Tuesday, August 4, 2009

August 4 2009: Drown out the alarms


Harris & Ewing Elk 1916
Elks parade in Baltimore. The message on the paddle fans: "Bromo-Seltzer"


Ilargi: It might be funny to let ‘er rip into Niall Ferguson and wonder what that dude is smoking and drinking. Saying, as he does on Bill Maher's program , that the Fed has saved the country from a depression is nothing but an assumption, since there are no precedents to call on. Whether or not you agree that the Fed went wrong in the 1930's is irrelevant to the issue, since there is no conclusive evidence that the crisis is over. How a professor can still make such completely unfounded calls in apparent full faith and conviction is beyond me. Aren't professors supposed to look at the evidence?

At the other side of the coin lies Max Keiser's view of the future, a Dr. Strangelove derived landscape where:
People will start taking themselves public on new Citizen Exchanges created by Obama; commit public sex acts to boost their stock price then short themselves before committing suicide to cash in out-of-the-money puts they bought on themselves. As a result, the porn industry will need a bailout. Babies will abort themselves to avoid declaring bankruptcy on charges racked up on in vitro credit cards force-sold to them by Visa through their Verizon owned umbilical cords.

Facebook and Twitter will go public and will each have market caps bigger than Google causing the NASDAQ to shoot to all time new highs. Users will tweet and blog for insider stock. Perez Hilton will become a billionaire. The more you look in the mirror the more you get paid. Narcissism will get monetized by the Feds with some help by Nassim Taleb.

Or Tim Geithner brutally cursing two distinguished middle-aged ladies under the table because they won't give in to his ADHD driven demands that they do as he wants and give up their agencies' powers to the Fed. SEC's Mary Shapiro and FDIC's Sheila Bair perhaps find that behavior normal by now, having done a few years of Paulson.

But, funny as this all is, I'll address a few bits and pieces from England instead. First, this from the Guardian:
Britain's total assets fall for the first time since the early 90s
The total value of assets in Britain fell last year for the first time since the recession of the early 90s to £7 trillion, official data revealed today. The Office for National Statistics, releasing its annual tally of what Britain is worth, said the new figure is a drop of 2% compared to 2007 but is still well above the £4.2 trillion total value seen at the turn of the millennium. The total value of residential houses and flats tumbled by nearly £400 billion, or 9%, to £3.9 trillion. It still remains by far the most valuable single asset class, accounting for 56% of the country's net worth.

Commercial buildings shed £100 billion of value to be worth a total of around £600 billion. The value of all the country's vehicles, including planes and ships, fell by around £25bn to £160bn, presumably as a result of a collapse in new car sales which pushes down the average car or truck valuation. The figures also include a figure of £22bn for the value of the country's mobile phone spectrum, auctioned off a decade ago by the government.

I find this fascinating. In 2000, the total value of all assets was £4.2 trillion (about $7 trillion). Today, it presumably stands at £7 trillion, after a 9% drop in 2008. Residential real estate makes up the majority of the assets, at 56%, and it can also safely be assumed to be resonsible for the biggest part of the rise in value of, let's say, £3.5 trillion trough to peak. Let also say that in 2000 houses and flats were 50% of £4.2 trillion, or £2.1 trillion. The value at the peak was some £3.9 trillion, of which nearly £400 billion, or 9%, was lost since. So peak to trough prices doubled. And lost 9%.

And that's where I'm going to guess that prices will return to the levels of 2000, which would mean that another £1.8 trillion will be shaved off, for an accumulated loss of 50% from the peak. And once we're there, the economic impact of that -first- downfall will be so severe that prices will keep falling for quite a while. The overall picture of the British economy has little positive to offer, and it won't get any better any time soon. How soon, you ask? Well, the National Housing Federation, the UK equivalent of the NAR, and undoubtedly equally impartial, has published its impartial forecasts, and even they, the people who depend on good housing news, have little of it to offer for now:

UK housing market to return to growth by 2014
House prices could rise by 20 per cent from 2012 to 2014 as a shortage of properties being built puts pressure on the market, according to forecasts published today. The National Housing Federation (NHF) said that prices will fall by 12.2 per cent in total this year and 4.6 per cent next year before stabilising in 2011, with a 1.1 per cent rise. It then expects a three-year boom, with a 7.5 per cent rise in 2012, 8.4 per cent in 2013 and 6.8 per cent in 2014, with the average price rising by £38,000, from £189,900 to £227,800 at the end of the period.

However, the Federation added that even these rises will not be enough to pull homeowners who bought with high loan-to-value mortgages at the peak of the market in 2007 out of negative equity. Prices have already fallen by about 25 per cent from peak to trough. The prediction of another sharp upturn in the market comes amid fears that not enough new homes are being built to meet growing demand for property.

Only 60 per cent of the amount of homes required are currently completed each year, according to the research conducted for the NHF by Oxford Economics, the independent economists. The NHF predicts that five million people could be on the social housing waiting list by next year. The number on the waiting list grew by 40 per cent to 1.77 million between 2003 and 2008. It said that a lack of lending by banks is preventing first-time buyers and other low-income households from taking advantage from steep falls in house prices to get on the ladder.

David Orr, chief executive of the NHF, said: "Our new research shows that while house prices are falling in the short term, they will inevitably increase in the long term because of a fundamental under-supply of housing. If we are to avoid run-away house prices in the future when the economy picks up, ministers must ensure we build the right numbers of homes for social rent now, so that housing supply meets demand."


I don't know about you, but I think that to get those growth numbers you’d first need to lose 90% of the "value", which will put every single Brit so deep in debt that it'll all be downhill from there.

In fact, I'd say you have far better odds that Sarah Palin will be president of the US by 2014.

Which brings me to a Michael Lewis quote:
We are at a point right now where we should be radically reforming the financial system, and no Wall Street person with an actual interest should have a great deal of influence on that reform. Instead, the Obama administration is sort of half-heartedly reforming things, with little radical change -- and Wall Street people are instrumental in designing the new rules. I think they think nobody's going to say anything to them about it, but I think it's politically risky. There's a real chance that there's going to be an uprising about this, and they're going to have trouble controlling the process.

Combine that with Sarah Palin for President, and you have one scary picture.

Joe Bageant has something to add to that picture:
Speaking of motives, there are those who worry about an American authoritarian police state one day rounding folks up, shuffling them off to geographically remote camps, such as the Department of Homeland Security's scattered FEMA Camps. But physical geography isn't the only geography. There is geography of the mind too, where another kind of hellish internment may be conducted.

One without razor wire or sirens but surely as confining and in its own way, as soul chilling as any concentration camp. One with plenty to eat and filled with distractions and diversions enough to drown out the alarms and sirens that go off inside free men at the scent of tyranny. If a round up of Americans is real, then it began years ago. And as far as I can tell, everyone went peacefully, each one alone, like children, whose greatest concern on that day when the gates were closed, was the absence of Ranch flavored Pringles.







US Tax Revenues Post Biggest Drop Since Depression
The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab. The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever. The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression. "Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation. "This just adds to the problem."

While much of Washington is focused on how to pay for new programs such as overhauling health care – at a cost of $1 trillion over the next decade – existing programs are feeling the pinch, too. Social Security is in danger of running out of money earlier than the government projected just a few month ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining. The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.

For this report, the AP analyzed annual tax receipts dating back to the inception of the federal income tax in 1913. Tax receipts for the 2009 budget year were available through June. They were compared to the same period last year. The budget year runs from October to September, meaning there will be three more months of receipts this year. Is there a way out of the financial mess? A key factor is the economy's health. The future of current programs – not to mention the new ones Obama is proposing – will depend largely on how fast the economy recovers from the recession, said William Gale, co-director of the Tax Policy Center.

"The numbers for 2009 are striking, head-snapping. But what really matters is what happens next," said Gale, who previously taught economics at UCLA and was an adviser to President George H. W. Bush's Council of Economic Advisers. "If it's just one year, then it's a remarkable thing, but it's totally manageable. If the economy doesn't recover soon, it doesn't matter what your social, economic and political agenda is. There's not going to be any revenue to pay for it."

A small part of the drop in tax receipts can be attributed to new tax credits for individuals and corporations enacted in February as part of the $787 billion economic stimulus package. The sheer magnitude of the tax decline, however, points to the deep recession that is reducing incomes, wiping out corporate profits and straining government programs. Social Security tax receipts are down less than a percentage point from last year, but in May the government had been projecting a slight increase. At the time, the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.

Some experts think the sour economy has made those numbers outdated. "You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania. The government's projections included best- and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.



The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.
"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out." The recession's toll on Social Security makes it even more urgent for Congress to address the fund's long-term solvency, said Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee. "Over the past year, millions of older Americans have watched their retirement savings crumble, making the guaranteed income of Social Security more important than ever," Kohl said.

President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies. Medicare tax receipts are also down less than a percentage point for the year, pretty close to government projections. Medicare started paying out more money than it received last year.

Meanwhile, the recession is taking a toll on fuel and industry excise taxes that pay for highway, mass transit and airport projects. Fuel taxes that support road construction and mass transit projects are on pace to fall for the second straight year. Receipts from taxes on jet fuel and airline tickets are also dropping, meaning Congress will have to borrow more money to fund airport projects and the Federal Aviation Administration.

Last week, Congress voted to spend $7 billion to replenish the highway fund, which would otherwise run out of money in August. Congress spent $8 billion to replenish the fund last year. Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees fuel taxes, is working on a package to make the fund more self-sufficient. The U.S. Chamber of Commerce, which doesn't back many tax increases, supports increasing the federal gasoline tax, currently 18.4 cents per gallon. Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep going back to the general fund."




GDP Follies
by Bill King

The GDP report last Friday evinces the folly of US government economic statistics and Wall Street consensus analysis. Most of the Street heralded the 1% decline in Q2 GDP because it was 0.5 better than consensus – even though the US government admitted in the release that its GDP estimates over the past several years were consistently wrong! So why should the latest report be any more accurate?!?! We feel compelled to address the scheme of ‘past month lower revisions producing better than expected m/m or q/q results’ even though the aggregate metric is worse than expected. We have incessantly noted and commented on this scam but most of the trading & investing universe elides it.

We will again utilize basic math to illustrate the scam. If Q4 08 GDP was 100 units, and Q1 09 was reported at -5.5% and Q2 09 GDP was expected to be -1.5%, the expectation was for GDP of 100 units minus 5.5% or 94.5 units, minus 1.5% or 93.08 units. With the revision of Q1 09 GDP to -6.4% the Q1 GDP units become 100 minus 6.4% or 93.6 units. So Q2 is minus 1% or 92.664. Ergo aggregate GDP was worse than expected!!!! As we warned, lower imports, a sign of economic weakness, contributed a net 1.4% to GDP. Once again beancounters ‘fooled’ with inflation to produce higher GDP than warranted.

John Williams: The relatively narrower quarterly contraction in the second quarter reflected the impact of greater weakness being thrown back into the first quarter, in revision, and the use of artificially reduced inflation. The implicit price deflator for the second quarter was 0.2% versus a revised 1.9% (was 2.8%) in the first quarter. Last week we complained that despite records in fiscal stimulus, Fed largesse, nationalization and rigging of markets the best that can be said is the pace of economic decline is slowing. Despite a 10.9% surge in federal government spending and virtually no inflation adjustment all that beancounters could fabricate (June data is still incomplete) is a 1% ‘official’ decline in GDP.

David Rosenberg echoes our observation: Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms?…In the absence of the fiscal largesse, it is quite conceivable that consumer spending would have shrunk at a 10% annual rate last quarter!"

And, it is not just labour income that is still in deflation mode. Practically all forms of income are deflating from a year ago — interest income is down 4.5%, dividend income is down 23.0% and proprietary income is down 8.0%. The only income that is really going up is the income from Uncle Sam, which is up more than 10.0% and we have reached a point where a record of nearly one-fifth of personal income is being accounted for by paychecks out of Washington… Even with decades of understated inflation and overstated of GDP, the current economic contraction is the worse since the Great Depression.

The GDP report also shatters the notion that the stock market is omniscient and demonstrates that Wall Street analysis could not discern the worst economic and financial collapse since the Great Recession.
While the US was in recession since at least Q4 2007, most of the Street did not forecast recession. Stocks, most notably the DJTA, missed the worst economic downturn since the Great Depression. As we keep averring, record funny money, lax regulation and smiley-faced fascism has transformed the stock market from a gauge of economic activity into a generator of economic activity.




