you might add this essay by the atlantic's ross douthat. there is hope for the republican party. but it will have to manifest through some time in the political wilderness, and probably more many lost elections, the example of which empowers pragmatic conservatives in their efforts to salvage what can be taken from the wreckage of this stunning trainwreck of radicals and luddites.

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funny, the msm leads me to believe that the future on the right is a 'rogue diva'. tell me when it's safe to go back outside gm. i'm going into my bunker for awhile.

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provoking syria

us commandoes launch a raid well into syria from iraq.

Damascus and Washington have taken steps recently towards easing their strained relations. The Syrian Foreign Minister, Walid Moallem, briefly met the US Secretary of State, Condoleezza Rice, last month.

But on Sunday the Syrian Foreign Ministry summoned the top US and Iraqi diplomats in Damascus and made charges of "dangerous aggression", the news agency said. It demanded that Iraq begin an immediate investigation of the attack and that it prevent foreign forces from using Iraqi territory to launch attacks.

the bush administration perhaps cannot muster the respect for their own country and its impending electoral verdict needed to simply go quietly. then again, it's clear the administration does not respect sovereign borders in many other places, most conspicuously of late pakistan, where it finds them inconvenient -- so it's also possible that the administration is so denuded of ethical and legal boundaries that it no longer knows any better.

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glad you brought it up gm. i had meant to do the same in an earlier comment.

moon of alabama is (indirectly) calling it cheney's gift to mccain:


[excerpt:] The timing is amazing from a neoconservative point of view, a few days before the American elections. Right now, after years of scrupulously avoiding crossing into Syrian territory, the American military receives instructions to invade a town in Syria and kill 8 people.

so transparent - - is there no end, no limit, to the neocons' desire for permanent power? doesn't human life have any value to them in their quest for power?

dumb question. my bad. (see iraq).

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george condon of the san diego union-tribune ran a nice retrospective of foreign policy acts/prnouncements in the name of domestic politics.

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just amazing isn't it. there is no respect for any international law when it comes to these guys. with the war in iraq fading away...the u.s. goes on the offensive with syria, less than 10 days from the election. my jaw just drops. has this country become so full of followers that nobody questions this? it is going to take decades to recover from the 8 years of foreign policy set in place by these warmongers.

shameful, just fucking shameful and we are all to blame for not holding these guys accountable for their actions.

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maybe they are just trying to stoke that international crisis "predicted" by joe biden?

todd harrison has been posting a fear to an incident "occurring" in the middle east to rattle the election/inauguration for some time now.

it's going to be one long frikkin' week, boys.

don't forget to vote? or, forget to vote...whichever suits you.

because sometimes it feels like we're in a vortex, and not much can be done about it.

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to be honest, fellas, when i heard biden suggest that i thought 1) that's a pretty astute reading of international politics; and 2) in spite of that, it's far more likely that obama's biggest tests will come not from without.

the significance of september 11 is often in the eye of the beholder. but i see one of the inescapeable conclusions to be drawn from the event and its aftermath is that america's most violent, most divisive and most destructive enemy is no kind of external force. and that is of course typical of any of history's many universal states.

on that note -- i wonder how many more of these idiots are out there. god save this society from itself.

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woop -- thanks dc -- this is the link i meant above!

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quantitative easing

from the financial times, citing deutsche bank.

note that japan's nikkei index hit a 26-year low this morning.

also, jim hamilton examines the fed balance sheet.

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the emerging market crisis

following on -- the telegraph's ambrose evans-pritchard reports on the possibility of a eurozone crisis stemming from the collapse of eastern european emerging markets.

This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect. ...

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall. ...

Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union.

The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.

Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself.