Dr. Blankfein or: How I Learned to Stop Worrying & Love Goldman Sachs
by Max Keiser

The Financial Crisis was a Hoax. The global casino is open again. No worries! You actually believed there was a problem when Paulson and Bernanke threatened Congress last year with Martial Law; to blast the U.S. economy back to the 16th century; to crash the market unless ransom was paid requiring each American to fork over $100,000, give or take, in impossible-to-payback future loans today to add to the hundreds of thousands of dollars each American already owes forever?

HAHAHA. It’s all good, bro. Goldman Sachs and the other cruel sisters of syphilitic lending are reporting huge profits and bonuses. Analysts are begging Wall St. to raise their debt ratios and risk profiles to increase leverage to thousands of times equity back to where it was before their competition BearSteans and Lehman Brothers were murdered. The bubble machine is whipping up cash like cotton candy machines at the end of an endless pier stretched over an ocean of easy credit, pay check loans and Cash for Clunkers.

All efforts to remove the investment banking tapeworm from our collective colon have failed, but that’s a good thing. We poked the monster at 85 Broad St. and made it angrier and greedier in ways never thought possible and daddy’s feeling fine. Ain’t no audit going on at the Fed, bud. I’m so happy I could just plotz. You’re gonna LOVE what happens next. Insatiable greed meets infinite moral hazard when Goldman eats the Fed.

We’re on the cusp of another financial eclipse. The Shadow of Wall St.’s banking pyramid is covering the U.S. dollar in a blanket of Chinese sell orders. Embrace the moment. While Wall St. has been off-loading last year’s crooked schemes: CDOs, High Frequency Trading, and Ponzi profits engineered by pilot-less computers firing a million trades a second into the heart of capitalism. A whole new generation is waiting in the wings to get cold-called from Wall St. and sold a few thousand shares of today’s hot IPO:
(Reuters) - PennyMac Mortgage Investment Trust (PMT.N), which buys distressed home loans and is run by several former Countrywide Financial Corp executives, on Wednesday raised $320 million from an initial public offering, $80 million less than planned. The Calabasas, California-based company sold 16 million shares at $20 each. It had on July 16 projected an offering of 20 million shares at $20 each.

The company had also said it hoped to raise $400 million from the offering. The company plans to operate as a real estate investment trust. Its shares are expected to begin trading on Thursday on the New York Stock Exchange under the symbol "PMT." Bank of America Merrill Lynch, Credit Suisse and Deutsche Bank Securities Inc arranged the IPO.

Your neighbor will be ‘making a killing’ as re-re-re-repackaged sub-sub-sub-prime debts bought from the government - who bought them from Goldman - who bought them from the government before skyrocketing from $20 to $2,000 while you relax aboard the Virgin Galactic to outer space. The CCX (Chicago Climate Exchange) owned in part by the same double dealing banks that have been rigging the game in New York, Beijing, Tokyo, Moscow and all points in between invites you to play in the carbon futures market.

In the UK, DTQs (Domestic Tradable Quotas) give homeless people a swipe card that will top up with credits as a result of having relatively minuscule carbon ‘footprints.’ Greed and good will finally be trading side-by-side 24/7 and anyone looking to hedge their wickedness can go long altruism for pennies on the dollar.

Political futures will become much bigger as state economies fail and gambling becomes legalized. Sites like InTrade that offer ways for punters to make political bets will bloom. Some bet that Obama would be President when his chances were less than 5% did and made a bundle. The McCain camp tried to manipulate that market. Remember? But you knew that. That’s why you shorted McCain at the top!

Hollywood futures will be much bigger. Look for studios to sabotage each other’s projects by short selling and ‘naked’ short selling competing projects on the Cantor Exchange to drive the perception of a film’s popularity down before it’s released. No problem, just spend more on marketing. More money will be made trading box office futures than at the box office. Inside information will become legal. Milton Friedman will rise from the dead and advise the Honduran government. Brat Pitt will star.

High Frequency Trading (HFT) aka ‘flash trading’ will continue to grow exponentially. Trading will become so fast, time itself will have a public offering after Microsoft secures a patent on it and trading time futures will catapult traders backwards and forwards through time until they need bailouts on debts they have not yet incurred. Tim Geithner will sell his house in Larchmont.

Cloning time traders will get Congressional approval confusing the boundary between time and money further causing Warren Buffet to pass a kidney stone that looks exactly like Larry Ellison. Time Bandits will steal the DNA of time trading clones and sell the proprietary code to a Japanese housewife who will use it to crash the Icelandic Krona (again) because she thinks she’s over paying for a plate of sushi in Reykjavik.

People will start taking themselves public on new Citizen Exchanges created by Obama; commit public sex acts to boost their stock price then short themselves before committing suicide to cash in out-of-the-money puts they bought on themselves. As a result, the porn industry will need a bailout. Babies will abort themselves to avoid declaring bankruptcy on charges racked up on in vitro credit cards force-sold to them by Visa through their Verizon owned umbilical cords.

Facebook and Twitter will go public and will each have market caps bigger than Google causing the NASDAQ to shoot to all time new highs. Users will tweet and blog for insider stock. Perez Hilton will become a billionaire. The more you look in the mirror the more you get paid. Narcissism will get monetized by the Feds with some help by Nassim Taleb. Thanks Lloyd Blankfein, current CEO of Goldman Sachs and future President of the United States. We are eternally in your debt.




States, Cities Spend for Stimulus Cash
Strapped local and state governments are still spending on at least one activity: seeking stimulus money. Towns, cities, counties and states across the country spent a total of $21.4 million on lobbyists between April and June, up 2.7% from the first quarter of the year and in line with spending levels through 2008, according to data provided by the nonpartisan Center for Responsive Politics. Almost 1,000 different governments reported paying representatives to pursue their agenda.

About a quarter reported lobbying specifically about the stimulus package. The National League of Cities has said its members face their worst fiscal problems since 1985. State revenue dropped more sharply in the first quarter of this year than any time since 1952, according to the Rockefeller Institute of Government in Albany, N.Y. The collapse in tax receipts makes the stimulus package's $300 billion for state and local government spending all the more important.

The municipal governments paid for lobbyists despite White House attempts to curb those lobbyists' activities. Registered lobbyists are allowed to submit only in writing their questions to administration staff about competitively awarded stimulus money. Until recently, mayors, governors and other local government officials weren't subject to this rule. But the White House has changed the ban by broadening it to registered lobbyists and nonlobbyists alike. Most localities with lobbyists keep them on retainer, usually paying from $10,000 and $30,000 a quarter to Washington lobbying firms that have multiple local-government clients. Some places had more than one firm working for them, including Miami-Dade County in Florida, which paid five firms a total of about $200,000 in the second quarter.

Joe Rasco, the county's director of intergovernmental affairs, said Miami-Dade was debating whether to continue with its current lobbying expenditures. Some county politicians argue that it was an unjustifiable expense in the face of a $427 million budget shortfall, which could result in 1,700 county employees losing their jobs, Mr. Rasco said. "Other people are saying that with the type of money coming out of Washington with the stimulus, how can you afford not to keep your lobbying corps at full strength?"

Pennsylvania paid a total of $180,000 for work carried out by three firms. A spokesman for Gov. Ed Rendell, a Democrat, said the state previously had a permanent lobbying office in Washington but closed it when the governor took office because hiring contract lobbyists was cheaper. A few local governments have hired lobbyists for the first time this year. One is Pelham, Ala., a city of about 21,000 south of Birmingham. Pelham hired Bradley Arant Boult Cummings at the beginning of 2009. The firm, which has three federally registered lobbyists and 24 other clients, is getting $10,000 a quarter for its work for Pelham, according to disclosure filings.

Longtime Pelham Councilwoman Karyl Rice said the lobbyists haven't yet justified their cost to the city. "We are our own best lobbyists," she said. "I just think it is not good fiscal policy to spend thousands of dollars on lobbying." Besides, she added, "President Obama said up front, 'You might as well not send lobbyists for this money,' and I took him at his word." Pelham Mayor Don Murphy supported the hiring of the lobbyists, Ms. Rice said. Mr. Murphy didn't respond to requests for comment.

George Harris, one of the two Bradley Arant Boult Cummings lobbyists representing Pelham, said the slow pace of stimulus spending has been frustrating for some clients. But he said the firm is "a good investment" for smaller communities, which often don't know how to navigate funding processes. "We tell people all the time this is certainly something you can do on your own, just as you could represent yourself on your own in court," Mr. Harris said.




GM May Need More U.S. Job Cuts as Buyouts Fall Short
General Motors Co. may have to cut more U.S. hourly jobs after an offer of buyouts and early retirements fell about 7,500 workers short of the reorganized automaker’s target. The possibility of layoffs was disclosed today by Sherrie Childers Arb, a spokeswoman, in an interview after GM announced that more than 6,000 United Auto Workers members, or 11 percent of the hourly workforce, left the company on Aug. 1.

GM’s latest voluntary exits pushed the total of U.S. hourly workers leaving through buyouts and retirement offers to about 66,000 since 2006. The biggest domestic automaker is shrinking its workforce to match reductions including the shutdown of 14 U.S. plants and 3 warehouses by the end of 2011. "It’s not surprising they didn’t reach their goal," said Dennis Virag, president of Automotive Consulting Group Inc. in Ann Arbor, Michigan. With U.S. unemployment at 9.5 percent in June, "workers are more reluctant to accept a buyout because the prospects for other employment are more challenging."

GM aims to eliminate 13,500 hourly positions in 2009, trimming that payroll to about 40,500 jobs, said Tom Wilkinson, a spokesman. Detroit-based GM began the year with about 61,000 U.S. hourly jobs and cut that total to about 54,000 at the end of April with buyouts and early retirements. Any layoffs probably wouldn’t total 7,500, Childers Arb said. Some employees are likely to leave on their own or retire rather than relocate once GM shuffles work among its facilities, dropping jobs in some locations while keeping others, she said. GM hasn’t said where the job cuts will take place.

Hourly workers who took the buyout and retirement offers are receiving cash payments of $20,000 to $115,000 as well as $25,000 vehicle vouchers. Chief Executive Officer Fritz Henderson is also paring the U.S. salaried workforce and chopping its eight domestic brands in half. GM left a government-backed bankruptcy on July 10 as a new company whose largest shareholder is the U.S. Treasury. Losses at predecessor General Motors Corp. totaled $88 billion since the company last posted an annual profit in 2004.




Wall Street reaps outsized profits from trades with Fed
Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say. The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price. The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.

"You can make big money trading with the government," said an executive at one leading investment management firm. "The government is a huge buyer and seller and Wall Street has all the pricing power." A former official of the US Treasury and the Fed said the situation had reached the point that "everyone games them. Their transparency hurts them. Everyone picks their pocket." The central bank’s approach to securities purchases was defended by William Dudley, president of the New York Fed, which is responsible for market operations. "We believe that opting for transparency is a greater good," he said. "If we didn’t have transparency, we’d be criticised on other grounds."

However, another official familiar with the matter said the central bank "has heard that dealers load up on securities to sell to the Fed. There is concern, but policy goals override other considerations." Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system. "You can’t rescue the credit system without benefiting some of the people in it." Still, Mr Frank said Congress would be watching. "We don’t want the Fed to drive the hardest possible bargain, but we don’t want them to get ripped off."

The growing Fed activity has coincided with a general widening of market spreads – the difference between bid and offer prices – as the number of market participants declines. Wider spreads enable banks, in their capacity as market-makers, to make more profit. Larry Fink, chief executive of money manager BlackRock, has described Wall Street’s trading profits as "luxurious", reflecting the banks’ ability to take advantage of diminished competition.

"Bid-offer spreads have remained unusually wide, notwithstanding the normalisation of financial markets," said Mohamed El-Erian, chief executive of fund manager Pimco in Newport Beach, California. Spreads narrowed dramatically during the years of the credit bubble. Brad Hintz, an analyst at AllianceBernstein, said he doubted that spreads would ever return to those levels, a development that could be pleasing to the Fed. "They want to help Wall Street make money," he said.




Q and A with Michael Lewis (Part 2): There's a Real Chance There's Going to Be an Uprising
I recently interviewed Liar's Poker author Michael Lewis. After talking about his new book, Home Game: An Accidental Guide to Fatherhood, we discussed the financial meltdown and the bailout. This is Part 2 of some excerpts. You can hear the full podcast at terrencemcnally.net.

In Part 1, we talked about how the rules of the game were "totally screwed up" - for individual traders, firms, and ratings agencies. In Part 2, we look at some implications for American society at large.

TM: In 1970 only about 5% of men graduating from Harvard went into finance. By 1990, 15%, and by the class of 2007, 20% of the men and 10% of the women planned to go into investment banking.

ML: And half of the other ones applied, they just didn't get jobs. This is a radical misallocation of human talent. You can say it's faith in the free markets, but it's caused by the huge growth of a culture of financial manipulation.

TM: For years people have been saying that the U.S. was shifting from a manufacturing to a service economy. I suspect people thought of services as fast food, IT, health care, maybe lawyers. I don't think many really saw the huge role played by the financial sector.

ML: That's right. And let me draw an analogy. With the sub-prime mortgage racket generating lots of fees, the people within each big Wall Street firm who create that business acquire enormous power. So when the business gets decreasingly sane, when the loans get shakier and shakier, and the leverage gets bigger and bigger, they're the ones who say we've got to keep doing this. Even though people not directly implicated in the business might have said, "No, it's time to stop."

TM: So there were people within the firms who were sane and conservative ...

ML: There were, and they got driven out.


The plot thickens. Lewis sees the same dynamic at play among our country's leadership.

ML: I want to draw an analogy between what happens inside Merrill Lynch and what happens inside the United States. Here we have our little company, the United States of America. For thirty years the people who have had the most money to throw around were engaged in financial manipulation. Now they have outsized influence over the way the company is run.

TM: The company being the United States, the U.S. government...

ML: We are at a point right now where we should be radically reforming the financial system, and no Wall Street person with an actual interest should have a great deal of influence on that reform. Instead, the Obama administration is sort of half-heartedly reforming things, with little radical change -- and Wall Street people are instrumental in designing the new rules.

I think they think nobody's going to say anything to them about it, but I think it's politically risky. There's a real chance that there's going to be an uprising about this, and they're going to have trouble controlling the process.

TM: Do you mean they'll face trouble when what they pass doesn't work?

ML: Right. It won't work, and the mess they've created is going to have slow-burning economic consequences. We're going to be living in a very soft economy for a long time, and it's going to create disillusionment and anger. I expect there's going to be a crashing down of Wall Street's influence. It's just amazing it hasn't happened yet. And it hasn't happened yet because for thirty years their influence has become part of the air we breathe.

TM: It doesn't look like it's due simply to financial contributions to political candidates -- although there's certainly plenty of that -- but it's more that the best and the brightest...

ML: -- want to go work on Wall Street. That's the out.

If you're in Washington right now and you're engaged in public policy around Wall Street, if you're a regulator at the SEC, or you're at the Federal Reserve or the U.S. Treasury, and you're thinking what do I do next -- after I stop doing my poorly paying public service job -- there is an out. You get paid millions of dollars a year to go work at Goldman Sachs.

I don't think people engaged in trying to fix the problem are necessarily conscious of this, of how corrupt it all is. It's just in the air they breathe.

The existing institutional structure rewards those who are making the decisions, so they don't want to change it. In fact, they can't imagine a different institutional structure. They can't imagine a completely tamed financial sector that actually exists to serve the productive economy.

TM: They never ask, "How do we save the folks?" They never get past, "How do we save the banks?"

ML: The premise of the bailouts wasn't even really "How do we save the banks?" There are lots of banks, not all of them were involved in sub-prime mortgages. If you were going to start giving money to banks, you'd think you'd give it to the ones who didn't do dumb things. But instead the money goes to bankers who did do dumb things, because they're the ones who are about to go out of business.

What's even more interesting, the starting point for dealing with this problem - for both the Bush and Obama administrations -- was to say, one, we can't nationalize these banks, and two, the creditors of these banks can't take any sort of haircut, they can't take any losses.

TM: -- for making these terrible investments.

ML: So it leaves you, as a matter of public policy, with only one solution: to give money to the banks until they "earn their way out of it". Congress wrote a check for 700 billion dollars six or seven months ago. Then they lost the appetite for giving money to the banks, so now the banks are being gifted money, kind of sneakily, in the form of zero interest rate loans from the Federal Reserve. They can reinvest it in government securities, continue to run their high leverage, and keep the spread.

You take a step back and say, "What kind of society is this, where you have socialism for careless bankers and capitalism for everybody else?" Capitalism for everybody but the capitalists. That's not sustainable.

I think people generally don't completely understand what's going on, but it's a political issue.

TM: People say to themselves, "This is too complex for me..."

ML: -- and "They must know what they're doing."

But the fact is, they haven't known what they were doing, so there's no reason to suspect they know what they're doing now.

They're trying, I guess, but with a double standard that in these places alone, profits are privatized, and losses are socialized. That's a disaster. That they have not taken a more punitive approach to Wall Street amazes me, but I think the Obama administration is going to be forced to.

TM: When?

ML: Couple of years out.

It's hard to guess what's happening, but Obama probably looked at the problem and said, "If I do what actually needs to be done right now, it would consume the first two years of my administration. I could get one thing done -- radical reform of the financial industry, but I wouldn't get healthcare, climate change, anything else. So I'm going to put a band-aid on that problem, and do the other things I want to do. Then we'll come back to it.

TM: You're giving him the benefit of the doubt.

ML: Maybe. I think he deserves the benefit of a lot of doubt. He's earned it with me. That's the only thing I can think.

TM: You do see a day of reckoning...?

ML: Yes I do.

TM: And the question is, "Will society get really ugly before that happens?"

ML: Yes, that's the problem.

If you accept that what caused the financial crisis was totally screwed up rules of the road, totally screwed up incentives...then you claim you're reforming things, but you don't change those rules, you're just going to get the same problem all over again. I think that's the issue. Eventually we're going to have to change the rules of the game.




Geithner Vents as Overhaul Stumbles
Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration's faltering plan to overhaul U.S. financial regulation, according to people familiar with the meeting. The proposed regulatory revamp is one of President Barack Obama's top domestic priorities. But since it was unveiled in June, the plan has been criticized by the financial-services industry, as well as by financial regulators wary of encroachment on their turf.

Mr. Geithner told the regulators Friday that "enough is enough," said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said. Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair. Friday's roughly hourlong meeting was described as unusual, not only because of Mr. Geithner's repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.

Mr. Geithner, without singling out officials, raised concerns about regulators who questioned the wisdom of giving the Federal Reserve more power to oversee the financial system. Ms. Schapiro and Ms. Bair, among others, have argued that more authority should be shared among a council of regulators. "You are talking about tremendous regulatory power being invested in whatever this entity is going to be," Ms. Bair told the Senate Banking Committee last month. "And I think, in terms of checks and balances, it's also helpful to have multiple views being expressed and coming to a consensus."

 Officials from the Federal Reserve and the Office of the Comptroller of the Currency, meanwhile, have questioned the creation of a new federal agency to oversee consumer regulations, a move that would take away powers from both institutions. The government's proposal would empower the government to take over and break up large financial companies, merge two bank regulators, and toughen oversight of mortgages, among other things. Administration officials say they aren't worried about the overhaul's prospects, adding that there is consensus on key aspects, including the regulating of over-the-counter derivatives. Treasury officials say they expected a big debate over the complex legislation. The first piece, which addresses executive pay, passed the House Friday.

"The industry is already back to their pre-meltdown bonuses," said White House Chief of Staff Rahm Emanuel. "We need to make sure we don't slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform." Neal Wolin, Treasury's deputy secretary, said Mr. Geithner told regulators "they have the prerogative to express their views, but he wanted to make sure that, since everyone had agreed on the importance of achieving reform this year, everyone stayed focused on that goal."

Government officials said Mr. Geithner had expected regulators to object to parts of the plan that threatened their power or authority, but Treasury officials appeared caught off guard at how much the criticism resonated with lawmakers. Mr. Geithner wanted to tell the attendees they shouldn't let turf battles get in the way of fixing a system that is clearly broken, Mr. Wolin said. He declined to comment on Mr. Geithner's tone and language. In addition to Mr. Bernanke, Ms. Bair and Ms. Schapiro, other attendees at Friday's meeting were: Fed Governor Daniel Tarullo, Comptroller of the Currency John Dugan, Commodity Futures Trading Commission Chairman Gary Gensler and Office of Thrift Supervision Acting Director John Bowman. Spokespeople for all regulatory agencies represented at the meeting declined to comment.

At a House hearing last month, Mr. Geithner said it was "perfectly reasonable and understandable" that different federal agencies would balk at giving up powers. "Frankly, all arguments need to be viewed through that basic prism," he told the House Financial Services Committee. The administration's proposal would give the Fed broad discretion to supervise any major U.S. financial company and would also create a "financial services oversight council" to coordinate policy and help resolve disputes among regulators.

How power would be balanced between the Fed and this entity has emerged as a flash point, one that administration officials debated. Ultimately, officials felt the regulatory structure needed a single point of accountability, arguing that one weakness in the government's response to the financial crisis last year was clarity over which entities were in charge. The administration has pushed for Congress to complete the overhaul by the end of the year. House Financial Services Committee Chairman Barney Frank (D., Mass.) and Senate Banking Committee Chairman Christopher Dodd (D., Conn.) have both said that remains the goal. Both men, however, have suggested the overhaul could change from Treasury's proposal.

Sen. Dodd favors giving extra powers to an oversight council rather than the Fed. Mr. Frank said Monday lawmakers were still working on a way to "make sure you have a sufficient broad base of participation and input" and "to make sure you have effective authority." He said the flap several months ago over the Federal Reserve's role in allowing American International Group Inc. to pay large bonuses to employees "damaged the Federal Reserve politically." The top Republicans on these committees, Sen. Richard Shelby (R., Ala.) and Rep. Spencer Bachus (R., Ala.), have also expressed skepticism over ceding too much power to the Fed. "A rush to judgment where they basically throw these things together without any consensus is going to be a disaster," Rep. Bachus said.




Nassim Taleb Rips Summers, Geithner, Bernanke
One of earliest and most outspoken experts who warned of disaster before the nation plunged into an economic crisis called out the president Monday for turning to advisers who either missed, fundamentally misunderstood, or contributed to the financial industry meltdown. Nassim Taleb, author of the book "The Black Swan," took some highly personalized swipes at what he deemed "the triplets" -- Barack Obama's chief economic adviser, Larry Summers, Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernake -- during an appearance on MSNBC's "Morning Meeting with Dylan Ratigan."

"Let's look at them," said Taleb. "They don't seem to understand risk. They have their models and were blinded by their models. The first person not to understand risk is Larry Summers ... [L]ook at Harvard's finances, all right? He is going to do to us what he did to Harvard?" "Second one, look at Geithner," he added. "In the rare instance in which you have to look at someone's behavior, the gentleman's house, he couldn't understand the risk of the real estate market? That the house could drop in value? Look at him. He is stuck with his house. Look at the numbers. You can see a lot of jokes on the way with someone with these mortgages."

"The third person is Bernanke," Taleb said. "We're giving more power to the Fed, who got us here?" Ouch. For the record, Harvard's endowment dropped more than 20 percent last summer after risky investments -- ignored by Summers -- turned up lame. Geithner, meanwhile, had difficulty selling his New York home after moving to D.C. because of a lousy housing market. He was ultimately forced to rent his house at a rate that was short of the monthly mortgage payments on his two loans.

The episode was part of a larger discussion on systemic risk. Taleb, a scholar in the epistemology of chance who became a critic of the financial derivatives industry during his time on Wall Street, used the forum to outline the need for regulatory reform that would ensure that future errors or misdeeds don't bring down the entire financial system. "What got us here is the pseudo-expert," he said. "So I want an economy where economists can be as incompetent as they want, and we are still adaptable."

And while Summers, Geithner and Bernanke received the brunt of Taleb's criticism, President Obama himself was not left untouched. "When I saw Obama I had high hopes, all right? Although I'm not a Democrat by any standard, I'm close to libertarian, but I had high hopes when I saw Obama," he said. "He did very well... in the international scene. But here I'm so disappointed."