“The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.

more via yves smith from ed harrison of credit writedowns. more still from paul krugman (and more). the unwind of the carry trade and resulting emerging market currency crisis is also this week's cover story for the economist.

this has gone in a week's time from being a sideshow to the main event. ken rogoff and carmen reinhart called early on to watch for sovereign defaults, as they are chronically characteristic of large financial crises. now we are getting them -- see the chart of PCY -- iceland and argentina being perhaps just the first of a string that could result in a titanic monetary and economic collapse which might well propel the global economy into something entirely more awful than a recession. here is rogoff in the ft this morning:

Ken Rogoff, former chief economist at the IMF, highlights the connection between commodities and sovereign debt crises. He tells FT Alphaville (our emphasis):

Even a normal global recession would surely have triggered a rash of sovereign debt crises (not necessarily defaults if they are bailout out). Falling commodity prices and tighter global credit conditions have been leading indicators of sovereign debt crises for two centuries (as Carmen Reinhart and I show in charts in our “Panorama paper”). What is happening now goes beyond that, the financial panic that was centered in Europe and the US up until a couple of weeks ago has fanned out into emerging markets, particularly those with large current deficits and significant financing needs (the latter generally being due to corporate rather than public debt.)

If history teaches us anything therefore, the current sell-off in commodities from all-time inflation-adjusted highs just this summer will undoubtedly lead to a bout of sovereign defaults.

moreover -- note the position of switzerland in the crisis -- "Exposure is 50pc of GDP for Switzerland". the swiss franc (and particularly swiss banking) may not be the bastion of safety i would have thought. switzerland may very well not have the ability to prevent the kind of bank collapses that could result from a full manifestation of this crisis.

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damn, everything's a moving target like never before. you caught me right before i bought a plane ticket to switzerland. (kidding on the latter.)

i still like the idea of (at least) a "disaster insurance" play in foreign currency.

now if something would just sit still.

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lol -- hell of a close today, dc -- (-3%) in the final ten minutes! i wonder whose margin call that was...

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i was wondering if you'd comment on this little cliff-diving-last-10-minute-action ditty.

3%? pshaw - mere pocket change for the hedge funds!

think the runoff will pick back up at the opening bell?

waking up tomorrow looks to be easy.

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from perrone: hey GM, remember when I said yen instead of swiss francs?

I'll tell you what, I like my "Good Man Is Hard to Find" analogy more and more. we're all being taken out to the woods.

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you did call it, perrone -- dead right, seems to me. though who the hell knows what the next turn of this thing will be!

i'm really surprised by the intensity of the positive dollar move as well, considering the government promises being handed out. it may be fleeting, but it has been strong.

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Friday, October 24, 2008


limit down

i had wondered if we wouldn't have to have one of those crushing days that tripped circuit breakers to draw a line beneath what has become the most awful market crash since 1929. today, we may get it.

you know things have gone completely awry when albert edwards is starting to get bullish. echoing jeremy grantham, however, edwards expects to hit 500 in the s&p next year as the lights go out.

UPDATE: there are rumors the general motors is on the brink of bankruptcy. GM isn't trading that way early, however, off 41 cents to $5.69 at this writing.

UPDATE: nouriel roubini cites the flood of hedge fund and mutual fund redemption orders as a likely route to shutting the united states capital markets for a week or two in coming days. the head of GLG reminds of several others who have prognosticated that a third to as much as one-half of the hedge fund universe will be going away.

UPDATE: we didn't get it -- market closed (-3.5%) pretty much across the board -- and that's a pity because i still suspect that final hair-tearing, eye-scratching, screaming-at-the-monitor downdraft is lurking. the VIX momentarily touched 90 (!) today, and you'd think that would be enough, wouldn't you? but i can't help feeling there's another shoe still to drop. in the meantime, sleep with one eye open -- there's a monday up next, and crashing markets love a monday.


so how bad is this going to get GM?

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depends on whether you mean market or economy, dj.

economy will i think be some quarters of strong recession followed by anemic or no recovery -- probably the most severe economic test for the country since the 1930s. moreover, one should not entirely discount the possibility that things could actually get worse than that -- i know that sounds like hyperbole, but the initial conditions (debt-to-GDP, asset-prices-to-income, gini coefficient and many others) suggest that if the unwind gets well and truly out of control it could result in conditions as bad or worse. that would probably entail a currency collapse as well.

as far as the market goes, i think we're patterning the 1929/1987 fractal generator -- implying a low in the next week or two around s&p 750. (the 2002 low was 777 -- we'll test that, i think.) that's another 15% down, of course.

but that may only be a trading low, from which we might expect a multimonth rally. eventually, economic conditions, deleveraging and multiple contraction could mean s&p reaching down to 500 or so -- that would be around 8x trailing ten-year earnings, which is where the market normally ends up after protracted bear markets.

all this is speculative, of course. but it will be hard, that much seems certain.