Fixing Wall Street? The Feds Blew It
by Roger Ehrenberg

Today's press is constantly filled with bluster about "new" regulatory regimes, Executive Pay Czars and other gripping topics stemming from 20/20 hindsight and populist zeal. Sadly, they all miss the point. Wall Street's weakest link, it's super-leveraged capital structure and reliance on overnight funding, was laid bare in the depths of the financial crisis last fall. If not for the wide-open purse strings of the US Government, institutions ranging from Citigroup to Goldman Sachs would have gone down. No doubt.

This was the moment in history when smart minds could have gotten together and projected - really projected - what a better, safer, smarter Wall Street might look like, a Wall Street that wouldn't have collapsed like a house of cards so completely in the face of the mortgage crisis and credit derivatives melt-down. Rather than mindlessly shoveling liquidity in the system to prop up a broken model and failed institutions, a concerted effort could have been made to call time-out, not with respect to the markets but with respect to the institutions whose functioning had just been shown to be dangerously fragile. Needless to say, this is not how it was handled and we are suffering the aftermath today.

What we have is a return to business-as-usual. Except it's worse than that. The US taxpayer has been systematically looted out of hundreds of billions of dollars, yet the press is focused on Andy Hall and his $100 million payday. Whether this is
too much pay for Mr. Hall misses the big picture. Yes, the Wall Street pay model is messed up, and I recently provided an alternative approach. But how about the fact that Goldman Sachs is posting record earnings and will invariably be preparing to pay record bonuses, not nine months after the firm was in mortal danger? Whether anyone will admit it or not, without the AIG (read: Wall Street and European bank) bail-out and the FDIC issuance guarantees, neither Goldman nor any other bulge bracket firm lacking stable base of core deposits would be alive and breathing today.

Goldman is a great firm with a stellar culture, and in most circumstances it's risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities. And while it had a massive cushion of collateral, it would likely have been inadequate if the Treasury and the Fed hadn't come to its rescue. In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm. While JP Morgan Chase CEO Jamie Dimon prefers to poke a stick in the eye of the Treasury, seeking to negotiate down the payment to buy back the TARP warrants, Lloyd Blankfein smartly paid the full $1.1 billion requested. He looked like a hero for doing so, a true US patriot repaying the US Government in full for its lifeline, thanking the US taxpayer in the process. $1.1 billion... $1.1 billion...Hmm...something doesn't seem right. You know why it doesn't seem right? BECAUSE THE US TREASURY MIS-PRICED THE FREAKING OPTION.

There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman's equity could have done a digital, dis-continuous move towards zero if it couldn't finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren't discriminating back in November 2008. If you didn't have term credit, you certainly weren't getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let's just say that it is a tad north of $1.1 billion in premium.

And the $10 billion TARP figure? It's a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won't let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down. I thought the best way was to impose Good Bank/Bad Bank restructurings on troubled institutions, making plain the value of the assets, hiving off the most troubled and letting the healthy institutions live on and thrive with a healthier capital structure and significant US taxpayer ownership that would eventually be re-offered to the marketplace. An alternative would have been a more accurate and representative pricing of the option inherent in the bail-out given to Wall Street firms. But the US Government elected to pursue neither approach.

Where we are left today, dear taxpayer, is a lot poorer. Unless you are a major shareholder and/or bonusable employee of Goldman Sachs. Brains, ingenuity and value creation should be rewarded in all fields, Wall Street included. But when value created is the direct result of the risks borne by others for your benefit, the sharing of benefits needs to be re-allocated. This has not and apparently will not be done, and we, dear taxpayer, are the worse for it. Further, such a crisis could have provided the opportunity and the impetus for a re-look at capital markets risks, getting CDS users to support a central credit derivatives exchange and revised capital rules to incentivize better gap management.

The banks lobby like hell against these changes, because it cuts into their fees, notwithstanding the systemic benefits such changes could have on the global financial markets. Banks now lobbying with US taxpayer dollars against changes that could protect the US taxpayer from more harm in the future. Something is terribly wrong with this picture, yet all anyone wants to talk about are executives getting paid too much. It's called missing the forest for the trees, and it is a fixture of both those trying to sell newspapers (get clicks) and run our Government, and it pisses me off.




How debt could turn into a runaway ghoul
Scare stories about British public debt are not new. Contemporaries fretted about the unsustainability of the national debt in the 18th century, long before the era of credit rating agencies and sovereign debt downgrades. Yet somehow bondholders have been paid interest, and government debt has been redeemed and renewed, without interruption since the Stop of the Exchequer in 1672. The last two periods of intense anxiety about Britain’s public debt were in the mid-1970s (which culminated in a visit from the International Monetary Fund in late 1976) and the early 1990s (met by large tax increases in 1993 and 1994, and several years of expenditure restraint). They saw budget deficits in the 7-11 per cent band of gross domestic product, with the precise number depending partly on the definition adopted.

The deficits were bad enough, but they were markedly lower than the 12 per cent of GDP expected for public sector net borrowing in 2009-10. From April to June this year, public sector net borrowing was £41.2bn ($67.8bn, €48.2bn), exceeding in just three months the total in any full year before 2008-09. As at present, analysts worried in both the mid-1970s and the early 1990s about a potential slide into insolvency. A large deficit would add to debt in year one, which would increase debt interest, which would increase expenditure and expand the budget deficit in year two, which would cause faster growth in the debt and debt interest, and so on. In some analyses interest payments became a Frankenstein’s monster, taking on a life of their own and overwhelming attempts at debt control.

A framework for thinking about debt sustainability emerged. The budget deficit was split into two elements, debt interest and the so-called "primary balance" (the excess of non-interest expenditure over tax receipts). A simple algebraic argument showed that – if the primary balance were nil – debt would grow faster than GDP when the real interest rate was higher than the trend rate of output growth. Alternatively, if the real interest rate were equal to the trend growth rate, a continuing primary deficit would also cause debt to grow faster than GDP. (Of course, a nation both running a primary deficit and paying a high real interest rate on its debt would see its public finances deteriorating with particular rapidity.)

How do the UK’s public finances fare at present, relative to these concepts and the past? The National Institute of Economic and Social Research has estimated that the cost of servicing the national debt will be £25.6bn in the current fiscal year, about 2 per cent of GDP. By implication, the primary deficit is roughly 9-10 per cent of GDP, which far exceeds the previous highest figure (of under 6 per cent in 1993) in the postwar period. Even apart from this, the medium-term fiscal position is in one respect much worse than in the early 1990s. Two types of public expenditure, on health and pensions, are heavily influenced by demographics.

In the early 1990s the baby-boomer cohorts of the population were of working age and would remain so until roughly 65 years from 1947 (the year in which the birth rate peaked), that is, until 2012. From 2012 onwards the baby boomers become elderly, and will put upward pressure on health and pension expenditure, as well as ceasing to contribute significantly to tax revenues.

In another respect the government today is in a fortunate position. In the early 1990s, investors were so suspicious of promises by politicians, even Conservative politicians, to keep the public finances in good shape that they demanded a high real interest rate of about 5 per cent on gilt-edged securities. By contrast, the current real yield on index-linked gilts is 1-1.5 per cent, while the nominal yield on conventional medium-dated gilts is about 4 per cent, which is only 2 per cent above the official inflation target. The Labour government has been lucky, in that its ability to issue gilts on a low real yield has eased the task of maintaining financial stability.

Can doomsters tell a horror story about Britain’s public finances over the next few years? Suppose that investors in gilt-edged securities were to insist on real yields similar to those during the last period of Conservative rule. The danger of runaway debt interest costs – of an uncontrollable public debt Frankenstein’s monster – would then increase sharply. Since companies and individuals are already leaving the UK because of an excessive tax burden, the scope for tax increases is limited. The combination of a primary deficit of almost 10 per cent of GDP, adverse demographic trends and the potential for real interest rates to reach 5 per cent or more therefore justifies the widespread concern about the UK’s long-run fiscal solvency.

The next government will have a prolonged struggle to reduce public expenditure relative to national income. If there is any good news here, it is that David Cameron seems well-prepared. The Tory leader has already warned that he expects his government to be deeply unpopular after its first year in office.




Goldman Sachs’ reputation tarnished
Goldman Sachs’ reputation among both the general public and financially sophisticated Americans has been damaged by the events of the past year, according to research conducted for the Financial Times. In a survey of 17,000 Americans, Brand Asset Consulting found that Goldman’s stature – as measured by several gauges of brand strength – had suffered in 2008 and 2009.

"Goldman Sachs still has that Gordon Gekko look to it among the general public," said Anne Rivers, who oversaw the survey, referring to the villain of the 1987 film Wall Street. Goldman’s long-time rival, Morgan Stanley, also suffered a decline in stature in the survey. But respondents liked and respected Morgan Stanley more than Goldman, a reversal of respondents’ sentiment in 2006.

Yet among those familiar with the two businesses, Goldman still led Morgan Stanley in a category known as "energised differentiation", a measure that translates into pricing power, Ms Rivers said .In other categories, including relevance and esteem, Goldman lagged or was tied with Morgan Stanley. Brand Asset Consulting , owned by WPP, the marketing services group, surveys a group of 17,000 people about major brands at least four times a year. Its surveys have a statistical accuracy of 95 per cent, according to the group.

In recent months, Goldman has faced an unprecedented spate of negative publicity as a variety of lawmakers, corporate governance experts and magazines have accused the bank of causing last year’s financial crisis, vilified its plans to pay bonuses on a par with those handed out in the frothy days of 2006 and 2007, and claimed Goldman was relying on its alumni network in Washington to insulate it from the consequences of the failure of AIG, the insurance group.

The onslaught of criticism began slowly following the collapse of Lehman Brothers and the rescue of AIG last September, built gradually over the intervening months as the US plunged into the worst recession in decades, and reached a crescendo in recent weeks after Goldman paid back its taxpayer rescue funds and posted record profits, thus positioning the firm to ladle out bonuses as though last year’s financial crisis had never occurred.

In Rolling Stone last month, Goldman was described as a "great vampire squid wrapped around the face of humanity". The headline on the cover of New York magazine last week asked: "Is Goldman Sachs evil? Or just too good?" The subsequent article argued in favour of the former, with a tip of the cap to the latter. The bank has been approached by a gaggle of crisis public relations firms promoting ways for Goldman to improve its image.

Eric Dezenhall, a crisis communications expert, thinks Goldman should steer clear of such approaches. "A lot of these image campaigns don’t do anything to convince the public that company is a cuddly koala bear", he says. However, some marketing professionals say the storm will pass. "All of this giant squid language they can pretty much brush off," said William Barker of Brand Finance. "My guess is that their customers are probably very happy with them." In July, Goldman reported record quarterly profits of $3.44bn on revenues of $13.8bn.




Ilargi: $27.6 billion in 2008 losses, $3.6 billion in bonuses, and a $33 million fine, without admitting any of the allegations. Justice has been done.

Bank of America settles Merrill bonus case with SEC for $33 million
Bank of America Corp has agreed to pay $33 million to settle charges by the U.S. Securities and Exchange Commission that it made false and misleading statements to investors about bonuses when it took over Merrill Lynch & Co. The country's largest bank and the regulator announced the settlement on Monday amid continuing investigations into billions of dollars paid to executives at Wall Street firms in 2008 even as they made huge losses in the financial crisis.

The bank neither admitted nor denied the allegations, which were made in a lawsuit filed in Manhattan federal court on Monday. The settlement was announced almost immediately, but the SEC said its investigation was continuing. Marshall Front, chairman of Front Barnett Associates investment counseling firm in Chicago, said the settlement did not change the fundamental outlook for the bank but was a concern for its chairman, Kenneth Lewis.

"This is not something that I would worry about as an investor," Front said. "Ken Lewis should worry about it, but not an investor." The bank said on Monday that it has hired Citigroup Inc veteran Sallie Krawcheck to head its wealth management operations, making her a potential candidate to succeed Lewis . Lewis has run the bank since 2001. He was stripped of his role as the bank's chairman in April.

Bonuses paid at Merrill and other banks became a hot-button issue last year with a public outcry and several probes, including one by New York Attorney General Andrew Cuomo. His office said last week that $33 billion was paid in bonuses at nine banks, including Merrill, that were among the first recipients of U.S. taxpayer money to help them survive.

The SEC lawsuit said Bank of America told investors in proxy documents about the $50 billion Merrill takeover that Merrill had agreed it would not pay year-end performance bonuses or incentive compensation before the Jan. 1, 2009, deal closed. "In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008," the SEC said.