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gm -

man, when i said nothing makes sense anymore, i didn't think it would include yesterday's markets. especially with a vix at 90.

i agree: monday could be a biggie. especially with everyone howling at the moon, so to speak.

oh well, here's something to ponder in the interim:

the final bubble?

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dr. steenbarger is noting the expanding weakness in this last week -- i hate to even say this, but the consolidation since oct 10 looks very much like a bear triangle which broke down thursday. that would suggest a measured continuation to 750 in the s&p as well.

the hedge funds are simply not done unwinding yet, and you can bet many more margin calls will be issued as broker/dealers squeeze requirements.

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the final bubble?

that was the lesson of smoot-hawley, wasn't it dc? reactionaries are going to start blaming china regardless of what happens, and (though we are at primary fault for what has befallen us) not entirely without a case. democratic ascendance will mean empowerment for labor -- and while that is needed (for this country needs badly to get real incomes rising again to bolster economic activity) it will mean trade barriers.

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ala steenbarger (good one), i agree with you: new lows in the near-term do seem inevitable. what's frightening is where and when the hell the bottom's going to be. mish is saying 450-600. right now you could add a zero to the range for dow 4500-6000. (and there is more of your continued hedge fund unwind, eh?) finally, kevin depew says stocks aren't going to be attractive for 4-6 years.

democratic ascendance is a necessity in my book too. and all that krap will pretty much just be "history repeats itself". (the ptb pretty much know what's ahead - how about biden's claim of a quick crisis for obama?)

i think it's also pretty telling that precious metal fabrication of coins and such seems to be drying up "until further notice".

no matter what, it's going to be one hell of a ride.

but, lest we forget, as the zen master always says - "we'll see".

for now, time for a sleeping pill.

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to go with this dourness, however -- blodgett cites cbuffett and grantham correctly in this excellent overview at clusterstock. laddering into stocks from a high-cash position (which is hopefully where good folks are) at these prices and lower should bring good things.

my view is a bit more sour on the long term -- the risk of holding stocks is high enough that investors should really hold their fire until we see the whites of their eyes. buying around 15x adjusted trailing earnings is insufficient risk control in the long view, imo -- we are likely to get 10x or less as time goes on, and that will be time to get greedy. one has to remember that stocks carve out as much time and price beneath average as above it -- there's no need to hurry from here.

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good follow-up discussion and strategy, gm - thanks.

blodgett piece was good too.

man, what a ride.

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Thursday, October 23, 2008


synthetic CDOs to unwind

from the financial times, following on a bloomberg piece:

The article is referring to synthetic CDOs: that is, CDOs which are not backed by tangible collateral (RMBS, CMBS, for example) but CDS contracts which reference some form of collateral. In this case, CDS on corporations

[W]hat can be expected to happen to the market as we move through a recession in the coming months[?] ... Huge, disastrous downgrades: exactly mirroring the structured finance downgrades from ABS CDOs which have brought the financial system to its knees already. Don’t forget, moreover, that these CDOs aren’t backed by dodgy subprime collateral, but are supposed to reference the investment grade corporate world. More proof that it’s not the collateral which is to blame, but the structuring. The medium is the message, and all that.

We guess the impact of this might make itself felt in three ways:

Firstly, there will likely be the mark-to-market losses on the CDO notes themselves. As the Bloomberg article noted, in some cases this is equivalent to a 90 per cent loss on capital. The question here then, is who is holding these notes? Hedge funds were certainly big buyers of synthetic CDOs. But guess what - banks are also holders too. And by and large, banks synthetic corporate CDO holdings haven’t been written down.

Secondly, trouble in the synthetic CDO market will - just as with ABS CDOs - have huge regulatory capital impacts for banks. ... Downgrades of synthetic CDOs, in other words, will have a devastating caustic effect on banks’ capital ratios - with the potential to completely offset government recapitalisation actions.