Merrill paid $3.6 billion in bonuses for 2008 despite losing $27.6 billion that year. "As Merrill was on the brink of bankruptcy and posting record losses, Bank of America agreed to allow Merrill to pay its executives billions of dollars in bonuses," David Rosenfeld, associate director of the SEC's New York Regional Office, said in a statement. "Shareholders were not told about this agreement at the time they voted on the merger." Bank of America said the settlement "represents a constructive conclusion to this issue."

Cuomo, New York state's top legal officer, said on Monday that "we want to be clear that our investigation of these and other matters will continue." Members of the U.S. Congress have expressed outrage over the Bush administration's involvement in the deal between Bank of America and Merrill. Some have accused Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson of coercing Lewis to go ahead with acquiring Merrill despite the investment bank's deteriorating finances.

Edolphus Towns, chairman of the U.S. House of Representatives Oversight and Government Reform Committee, said committee hearings and investigations had uncovered "very troubling facts that we will continue to explore.".




Bank of America Sets Succession Plan for Lewis, Hires Krawcheck
Bank of America Corp. shuffled senior management and hired former Citigroup Inc. executive Sallie Krawcheck to run wealth management as the lender prepares for the eventual departure of Chief Executive Officer Kenneth Lewis. Brian Moynihan was put in charge of consumer banking, with Tom Montag replacing him in global corporate and investment banking, according to a statement today from the Charlotte, North Carolina-based lender. Liam McGee, who ran consumer banking, is leaving to pursue the goal of running a company, the statement said.

The changes "position a number of senior executives to compete to succeed me at the appropriate time," Lewis said in the statement. Lewis, 62, has said he expects to remain CEO until the bank is earning $30 billion annually, showing investors a payoff from the acquisitions of Countrywide Financial Corp. and Merrill Lynch & Co. Lewis drew criticism for pushing the Merrill purchase without telling shareholders about the brokerage’s spiraling losses.

The bank said today it paid $33 million to settle a regulatory complaint that it misled investors about bonus payments at New York-based Merrill. Moynihan, 49, takes on a role covering deposit accounts, small business and credit cards in a division that traditionally has provided most of Bank of America’s revenue and profit. Montag, 52, joined Merrill in August 2008 after a career at Goldman Sachs Group Inc. Moynihan came to Bank of America through the acquisition of FleetBoston Financial corp.

Krawcheck, 44, stepped down in September as head of Smith Barney. She joined Citigroup from Sanford C. Bernstein & Co. in October 2002 as head of the Smith Barney brokerage and stock- analysis department. She was chief financial officer from November 2004 through early 2007, when she returned to overseeing the bank’s wealth management-businesses, including Smith Barney. "Ken made these changes, obviously working with the board," bank spokesman Robert Stickler said. "He is very much in the saddle."




Bill Maher feels disconnected from the Fed (but Niall Ferguson doesn't)




Ilargi: Not exactly new, the video is a few months old, but still worth your attention, if only for its humor content. It’s like a 5 minute laugh track for a sitcom, certainly after Niall Ferguson's vigorous Bernanke promo at Bill Maher's right above.

Ben Bernanke Economic Forecasts Proven to be Incredibly, Uncannily Wrong
We now have the diametrical opposite of the famous "Peter Schiff Was Right" video (a compilation of 2006 and 2007 clips in which Schiff, a financial expert who subscribes to Austrian economics, predicted the deep recession that would follow the bursting of the housing bubble).

The new, opposite video is a compilation of the 2005–2007 prognostications of Federal Reserve Chairman Ben Bernanke. In it, Bernanke is shown to have been just as embarrassingly wrong as Schiff was uncannily right.

Could their differences in economic understanding have anything to do with this remarkable dichotomy? I have transcribed most of the video, and offer my own comments interspersed with it.



July 2005

INTERVIEWER: Ben, there's been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.


This is not only wrong in hindsight; it's a complete misunderstanding of the issue. Bernanke said that the housing boom was fine because it was supported by, among other things, growth in jobs, incomes, and in the economy in general. But that very growth itself was supported by the housing boom! For example, most of the job growth was in the housing sector. Witness Bernanke's amazing levitating economy: its housing sector is held up by economic growth, which is held up by its housing sector. And it's just as ridiculous that he denied the existence of a housing bubble by pointing to low mortgage rates. The low rates were a chief cause of the housing bubble, and were a direct result of his actions as Federal Reserve chairman.

July 2005

INTERVIEWER: Tell me, what is the worst-case scenario? Sir, we have so many economists coming on our air and saying, "Oh, this is a bubble, and it's going to burst, and this is going to be a real issue for the economy." Some say it could even cause a recession at some point. What is the worst-case scenario, if in fact we were to see prices come down substantially across the country?

BERNANKE: Well, I guess I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don't think it's going to drive the economy too far from its full employment path, though.


As Peter Schiff pointed out in his speech "Why the Meltdown Should Have Surprised No One," while it is true that up until the housing crash, house prices hadn't gone down on a nationwide basis, it's also true that they had never risen so precipitously before either. Bernanke's argument is akin to getting someone drunk for the first time, putting them in a car, and then saying, "He'll be fine; he's never been in a car accident before."

That interview continued:

INTERVIEWER: So would you agree with Alan Greenspan's comments recently that we've got some areas of that country that are seeing froth, not necessarily a national situation, but certainly froth in some areas?

BERNANKE: You can see some types of speculation: investors turning over condos quickly. Those sorts of things you see in some local areas. I'm hopeful — I'm confident, in fact, that the bank regulators will pay close attention to the kinds of loans that are being made, and make sure that underwriting is done right. But I do think this is mostly a localized problem, and not something that's going to affect the national economy.


Bernanke's Fed itself created the false signals that led to vast disruptions in the housing market. Speculators try to see through those disruptions and anticipate how prices will change as valuation mistakes are corrected in order to profit from them. In fact, their speculation is part of the correction process. If their speculation is on the mark, it speeds up the price-correction process. If it's wrong, then the consequences are on their heads. Speculation is nothing but high-uncertainty entrepreneurship; and entrepreneurship is how optimal prices are found and markets clear. It was the Fed under Bernanke himself, and his predecessor Alan Greenspan, that created the price disruption and high uncertainty that made speculation profitable in the first place.

November 2006

BERNANKE: This scenario envisions that consumer spending, supported by rising incomes and the recent decline in energy prices, will continue to grow near its trend rate and that the drag on the economy from the [inaudible] housing sector will gradually diminish. The motor vehicles sector may already be showing signs of strengthening. After having cut production significantly in recent months, in response to the rise in inventory of unsold vehicles, automakers appear to have boosted the assembly rate a bit in November, and they have scheduled further increases for December. The effects of the housing correction on real economic activity are likely to persist into next year, as I've already noted. But the rate of decline in home construction should slow as the inventory of unsold new homes is gradually worked down.


Here we have the Keynesian fallacy (which I have written about here) that consumer spending, in and of itself, creates general increases in wealth. And note the irony in Bernanke applauding the boost in automotive production: the products accumulated during that boost turned out just to be more malinvestment to be liquidated or bailed out when Chrysler and GM collapsed.

February 2007

BERNANKE: We expect moderate growth going forward. We believe that if the housing sector begins to stabilize, and if some of the inventory corrections still going on in manufacturing begin to be completed, that there's a reasonable possibility that we'll see some strengthening in the economy sometime during the middle of the new year.

Our assessment is that there's not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy. And the lending side of that still seems to be healthy.


For Bernanke, healthy lending is the same thing as "a lot of lending." This dovetails with his statement in the first interview, hailing low mortgage rates as a self-evidently good thing. He has no conception of an equilibrium interest rate determined by society's average time preference, so bubbles will always surprise him. For more on this calamitous gap in Bernanke's understanding, see "Manipulating the Interest Rate: a Recipe for Disaster" by Thorsten Polleit.

July 2007

BERNANKE: The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards, and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment, as well as by mortgage rates that, despite the recent increase, remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further, as builders work down the stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth in coming quarters, although the magnitude of the drag on growth should diminish over time. The global economy continues to be strong, supported by solid economic growth abroad. U.S. exports should expand further in coming quarters. Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend.


Strengthening in 2008? Perhaps the biggest confirmation ever of Rockwell's Law: always believe the opposite of what government officials tell you.

Bernanke's own words, in light of how the crisis developed, are a testament to much more than his own personal failings as a forecaster and policy maker. They demonstrate the complete inadequacy of mainstream macroeconomics in its present state, devoid as it is of the essential insights of the Austrian School. They also reveal the folly of the very idea of giving a single man and his institution the power to centrally plan the most important price in the economy: the rate of interest. Make no mistake: the present economic crisis was brought on by central planning. It is unsettling to think that the fellow in the new video who so badly misread an economy on the brink is arguably the most powerful central planner in the world.

But even the most powerful and sequestered bureaucrat is not completely invulnerable. The Federal Reserve Transparency Act and the End the Fed movement have ruffled the Fed's feathers enough that Bernanke actually felt the need to address the public in a "townhall forum" to be broadcast on the News Hour. According to NPR,

after the forum was over, a Fed employee passed out souvenirs, an unintended metaphor perhaps for what some fear Bernanke's aggressive policies may eventually do to the currency: shredded cash.


The Fed employee, who apparently suffers from a defective sense of irony, was even recorded saying, "Here, you want money?" and, "Here's some free shred folks, thanks for coming by, we appreciate it,"

No, no, thank you and your boss, Mr. Fed employee. Within the space of days, we've been provided, courtesy of the Fed itself, with footage that perfectly distills the complete failure of Fed forecasting and planning, and audio that encapsulates splendidly the only thing that the Fed actually accomplishes: the destruction of money.





Mortgage Modifications: Obama Administration Tries To Shame Industry
The Obama administration wants to shame the mortgage industry into doing a better job of helping borrowers avoid losing their homes to foreclosure. By publishing the names of companies that are lagging behind in the government's plan to ease the housing crisis, officials are counting on public outrage to get the industry on track. The Treasury Department on Tuesday plans to report on the progress of loan servicers – companies that collect mortgage payments – that are in line for up to $50 billion in subsidies.

"We want to go faster," said Michael Barr, the Treasury Department's assistant secretary for financial institutions. "There are a bunch of servicers that are lacking in performance. They have to lift their game." When the plan was launched in March, the government said it hoped to help up to 4 million financially distressed homeowners modify their mortgages to lower their payments. As of last week, just 200,000 homeowners were on track to get a modification, and the government has extracted a verbal promise to reach 500,000 borrowers by Nov. 1.

Meanwhile, foreclosures are continuing to rise. RealtyTrac Inc. says 1.5 million American households received at least one foreclosure-related notice in the first six months of this year. "We're losing houses rather than making modifications," said Bruce Dorpalen, director of housing counseling at Acorn Housing Corp., a nonprofit housing group based in Philadelphia. "The foreclosure train has not stopped." The 31 participating companies include such large players as Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. They have received billions in federal bailout money and are sensitive about their public image.

But there also are many independent companies involved. Most are secretive about their operations and may be less sensitive to bad publicity. For much of the industry, "there's no market value to having a good brand," said Julia Gordon, senior policy counsel at the Center for Responsible Lending, a consumer group. Housing advocates say the plan has been a big disappointment so far. They cite numerous cases in which companies haven't followed the program's rules. When borrowers are denied, they often don't get told why, leading to testy battles between mortgage companies, housing counselors and borrowers.

Violet McCurchin, 45, who owns a duplex in Brooklyn, N.Y.'s Canarsie neighborhood, wants to participate in the Obama plan. She says she's behind on her mortgage due to her tenant's missed rent and a lack of child support payments. Her mortgage company, Carrington Mortgage Services LLC, sent her a letter last month saying she did not qualify for the Obama program, but didn't provide any reason. The company offered to lower her monthly payment from about $3,400 to about $2,500, which she declined. According to her housing counselor, she should get a monthly payment of about $2,250 under the Obama plan. "If I don't qualify, provide me with a written explanation," McCurchin said.

A Carrington spokesman said the company's couldn't offer McCurchin the Obama plan because of restrictions in the contract that governs her loan. In response to complaints about such cases, the Treasury Department says Freddie Mac will be doing random audits to see if borrowers are being improperly denied. The lending industry is asking for patience, saying the industry needed time to get going. The administration rolled out the program's guidelines gradually this year. Much of the program was not finished until mid-May, and the guidelines were updated again in early July.

Plus, thousands of employees needed to be hired or retrained to deal with a flood of inquiries, many of which are from borrowers who aren't eligible or are calling just to ask questions. Sanjiv Das, chief executive of Citigroup's CitiMortgage unit, said his company has hired or retrained about 1,400 new workers – including an 800-person call-center in Tuscon, Ariz. – to work on loan modifications. "I absolutely believe that we as an industry can (achieve Obama's target) at a relatively quick pace," Das said.




Market for leveraged loans hits 12-month high
The prices of the most traded risky European and US loans have reached their highest levels for more than a year, in a further sign of improving conditions in credit markets. Over the past week, European leveraged loan prices reached 89.11 per cent of face value, a high not seen since July 10, 2008, according to Standard & Poor’s LCD and Markit. The same is true for riskier US loans, for which the average price bid rose above 90 per cent of face value for the first time since June 24, 2008.

Growing confidence in an economic recovery was further highlighted by a fall in a key barometer of financial stress, the spread between three-month dollar Libor – the rate banks charge each other to borrow – and three-month US Treasury bills. This so-called TED spread fell to its lowest level for two years on Monday – 29.3 basis points – having reached a high of 464bp last October. The loans rally has been fuelled by growing demand for credit this year. David Shaw, co-head of European leveraged finance at Barclays Capital, said the rise in secondary leveraged loan pricing would support the issue of new leveraged loans.

The rally in loan prices above a key threshold of 80-85 per cent of face value will also reduce pressure on collateralised loan obligations, complex funds that pool loans, which at the height of the credit boom accounted for 60 per cent of the demand for leveraged loans. As the price of their assets fall below 85 per cent, or more commonly 80 per cent, of face value, CLO managers have to mark-to-market those loans, which can lead to them breaching collateral tests and cutting off management fees.

Rating agencies have warned about the potential systemic risk posed by CLOs because many of them were exposed to the same borrowers. Moreover, the rising loan prices should reduce the risk of a growing number of zombie CLOs – funds where managers have reduced management operations owing to the lack of fees, which threatened to make restructuring corporate debt difficult. The recovery in prices has led to an "outstanding" year for loan funds, according to one loan investor.

Returns to European loan funds were up 22 per cent, and up 32 per cent for US loan funds during the first half of 2009, according to Standard & Poor’s. Loan funds in the US and Europe were down by about 30 per cent in 2008. Some analysts, however, remain concerned about pressure on the sector as defaults are expected to continue to rise this year and CLOs face continued downward pressure on credit ratings. "Loans were oversold but I am concerned that prices could now overshoot on the upside and there could be a correction," said Michael Hampden-Turner, credit strategist at Citi in London.




Ilargi: When stories such as this are still considered newsworthy in August 2009, even by my own readers, I must admit I despair a little.

Warning: Oil supplies are running out fast
The world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production, a leading energy economist has warned. Higher oil prices brought on by a rapid increase in demand and a stagnation, or even decline, in supply could blow any recovery off course, said Dr Fatih Birol, the chief economist at the respected International Energy Agency (IEA) in Paris, which is charged with the task of assessing future energy supplies by OECD countries.

In an interview with The Independent, Dr Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated. But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago.

On top of this, there is a problem of chronic under-investment by oil-producing countries, a feature that is set to result in an "oil crunch" within the next five years which will jeopardise any hope of a recovery from the present global economic recession, he said. In a stark warning to Britain and the other Western powers, Dr Birol said that the market power of the very few oil-producing countries that hold substantial reserves of oil – mostly in the Middle East – would increase rapidly as the oil crisis begins to grip after 2010.

"One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day," Dr Birol said. "The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously," he said. "The market power of the very few oil-producing countries, mainly in the Middle East, will increase very quickly. They already have about 40 per cent share of the oil market and this will increase much more strongly in the future," he said.

There is now a real risk of a crunch in the oil supply after next year when demand picks up because not enough is being done to build up new supplies of oil to compensate for the rapid decline in existing fields. The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong.

"If we see a tightness of the markets, people in the street will see it in terms of higher prices, much higher than we see now. It will have an impact on the economy, definitely, especially if we see this tightness in the markets in the next few years," Dr Birol said. "It will be especially important because the global economy will still be very fragile, very vulnerable. Many people think there will be a recovery in a few years' time but it will be a slow recovery and a fragile recovery and we will have the risk that the recovery will be strangled with higher oil prices," he told The Independent.

In its first-ever assessment of the world's major oil fields, the IEA concluded that the global energy system was at a crossroads and that consumption of oil was "patently unsustainable", with expected demand far outstripping supply. Oil production has already peaked in non-Opec countries and the era of cheap oil has come to an end, it warned. In most fields, oil production has now peaked, which means that other sources of supply have to be found to meet existing demand.

Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030, Dr Birol said. "It's a big challenge in terms of the geology, in terms of the investment and in terms of the geopolitics. So this is a big risk and it's mainly because of the rates of the declining oil fields," he said.

"Many governments now are more and more aware that at least the day of cheap and easy oil is over... [however] I'm not very optimistic about governments being aware of the difficulties we may face in the oil supply," he said. Environmentalists fear that as supplies of conventional oil run out, governments will be forced to exploit even dirtier alternatives, such as the massive reserves of tar sands in Alberta, Canada, which would be immensely damaging to the environment because of the amount of energy needed to recover a barrel of tar-sand oil compared to the energy needed to collect the same amount of crude oil.

"Just because oil is running out faster than we have collectively assumed, does not mean the pressure is off on climate change," said Jeremy Leggett, a former oil-industry consultant and now a green entrepreneur with Solar Century. "Shell and others want to turn to tar, and extract oil from coal. But these are very carbon-intensive processes, and will deepen the climate problem," Dr Leggett said. "What we need to do is accelerate the mobilisation of renewables, energy efficiency and alternative transport. "We have to do this for global warming reasons anyway, but the imminent energy crisis redoubles the imperative," he said.

Oil: An unclear future
*Why is oil so important as an energy source?

Crude oil has been critical for economic development and the smooth functioning of almost every aspect of society. Agriculture and food production is heavily dependent on oil for fuel and fertilisers. In the US, for instance, it takes the direct and indirect use of about six barrels of oil to raise one beef steer. It is the basis of most transport systems. Oil is also crucial to the drugs and chemicals industries and is a strategic asset for the military.

*How are oil reserves estimated?
The amount of oil recoverable is always going to be an assessment subject to the vagaries of economics – which determines the price of the oil and whether it is worth the costs of pumping it out –and technology, which determines how easy it is to discover and recover. Probable reserves have a better than 50 per cent chance of getting oil out. Possible reserves have less than 50 per cent chance.

*Why is there such disagreement over oil reserves?
All numbers tend to be informed estimates. Different experts make different assumptions so it is under- standable that they can come to different conclusions. Some countries see the size of their oilfields as a national security issue and do not want to provide accurate information. Another problem concerns how fast oil production is declining in fields that are past their peak production. The rate of decline can vary from field to field and this affects calculations on the size of the reserves. A further factor is the expected size of future demand for oil.

*What is "peak oil" and when will it be reached?
This is the point when the maximum rate at which oil is extracted reaches a peak because of technical and geological constraints, with global production going into decline from then on. The UK Government, along with many other governments, has believed that peak oil will not occur until well into the 21st Century, at least not until after 2030. The International Energy Agency believes peak oil will come perhaps by 2020. But it also believes that we are heading for an even earlier "oil crunch" because demand after 2010 is likely to exceed dwindling supplies.

*With global warming, why should we be worried about peak oil?
There are large reserves of non-conventional oil, such as the tar sands of Canada. But this oil is dirty and will produce vast amounts of carbon dioxide which will make a nonsense of any climate change agreement. Another problem concerns how fast oil production is declining in fields that are past their peak production. The rate of decline can vary from field to field and this affects calculations on the size of the reserves. If we are not adequately prepared for peak oil, global warming could become far worse than expected.




White House says Obama remains opposed to middle-class tax increases
Never mind the comments of high-level Obama administration officials over the weekend that tax increases for the middle class remain a possibility, another high-level administration official said today. "The president's clear commitment is not to raise taxes on those making less than $250,000 a year," Robert Gibbs, the chief White House spokesman, told reporters pressing for an explanation about apparent discrepancies in the White House's message.

Both Treasury Secretary Timothy F. Geithner and presidential economic advisor Lawrence Summers suggested in Sunday news show appearances that tax increases could not be ruled out for Americans earning less than the threshold that the president has set for any new taxes supporting his legislative initiatives. Today, however, Gibbs said, "I hope you'll take my reiteration of this clear commitment . . . in the clearest terms possible, that he is not raising taxes on those who make less than $250,000 a year."

Gibbs added: "The president has been clear on this. The most important thing we can do now is get our economy growing again." He also was asked whether other administration officials would be "on message" from now on. "Promising that everybody is going to be on message may be a bar that is too high for me to leap over," Gibbs said with a smile.




'Clunkers' Critics Question Move to Extend Funding for Program
The cash for clunkers exchange program has turned lawmakers into victims of their own success. Now some senators are questioning why taxpayers should continue to foot the bill for something that, according to supporters, has already achieved its goals.  The program, approved in June, pays people to trade in their gas-guzzling "clunkers" for new, fuel-efficient cars. It has helped boost auto dealers' sales numbers, and it's gotten a heap of inefficient vehicles off the road. 

But the program, which was set to expire on Nov. 1, has already spent pretty much all of the $1 billion the government set aside for it, leading Transportation Secretary Ray LaHood to say that the "wildly popular" program should be extended with additional funds. The House voted to give the program a $2 billion lifeline on Friday, and LaHood now is putting pressure on the Senate to approve the extension before it adjourns for August recess at the end of the week. He said Monday he expects it will pass.  A senior Democratic adviser told FOX News that Senate leaders hope to act on the extension later this week. 

But while the $1 billion was drained faster than expected, there was never a mandate in the original legislation that said the program had to last until November. "Program runs through Nov 1, 2009 or when the funds are exhausted, whichever comes first," reads the government Web site for the "clunkers" program.  The exhaustion of funds simply came before the expiration date. Republicans are suggesting it's too late to change the allocation now. 

"I just think this is a great example of the stupidity that's coming out of Washington right now," Sen. Jim DeMint, R-S.C., said on "FOX News Sunday," adding that the Senate needs to "slow this thing down." "We estimated this would cost $1 billion," DeMint said. "Now they're saying we need $2 billion more. Our children and grandchildren can't afford to make these car dealers well right now."  Sen. John McCain, R-Ariz., has threatened to block the bill.  Senate Minority Leader Mitch McConnell, in prepared remarks, said Monday that the lifeline request just shows how poor the original spending estimates were. 

Though supporters are talking about pulling the additional $2 billion from existing stimulus funds, that hasn't quelled Republican concerns.  McConnell spokesman Don Stewart said that cash is still "borrowed money."  "They can say it's paid for, but it's paid for with a credit card. ... It's like making your minimum payment through a cash advance of another credit card," he said.  However, because the "clunkers" program was originally authorized at $4 billion -- not $1 billion -- some supporters had wanted to review its funding this fall anyway to see if more money could be allocated. 

One House Democratic aide said representatives who backed the bill originally wanted to provide enough money for 1 million cars, or $4 billion.  The aide said that number was reduced to 250,000 cars, or $1 billion, so it could pass the Senate -- which was a much tougher sell than the House.  "Everybody expected we would be revisiting it," the aide said.  The aide said the program has been an "enormous success" and should be continued to help auto dealers come out of the recession, help stimulate the economy overall and help improve the environment.  "It's a triple play," the aide said. 

According to statistics from the Department of Transportation, most of the trade-ins through the program have been fuel-inefficient SUVs like Ford Explorers made in the 1990s.  They're being traded in most commonly for cars that are considerably more fuel efficient. They are a mix of American and foreign-made vehicles -- the top five cars that were bought were the Ford Focus, Honda Civic, Toyota Corolla, Toyota Prius and Ford Escape.  Under the plan, owners of gas-guzzlers can receive rebates of $3,500 or $4,500 toward the purchase of a new fuel-efficient car. LaHood said 62 percent of the traded-in vehicles were trucks, and "these people are buying cars that get much better gas mileage." 