Thirdly - crisis for synthetic CDOs will suck money out of the banking system in other ways. Synthetics are “unfunded”. In a normal asset-backed CDO, the cash raised from selling bonds is used to buy assets, but in a synthetic CDO, the cash raised from selling bonds is not used up front: as a protection seller, the CDO collects premiums on CDS contracts which only cost it money in the event of a default (when the CDO must make good on its protection). Of course, depending on what is happening to the spread on the various CDS contracts a synthetic CDO might hold, the CDO might also need to make margin calls. ...

The point here is that the “collateral” account of synthetic CDOs usually takes one of two forms: a bank deposit, or a similar cash-equivalent holding: a money market deposit, for example. As spreads widen, and collateral posting (the red line in this diagram) comes into force, synthetic CDO SPVs will be drawing money out of banks and money market funds to meet their obligations. Given that there are quite a few synthetic CDOs out there, the effect shouldn’t be too insignificant.

Complicated all the above might be. The long and the short of it is that the synthetic CDO market has used derivative technology to build a huge amount of leverage. With recession now biting, the whole house of cards is dangerously close to collapse.

then please consider -- via paul kedrosky -- that the banks have already eaten through what the government is gifting them by the TARP.

The gist: Government recapitalization and other fund-raising has largely been in service of banks' prior subprime losses, while corporate and consumer loans are just starting to hit bank balance sheets. It won't take much to tip banks over into insolvency again.

is there any avenue which the banks did not exploit in an attempt to destroy themselves? this seals it -- there is utterly no way for any of the major money center banks to avoid wholesale nationalization, and the sooner we get about it the better.

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well, gm. opening bell and we're off. good luck, pal.

see you on the other side, so to speak.

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is a rally too predictable or impossible, dc? i can't tell anymore. a 6% gap down isn't going to go unfilled, though, i suspect.

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i don't think anyone can tell anything anymore. more and more, things are making less and less sense.

there are too many forces at work -the worst being the fed and treasury - to undercut every play and every strategy being attempted.

safes and cash in mattresses are starting to look very comforting.

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taleb and mandelbrot

via paul kedrosky, nassim taleb and benoit mandelbrot -- who i would have loved to hear unedited -- are interviewed by paul solman for the lehrer newshour in this ten-minute podcast. (transcript here.)

this may be the single scariest thing you will hear about the "overoptimized" financial system. taleb and mandelbrot understand the characteristics of markets far better than most, including most everyone who is "shocked" by what is happening; though their discussion is less about markets than systems theory, they are talking about the financial equivalent of the End Times.

We live in a world that is way too complicated for our traditional economic structure. It's not as resilient as it used to be. We don't have slack. It's over-optimized.

"optimization" is the product of evolutionary processes -- not progress, but specialization. left to run in stable conditions for long periods, evolution produces highly specialized and interdependent, tightly coupled systems which are very efficient -- "optimal". but such systems are, by their nature, fragile and very vulnerable to perturbation. highly evolved systems are houses of cards -- "overoptimized".

mandelbrot and taleb observe the financial system that has developed since the early 1980s in the western world, under the aegis of pax americana, as an example of an "overoptimized" system. and it is now facing a very serious (and autoactualized) discontinuous perturbation.

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Wednesday, October 22, 2008


not with a bang but a whimper?

ancient pal ccd forwarded this update on the acrimony surrounding the status of forces agreement in iraq, which is intended to replace as justification for our resource war the expiring united nations mandate that colin powell was duped by the office of the vice president into procuring with fabrications.

Iraq's Cabinet asked for changes to a draft U.S.-Iraqi security agreement Tuesday, once more casting doubt on the document's speedy passage, less than three months before the U.N. mandate authorizing the presence of American troops in the country is to expire.

The first Cabinet session to review the document revealed how divisive the security agreement has become. Only the country's Kurdish bloc is publicly backing the current accord, while Shiite Muslim and Sunni Arab allies of the U.S. remain wary of endorsing the draft, which had been described by Americans and Iraqis as in its final form. The Iraqi side again called for more negotiations.

In Washington, Defense Secretary Robert M. Gates told wire service reporters that the door to change was "pretty far closed" and warned that failure to reach a deal or renew the United Nations mandate would mean suspension of U.S. operations.