The program helped lift Ford Motor Co. to its first monthly sales increase in two years, the company's top sales analyst said Sunday.  July sales results mark the first year-over-year gain for Ford since November 2007 and apparently the first uptick by any of the six biggest carmakers since last August, sales analyst George Pipas said. He declined to disclose a specific total before sales results are officially reported Monday.  "We were having a good month -- and Ford's been having some good months lately -- but the (clunkers) program really put us over the top for sure," Pipas said. 

The National Automobile Dealers Association said in a written statement that the program has been "very successful," and that it "aggressively supports" additional funding to sustain it.  But aside from GOP concerns, some Senate Democrats are raising questions too.  Sens. Dianne Feinstein, D-Calif., and Susan Collins, R-Maine, who along with Chuck Schumer, D-N.Y., worked on the earlier Senate bill, released a skeptical statement last week saying they want requirements for consumers to purchase more fuel efficient cars through the program. 

"We will not support any bill that does not meet these goals. We will insist than any extension of the program requires that the minimum fuel economy improvement for newly purchased vehicles be at least two miles per gallon higher than it is under the enacted Clunkers program. It is also important to include lower-income consumers who are disadvantaged under the current program," they wrote.  Not all dealers are on board either. Jim Anderer, a Mitsubishi dealer in New York, told FOX News the expense to taxpayers is unfair. "I don't think this is a function of government. ... And it does nothing to help the unemployment rate," he said. "Where does it end?" 




Feds raid Colonial Bank office in Florida
Federal agents working with the U.S. Treasury's Troubled Asset Relief Program (TARP) executed search warrants at two Florida banks on Monday and Colonial Bank said one of them was its office in Orlando. A spokeswoman for the Alabama-based bank told Reuters a warrant had been served at the bank's Orlando location but could not say what was the target of the warrants.

"The bank is cooperating," Colonial Senior Vice President Merrie Tolbert told Reuters by telephone. "Colonial continues to operate as usual. This search warrant has no impact on our day-to-day retail and commercial banking operations." A spokeswoman with the office of the Special Inspector General for the Troubled Asset Relief Program, which buys assets from troubled financial institutions to stabilize the banking industry, would only say that its agents executed two search warrants in Florida on Monday.

"Due to the nature of the ongoing investigation we cannot provide any further information," the agency said in a news release. FBI agents joined the search but declined to comment. Tolbert could not confirm local media reports that the second warrant was executed at a bank branch in the central Florida town of Ocala. Shares of parent company Colonial BancGroup Inc plunged 18 percent on Monday after it had said on Friday that a key $300 million investment from Taylor, Bean & Whitaker Mortgage Co had fallen through, raising doubts about its survival.

Colonial BancGroup, which last month was issued a cease-and-desist order by the regulators, said it was exploring strategic capital alternatives, including a sale or merger of the company. The shares have lost more than 90 percent of their value in the past year. Colonial BancGroup operates 355 branches in Florida, Alabama, Georgia, Nevada and Texas and has more than $25 billion in assets. Its failure would be the largest this year.




Roubini Says Commodity Prices May Rise in 2010
Commodity prices may extend their rally in 2010 as the global recession abates, said Nouriel Roubini, the New York University economist who predicted the financial crisis. "As the global economy goes toward growth as opposed to a recession, you are going to see further increases in commodity prices especially next year," Roubini said today at the Diggers and Dealers mining conference in Kalgoorlie, Western Australia. "There is now potentially light at the end of the tunnel."

Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, joins former Federal Reserve Chairman Alan Greenspan in seeing signs of recovery. Commodity prices gained the most in more than four months on July 30 as investors speculated that the worst of the global recession has passed and consumption of crops, metals and fuel will rebound.
"The things he was saying provide good indicators for our business," Martin McDermott, a manager for metals project development at SNC-Lavalin Group Inc., Canada’s biggest engineering and construction company, said at the conference. "The commodities that we’re involved with, being copper, nickel, gold, iron ore, all seem to have positive signs and we hope to take advantage of that."

Greenspan said yesterday the most severe recession in the U.S. in at least five decades may be ending and growth may resume at a rate faster than most economists foresee. Oil has jumped 56 percent in 2009 and copper has surged 86 percent. Roubini predicted on July 23 that the global economy will begin recovering near the end of 2009, before possibly dropping back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth.

Economic growth in China, the world’s biggest metals consumer, accelerated in the second quarter, gaining 7.9 percent from a year earlier. China, the biggest contributor to global growth, overtook Japan as the world’s second-largest stock market by value on July 16 after the nation’s 4 trillion yuan ($585 billion) stimulus package spurred record lending and boosted prices of shares and commodities.

China will meet its target of 8 percent growth in gross domestic product this year, Roubini said. Manufacturing in China climbed for a fifth month in July as stimulus spending and subsidies for consumer purchases countered a collapse in exports, and helped companies from chipmaker Semiconductor Manufacturing International Corp. to automaker General Motors Corp. as well as mining companies such as BHP Billiton Ltd. and Rio Tinto Group. China’s official Purchasing Managers’ Index rose to a seasonally adjusted 53.3 in July from 53.2 in June. A reading above 50 indicates an expansion. The manufacturing index has climbed from a record low of 38.8 in November.

A rise in commodity prices may help the Australian dollar, Roubini said today, adding he is "bullish" on the currency. Countries including Australia, New Zealand and Canada have so- called commodity currencies because raw materials generate more than 50 percent of their export revenues. The Australian dollar today rose to the highest since September before retail sales and house price data tomorrow that may add to evidence the nation’s economy will rebound faster than the central bank forecast six months ago.

The price of aluminum, used in beverage cans and airplane parts, has declined by a third in the past year as the global recession crimped demand. A recovery in demand may be offset by the "huge amount of excess capacity," which could be a risk to the price, Roubini said. The Reuters/Jefferies CRB Index of 19 commodities has risen 12 percent this year. It jumped 3.9 percent on July 30 to 253.14, the biggest gain since March 19.

"That recovery will continue slowly, slowly over time," Roubini said today. The global economy may contract 2 percent this year and swing to growth of 2.3 percent next year, he said. Vale SA, the world’s biggest iron ore producer, said demand for metals is starting to recover and it will begin boosting output. Vale Chief Financial Officer Fabio Barbosa said on July 30 that "the worst is over". The price of oil may rise more than other commodities because of an expected rebound in demand, Roubini said separately in an interview with Bloomberg News. It may average between $70 and $75 a barrel next year, he said.

Crude oil traded above $70 a barrel today for the first time in a month on speculation fuel demand will increase, amid signs the global economy is recovering from recession. The U.S. economy, the world’s biggest, is likely to grow about 1 percent in the next two years, less than the 3 percent "trend," Roubini said last month. President Barack Obama said on July 30 the U.S. may be seeing the beginning of the end of the recession.

In July 2006 Roubini predicted the financial crisis. In February of last year he forecast a "catastrophic" meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks with mortgage holdings and a "sharp drop" in equities. Since then, Bear Stearns Cos. was forced into a sale and Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital.




HSBC first-half profits fall 51% as bad debts soar
HSBC said profits had more than halved in the first six months of the year, after bad-debt charges soared. The 51pc drop in pre-tax profits to $5bn (£2.98bn) came after its bad debt charges soared 39pc to $13.9bn, the bank reported on Monday. Rival Barclays said earlier this morning its profits climbed 8pc to £2.98bn for the same period. HSBC raised $17.8bn in a rights issue in April to shore up its capital position, and it had a Tier 1 ratio of 10.1pc at the end of the first half. The bank has had to make some $67bn of bad loan provisions in the last three and a half years, in part because of its purchase of US subprime lender Household International in 2003.

"It may be that we have passed, or are about to pass the bottom of the cycle in the financial markets," HSBC chairman Stephen Green said in the statement. "Operating conditions in the financial sector have continued to improve as the effects of government and central bank policies work through the system." In its global banking and markets business, profit before tax more than doubled to $6.3bn on an increase in currency trading and underwriting bond sales. The shares were up 3.1pc to 624.6p in morning trading.




Bonuses to double as banks post multi-billion pound profits
The resilience of the two British banking giants that turned down taxpayer funds during last year's banking bailout was demonstrated today when both reported multibillion-pound profits today for the first six months of the year. Barclays and HSBC both said that pre-tax first-half profits hit £2.98 billion, representing an 8 per cent rise for Barclays but a 57 per cent plunge for HSBC - Europe's largest banking group - after a rise in bad debt charges to some £8.3 billion.

Barclays also saw a rise in bad debts from consumers in the US and UK but the overall group result was helped by a buoyant performance by Barclays Capital, its investment arm, which saw net income double to £4.2 billion for the period. That success means BarCap's 23,000 staff are in line to see average pay and bonuses double to almost £200,000 for the full year if results remain on track - despite the risk of a public and political backlash so soon after the banking meltdown.

But John Varley, the Barclays chief executive, promised to act "responsibly" and was quick to say that Barclays had not received any taxpayer funds in last October's bank rescue package. He told BBC Radio 4's Today programme: "The subject of compensation is a hot topic and I understand that, and it is very important that we are sensitive to the views of citizens and indeed central bankers like Mervyn King [Governor of the Bank of England] on this subject.

"We do not make bonus payments at this point of the year. The year is not over - there are five months to go. We will make our decisions about variable compensation at the end of the year. "When we do so, we will take guidance from the Financial Services Authority...we will take guidance from the Walker review on governance...so we are sensitised to this issue and we will behave responsibly." John McFall, the chairman of the Commons Treasury Select Committee, told The Times yesterday that banks that doled out big bonuses were failing in their social responsibility.

"Bonuses coming back online with a bang so quickly while we are still in recession will just not be understood by the public. "Banks have a social responsibility here and it seems that they are not living up to it. It was the banking crisis which sent the country into a tailspin in the first place." If Barclays Capital earmarks 53 per cent of its income for pay and bonuses, as it did this time last year, it will share out £2.2 billion among its staff.

Assuming Barclays repeats its first-half profits in the second half of the year, this would hand an average of £191,300 to each of the group’s investment bankers for the year, nearly double the £100,000 of pay and bonuses they received last year. According to research from the Centre for Economic and Business Research, a think-tank, bonus payments by all banks could hit £4 billion this year, up from £3.3 billion last year. Unlike Lloyds Banking Group and Royal Bank of Scotland, which were forced to turn to the British taxpayer to bail out their businesses and will report interim figures on Wednesday and Friday respectively, neither Barclays nor HSBC chose to take any public money.

However, all UK banks are under pressure from the Government to step up lending to businesses and high street customers, amid growing concerns that lenders are still hoarding cash and refusing to pass on favourable borrowing costs to clients. Last week, Alistair Darling effectively threatened Britain’s biggest banks with a competition inquiry should they fail to increase cheap lending to mortgage borrowers and small businesses.

Mr Varley said this morning that Barclays had lent £17 billion to UK businesses and individuals in the first half, well above the £11 billion target the bank had set itself for the year. But in the retail arm, which provides high street services, profits tumbled by 61 per cent. Total group profits of £2.98 billion were below analysts’ expectations of £3.5 billion. Barclays revealed that bad debts had jumped by 86 per cent to £4.56 billion while it recorded £3.5 billion in writedowns on credit losses. Commenting on the "tumultuous events of the last two years," Mr Varley said it had been a "humbling experience". He said: "Our strategy has helped us weather the crisis and we want our employees, customers and shareholders alike to continue to benefit from it over time."

Despite the fall in profits, HSBC, which gives its figures in US dollars, said that results were better than it expected at the start of the year in an "unprecedented" economic climate. Stephen Green, chairman of HSBC, said it was likely that "we have passed, or are about to pass" the bottom of the cycle in financial markets, but he also warned: "The timing, shape and scale of any recovery in the wider economy remains highly uncertain."

HSBC’s US consumer lending business in the US - which has been devastated by the credit crunch and is being wound down by the bank - posted a $2.9 billion (£1.7 billion) loss for the period. But the bank said that bad debts were rising at a slower rate than expected after efforts in previous years to cut down on higher risk loans. HSBC also benefited from record investment banking profits of $6.3 billion, more than double the level of 2008. The bank committed £15 billion for new mortgage lending in the UK, of which £6.7 billion was lent during the first half of the year. HSBC was one of the first major players to come back into the market to support first-time buyers and its estimated share of new lending has more than doubled to 9.7 per cent.