"There is great reluctance to engage further in the drafting process," he said.

this is probably all brinksmanship, but there's little doubt in this conservative mind that operations should soon end and the vast majority if not all american troops should be recalled as soon as possible in light of events at home. even given the long-term importance of oil resources to the extant american economy, iraq has become an insanely expensive boondoggle for a country with a crippled economy and borrowing trillions per annum to finance public expenditures ranging from war to bank bailouts, corporate lending to social programs. this is what the end of empire looks like, and notwithstanding the now-comical pride and hubris of the 'national greatness' crowd (which i suspect has never understood the extent of the charity which has funded their arrogance) the united states is going to have to get small or tempt much greater economic disasters than a standard-issue deflationary depression. that al-qaeda's strategy seems in fact to be working will certainly be a bitter pill for all of us, but that was a probable outcome from the moment on september 12, 2001, when the bush adminstration decided that the horrible events of that day would provide sufficient excuse for embarking on a long-desired program of imperial adventurism in the middle east.

viewed in this light, the failure to compromise on a SOFA would be a blessing for both america -- and could well be what iraq needs to begin to find a civil arrangement, and is certainly politically popular there. as such, the stalemate may be allowed to persist and end the rolling disaster that george bush, dick cheney, paul wolfowitz and the rest of the neoconservatives kicked off in 2003.

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the end of bretton woods 2

brad setser via yves smith:

In retrospect, Bretton Woods 2 depended on two things: ongoing flows from the emerging world’s governments to the US Treasury and Agency market, and the ongoing ability of the US financial system (broadly defined to include the dollar-based “shadow” financial system operating in London and other offshore centers) to transform these flows into loans to ever-more indebted US households. US investors** effectively sold their holdings of Treasuries and Agencies to the world’s central banks, and then redeployed their funds into private-label mortgage-backed securities. Between the end of 2003 and q2 2007 (three and a half years), the stock of mortgages held by private issuers of asset-backed securities rose from about $1 trillion to around $3 trillion. That demand meant that credit was available to any household that wanted it – even those without much ability to pay if the housing market ever turned.

Or, to put it more succinctly, Bretton Woods 2, as it evolved, hinged both on the willingness of foreign central banks to take the currency risk associated with lending to the US at low rates in dollars despite the United States large current account deficit AND the willingness of private financial intermediaries to take the credit risk associated with lending at low rates to highly-indebted US households.

The second leg of the chain collapsed before the first. And it collapse looks set to deliver a nasty shock to everyone – including the countries that supply the US with vendor financing. ...

I hope that the process of adjustment now underway isn’t as sharp as I fear. ... But right now it looks like there is a real risk that the adjustment won’t be gradual. And it certainly looks like the flow of Chinese (and Gulf) savings to US households over the past few years has produced one of the largest misallocations of global capital in recent history.

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and just for fun, let's toss in an emerging markets currency crisis as well, hey?

jesus wept. i read brad setser's account earlier and hoped for better. color me disabused.

Public sector surpluses in many [emerging markets] have masked the fact that the private sector there has (a) acquired long term (unsaleable) USD assets with S-T USD funds which it cannot now readily access and (b) that far too many of the firms and individuals whoe were so effortlessly earning those dollars via exports have geared up further to take advantage of what looked like the one-way bet of a falling greenback borrowable at negative real interest rates…

Now this has all fallen apart, we now have a severe squeeze developing in parts of Asia, most of Latam, and all across E Europe and the FSU…

We seem to be adding a slow burning 1997-01 EM crisis on top of our Western woes… and, so far, there has been no concerted CB move to provide these people with the dollars they need, unlike in the developed nations….

Given that many are also reliant on commodity earnings this can’t help either, for this adds to their overreliance on bankrupt Western consumers and on widespread capital expansion in a booming world for their higher order goods sectors…

pick your poison -- any one of a dozen countries are vying to become the next iceland. this way lies global depression.

UPDATE: more from setser -- what a disaster.

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Tuesday, October 21, 2008


continuing credit watch

following on yesterday -- another reduction in LIBOR is being taken as a good sign that money markets are at least starting to function again.

the financial times, however, notes that all is not well.

Last week, Jeffrey Rosenberg at Bank of America wrote that he thought lower-rated corporate bonds and equity markets were in for a rough few weeks ahead. We wrote that the most recent round of “stabilisation” measures aimed at the world’s banks and credit markets were in that light, merely passing the buck.

Throughout the crisis, credit markets have led equity. And it’s for that reason that the latest round of equity rallies look like a short-term uptick in an otherwise downward moving market.

Falling Libor and resurgent money market funds do not a credit crisis undo. In the credit market at large, fear is increasing, not abating.

... Mish reports that current prices imply a 5.6 per cent default rate. All the major indications are that defaults will increase beyond that. Historically speaking, we’re still nowhere near an expected peak [which could be in excess of 10%].

And indeed, the panic about a surge in defaults is being born out right now on the usually prescient CDS market. The iTraxx Crossover index of junk-linked CDS is at an all time wide, and the LevX index of swaps on leveraged loans is collapsing.

The global outlook is not good. Economists are predicting a severe global recession. In a Deutsche Bank note on Monday, Joel Crane wrote of the economic outlook:

…we now expect a major recession for the world economy over the year ahead, with growth in the industrial countries falling to its lowest level since the Great Depression and global growth falling to 1.2%, its lowest level since the severe downturn of the early 1980s. We also see a steep drop in global inflation to 3.1% next year thanks to a collapse of energy prices and rising unemployment.

Quite something to wake up to. As for a recovery - a bottom - the Deutsche analysts don’t see stabilisation occuring until 2010. A recovery won’t occur until further beyond that: “unlikely in the foreseeable future”.

... We’d again stress the point: this is a credit crisis, and equity is the first loss tranche.

accrued interest analyzes the strange spreads noted here yesterday in agencies and comes to a similar conclusion as hayman advisors did -- there's just no money for these instruments as deleveraging proceeds, and unlevered capital which could buy it is going the extra mile for treasury safety.

There are specific reasons why each of these sectors has widened. But the real question is, what is going to drive the trading levels on these sectors toward economic reality? Or maybe a better question is, if its an arbitrage, what's stopping the market from taking advantage of the arbitrage?

The answer is leverage, or a lack of it.

... We know that Fannie Mae has been put into conservatorship by the Treasury, so that spread should be close to zero. So let's say a hedge fund predicts the spread will drop to 0.3%. That would imply a price return of about 4%. But hedge funds can't charge 2 and 20 to make 4% for clients. That 4% return either has to happen quickly or they need to leverage it.

Its going to be a while before we find a happy median between the excessive leverage of the past and the unavailable leverage of the present. Until that happens, yield spreads are going to remain very wide on a variety of fixed-income sectors. Meanwhile, investors in beaten up sectors are going to have to be patient.

UPDATE: more from john jansen on corporates:

Repair and rehabilitation may be occurring elsewhere in the credit markets, but it does not seem to have spilled into the corporate bond market.

even if liquidity concerns are subsiding -- as they have from time to time in this now-15-month-old crisis -- economic concerns are clearly moving to the fore.

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check out this doozy (dated 3/16/08!):

(excerpt): According to LEAP/E2020, by the end of 2008, a formidable debacle will affect pension funds all over the world, endangering the entire system of capital-based pensions. This financial calamity will bear a particularly dramatic human dimension because it will come at the precise moment when the first wave of baby-boomers phase out of the labour force in the US, EU and Japan: pension fund revenues are collapsing at the very moment when they should be making their first large series of payments to pensioners.

did we not give enough credit to the financial engineering wizards? or rather, score one for the ptb and the ppt? how about calling the ppt the "plunge certainty team"?



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gm, link i gave earlier was bad. sorry.

try this one?

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they called it, dc. spot on.

let's absolutely pray for all our sakes that their call in the first link you attached is wrong, wrong, wrong.

Indeed our researchers anticipate that, before next summer 2009, the US government will default and be prevented to pay back its creditors (holders of US Treasury Bonds, of Fanny May and Freddy Mac shares, etc.). Of course such a bankruptcy will provoke some very negative outcome for all USD-denominated asset holders. According to our team, the period that will then begin should be conducive to the setting up of a « new Dollar » to remedy the problem of default and of induced massive capital drain from the US.

people think things are bad now. but they've no conception of what a dollar crisis would look like. indeed, maybe no one does.

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glad you checked out the first link too, gm.

this was my first awareness of the "geab" website - via moon of alabama (recommended by yves at nc).

per the comments at - (which led me to "geab' links today):

"you can print all the money you want and not create inflation as long as prices are steady and falling".

we know there are some brilliant minds at work. can it be this is "the plan"? can they be this good? or lucky?

can the u.s. really emerge at the top of this heap - albeit battered and bruised with a massive global financial body count?

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volcker and obama

as party-first republican factions go off the deep end in their commentary, warning of some shade of global disaster if sarah palin isn't -- not is, but isn't -- made vice-president, observant republicans whose doors are still attached to their hinges should pay attention to the large role that former federal reserve chairman paul volcker is playing in the obama campaign. in the (very republican) journal via barry ritholtz:

... [G]oing into the campaign's final weeks, aides say Sen. Obama is increasingly relying on Mr. Volcker. His staff now routinely reviews policy proposals and speeches with Mr. Volcker. Conference calls and face-to-face meetings of the Obama economic team are often reorganized to accommodate his schedule. When the team discusses the financial crisis, "The most important question to Obama: What does Paul Volcker think?" says Jason Furman, the campaign's economic-policy director."

i can think of few american economic minds i would rather have in the driver's seat than saint paul. in sharp contrast to economic idiots like vice president cheney (who unfortunately represents in his ignorance much of the supposedly-economically-literate republican establishment), he understands america's vulnerability to foreign financing. he understands that america must get consumption back into line with production, however painful. if the fed is to be imbued with greater power to oversee and regulate financial markets, volcker is the person who should be at the forefront of restructuring it. if we are going to be nationalizing most of the money center banks, volcker should be advising on how it will be done.

if thoughtful conservatives needed yet another excellent reason to abandon the ridiculous and reckless republican ticket (indeed party, as the whole mechanism is now best suited for the forced reform of the political wilderness) this season, this is it. propaganda histrionics from degenerate rags like the national review notwithstanding, a prominent role for volcker opens the possibility that the obama administration will run a more constructive and intelligent economic and fiscal policy than any since the 1950s -- which is admittedly not a high hurdle, but is desperately needed in light of the disaster which has been fomenting in presidency after presidency since the election of ronald reagan, if not well before.

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hot damn. another beauty, gm. the first positive hope i've felt in a while.

hard times call for hard measures. volcker's got the right cojones where so many others fail.

if you haven't seen it - check this piece out (via yves at NC):

holy krap - and thanks.

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Reagan? Too late: the rot started with LBJ's extravagance and Nixon's decision to accommmodate it.

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that's a fair assertion, dm -- debt really started out on its path of deviance and, ultimately, destructiveness in the late 1960s. it wasn't until reagan that policies went in place to encourage private indebtedness, foster financialization, reduce limits on capital and increase taxes on labor -- serving to skew income distribution in this country far to the top of the pyramid and fuel the fire of debt accumulation.

both parties are culpable -- this certainly isn't about political blame. but it's this skew of wealth that must be undone for the good of the stability of our society. if we address it, private indebtedness will i suspect come off of its own accord.

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Taxes on labo(u)r strike me as daft: in the US couldn't you shift the tax burden fron labo(u) r to gasoline? Preferably 30 years ago.

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now for the real losses: banking sector nationalization grows closer

barry ritholtz relays a short media piece by chris whalen of the institutional risk analyst (whose related latest missive is here).

the upshot: look for citi, bank of america and jpmorgan chase to be nationalized outright at some point over the next two years, as real loan defaults eat through everything they've already set aside as loan loss reserve and more. the TARP, as whalen sees it, is a down payment on the kind of government assistance that is going to be required to help these banks absorb the losses they are already exposed to -- never mind new credit growth, which will be essentially nonexistent.

of further concern, whalen's characterization of jpmorgan as "an OTC derivatives exchange with a bank attached to it" is utterly correct -- while citi is the riskiest of the large banks by traditional metrics, JPM carries scads of a different kind of non-banking risk.

as for smaller regional banks -- many of which are reporting deeply disappointing earnings this week -- they are more likely now that ever to end up in FDIC receivership with the money center banks as well as GS and MS swooping on their deposit bases in resolution.

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