Deutsche Bank: 'The Crisis Is Not Over'

That is what Josef Ackermann the CEO of Deutsche Bank said in a Bloomberg article. This is perhaps one of the first CEO’s to be honest about the situation. Of course this story was not talked about anywhere else that I saw in the media. Even though stories about unemployment benefits were prominent on CNBC and the New York Times where the government is considering lengthening the emergency unemployment insurance benefits, which they should, by another 13 weeks.

While those stories are relevant and important, the mere fact that Germany’s largest lender admits that; "The crisis is not over," Ackermann said. "When one looks at the developments of global economic growth, then it can be expected that starting in the second half of this year we slowly move into the positive territory. But we’re still moving on a low level."

Deutsche Bank this week set aside 1 billion euros ($1.4 billion) for risky loans in the second quarter. This is a seven-fold increase in provisions for risky loans and Mr. Ackermann also acknowledged that those banks which took government funds and which were "encouraged" to increase domestic lending may be in more danger of higher defaults than banks lending internationally.

If Germany’s largest lender, which has the capabilities to lend worldwide, is expecting more problems, sets aside more assets for defaults (as our banks did) and openly admits the crisis is not over-- then there are significant problems in the banking sector still. This is not a revelation to me, but it may be to some people who expect that a problem that took years to develop has subsided in just a few months.

I've got news for you: The problems are still there and the people paying for it are those collecting unemployment. Until those people are employed and can pay their mortgages, then the problem will persist. Especially since those people have more than likely relied on credit cards and home equity lines of credit along with other credit based lifelines. If they don’t have a job then those loans will blow up next, just like we've said would happen many times before.




The banks' jackpot is no surprise
Like Casablanca's Captain Renault ("I'm shocked, shocked to find that gambling is going on in here!") moments before being handed his roulette winnings, the news that Barclays and HSBC have raked in billions of pounds in profit shouldn't really be a surprise. In fact, given that they were granted a licence to print money by their respective governments, the real surprise would have been if they failed to win the jackpot.

It does seem strange that only 12 months ago, the entire edifice of modern banking appeared to be tottering and ready to collapse under its own weight. Yet here we are again, with the headlines blaring about the return of bonus culture. To understand how we got from boom to bust and back to boom again is to understand that the governments of Europe and America convinced themselves that a cure would be worse than the disease.

When the extent of the credit crunch became apparent in 2008, governments and central banks took fright, rightly or wrongly in degrees, and eventually took two courses of action. First, they guaranteed the bank's deposits (in the case of retail banks) and holdings (by offering to accept dodgy investment classes as collateral). Second, they prised open their central bank vaults and started offering bucketloads of liquidity at low, low, low prices to any bank that was still standing and wanted to borrow.

In many cases the governments even combined those two tacks by directly taking stakes in banks, so offering solid-gold backing and virtual gold to mend the bank's balance sheets. In the meantime, the credit crunch and recessionary squeeze combined to kill off the competition: the banks and pseudo-banks that boomed during the past 10 years by offering mortgages to buyers with bad credit histories, buy-to-let-ers, 110% mortgagees, sub-prime borrowers, and the now familiar cast of millions that were caught up in a bonfire of the Fannie Maes.

It wasn't just mortgages of course – if it had been there would have been no credit crunch, more of a credit blip. At the same time the venture capitalists and Bernie Madoffs of the world were availing themselves of the easy money pouring their way. Now, of course, Bernie is off to jail, the dodgy mortgage lenders have generally gone belly-up or shrivelled. Try and get a buy-to-let mortgage these days, and you'll get treated like a blogger at a Society of Concerned Newspaperpersons fundraising dinner.

As the smoke cleared, the likes of Goldmans and HSBC found a battlefield scattered with the bodies of their former rivals. Bruised and bloodied they may have been themselves, but because they are still standing they find that business is remarkably robust – there are creditworthy borrowers out there with a demand for capital. With fewer competitors, Barclays and the other survivors can pick and choose who they lend to. Things got even better for the survivors, as the cost of borrowing from the coffers of the Bank of England or the US Federal Reserve vanished towards zero. The result: cheap capital + eager borrowers = profit!

And what does profit mean on Wall Street and the City? Bonuses and drinks all round. Which is all very well, except that it feels a bit rich (in all senses of the word) for the big bankers who played a part getting all of us into the mess to so suddenly return to the golden era of fabulous bonuses, when the taxpayer has so recently bailed out their sorry asses. Where's our bonus? Why is it that the UK's sovereign fund (or the British government, to give it its technical name) isn't popping the champagne corks? And if not, why isn't there rioting in the streets in protest?

One answer is that the bizarre conditions of the past year or so can't last forever. A case can be made for the return of the profits and bonuses as a sign of normality restored. That and other indications – such as the UK manufacturing sector showing a pulse, and the US housing market starting to wake up – mean the recession has ended in the US and maybe even in the UK. (That of course doesn't mean that a recovery is underway yet.)

Now the crisis is over and the patient (both the banking industry and the global economy) is off life support, the real question is whether governments on both sides of the Atlantic will now take the serious action on regulation and consumer protection legislation, and even on the treatment of bonuses, that means we've gained something from the crisis, or at least something that isn't just measured in pounds and dollars.




Britain's total assets fall for the first time since the early 90s
The total value of assets in Britain fell last year for the first time since the recession of the early 90s to £7tn, official data revealed today. The Office for National Statistics, releasing its annual tally of what Britain is worth, said the new figure is a drop of 2% compared to 2007 but is still well above the £4.2tn total value seen at the turn of the millennium.

The total value of residential houses and flats tumbled by nearly £400bn, or 9%, to £3.9tn. It still remains by far the most valuable single asset class, accounting for 56% of the country's net worth. Commercial buildings shed £100bn of value to be worth a total of around £600bn.

The value of all the country's vehicles, including planes and ships, fell by around £25bn to £160bn, presumably as a result of a collapse in new car sales which pushes down the average car or truck valuation. The figures also include a figure of £22bn for the value of the country's mobile phone spectrum, auctioned off a decade ago by the government.




UK housing market to return to growth by 2014
House prices could rise by 20 per cent from 2012 to 2014 as a shortage of properties being built puts pressure on the market, according to forecasts published today. The National Housing Federation (NHF) said that prices will fall by 12.2 per cent in total this year and 4.6 per cent next year before stabilising in 2011, with a 1.1 per cent rise. It then expects a three-year boom, with a 7.5 per cent rise in 2012, 8.4 per cent in 2013 and 6.8 per cent in 2014, with the average price rising by £38,000, from £189,900 to £227,800 at the end of the period.

However, the Federation added that even these rises will not be enough to pull homeowners who bought with high loan-to-value mortgages at the peak of the market in 2007 out of negative equity. Prices have already fallen by about 25 per cent from peak to trough. nThe prediction of another sharp upturn in the market comes amid fears that not enough new homes are being built to meet growing demand for property.

Only 60 per cent of the amount of homes required are currently completed each year, according to the research conducted for the NHF by Oxford Economics, the independent economists. The NHF predicts that five million people could be on the social housing waiting list by next year. The number on the waiting list grew by 40 per cent to 1.77 million between 2003 and 2008. It said that a lack of lending by banks is preventing first-time buyers and other low-income households from taking advantage from steep falls in house prices to get on the ladder.

David Orr, chief executive of the NHF, said: "Our new research shows that while house prices are falling in the short term, they will inevitably increase in the long term because of a fundamental under-supply of housing. If we are to avoid run-away house prices in the future when the economy picks up, ministers must ensure we build the right numbers of homes for social rent now, so that housing supply meets demand."




UK companies in 'limbo' over toxic debts
Fears are growing that thousands of struggling British companies will be unable to rebuild and create jobs as a result of confusion over the state-backed insurance scheme for £585bn of the banks' "toxic" lending. Companies whose debt is declared "toxic" and is placed in the Asset Protection Scheme (APS) have been described as the "forgotten victims" of the bank rescue because they are trapped in a "restructuring limbo", unable to reconstruct their balance sheets to invest in growth and jobs.

Private equity houses claim to have been contacted by directors who want to write down some of their debt and inject equity into the business, but cannot negotiate with their lenders because of confusion and inertia over the APS. Regulatory officials have warned that the "hole in the system" threatens to slow economic recovery. The taxpayer-backed APS was set up earlier this year to insure £325bn of Royal Bank of Scotland's bad loans and £260bn at Lloyds Banking Group to improve their capital strength and encourage them to start lending again.

However, Jon Moulton, the managing partner of Alchemy Partners, said: "Companies are staggering on with ridiculous levels of debt, paying the interest and with no means of capital expenditure. If you're in RBS or Lloyds, it's just another level of uncertainty." Another senior private equity executive added: "We are getting calls from chief executives saying we need to restructure our balance sheet. . . but it's clear the banks and the Treasury are ignoring the problem. It's total restructuring limbo."

The problem is Lloyds and RBS are responsible for managing companies' debt, but the two banks will only bear the first 10pc of any loss under the APS, after which the taxpayer picks up the bill. As a result, private equity operators say, any negotiation has to be with both Treasury and the banks. In addition, the Treasury is setting up an Asset Protection Agency (APA) to protect the taxpayers' interests and ensure the banks do not offload debt cut-price. The Treasury yesterday named Jeremy Bennett, a former Credit Suisse banker, acting chief executive of the APA. He has indicated he does not want to be considered for the £140,000-a-year job on an ongoing basis.

According to the private equity executive, the APS has created a system "where no one is incentivised to manage a portfolio to help companies de-lever [reduce their debts]". He added: "What we're seeing is the banks agreeing covenant resets, which means companies just struggle on paying interest but can't invest in machinery or jobs." One senior regulatory official said this was one of the main problems of the APS and that companies with tens of billions of debt may be affected, possibly delaying an economic recovery as businesses simply "limp on".

Despite six months of negotiations, the APS is still not finalised, which has added to the sense of "limbo". It is thought the Treasury will not seek disclosure of the individual companies whose debts are declared "toxic", potentially complicating restructurings for any company with debt from RBS or Lloyds. However, bank insiders said that, in many cases, companies would rather delay a restructuring until the economy has improved and that private equity has a vested interest in attempting to take equity stakes in companies at distressed prices, potentially at the taxpayers' expense.




Europe prepares for a Baltic blast
A writer who projects emotions on to the weather is guilty of the "pathetic fallacy". But, at the risk of sounding both pathetic and fallacious, it was entirely appropriate that the sky darkened and the thunder cracked as I approached the office of the Latvian prime minister in Riga last week. The gloomy atmosphere reflected the dark mood in a small, embattled country of 2.2m people. While business headlines in the rest of the world speak of clearing skies and rays of sunshine, the Baltic states are still in the midst of a howling economic gale.

Despite the region’s small size, the intensifying crisis in the Baltics cannot be treated as a freakish local squall of little concern to outsiders. Bank failures or plunging currencies in the three Baltic nations – Latvia, Lithuania and Estonia – could threaten the fragile prospect of recovery in the rest of Europe. These countries also sit on one of the world’s most sensitive political fault-lines. They are the European Union’s frontier states, bordering Russia.

The economic downturns in the region are shocking. Last week, Lithuania announced that its economy had shrunk by 22.4 per cent, at an annual rate, during the second quarter of 2009. Latvia and Estonia are likely to record similar falls when they announce their figures. Dalia Grybauskaite, the Lithuanian president, told me last week that her country might have to apply to the International Monetary Fund for a loan. Latvia has already trodden that path. Last week it agreed its second loan in eight months from the IMF and the EU.

The injection of cash is the good news. The bad news is that, in return for shoring up state finances, the new IMF deal will require the Latvian government to impose yet more pain on its suffering population. Public-sector wages have already been cut by about a third this year. Pensions have been sliced. Now the IMF requires Latvia to cut another 10 per cent from the state budget this autumn.
So far, the population has treated the downturn with remarkable equanimity. There is little sign of extremist political parties making headway.

But the government has good reason to fear a winter of discontent. Unemployment benefits last just nine months in Latvia. Many Latvians lost their jobs at the beginning of this year – and will lose their income from the state this autumn. Officially, unemployment is 11 per cent, unofficially it is 16 per cent and rising fast. Heating bills also shoot up in the cold Latvian winter. Cutting police pay by 30 per cent in such circumstances seems slightly foolhardy.

It would be easier if the Latvian government could point to some prospect that things will eventually improve. But the country seems to be locked into a downward spiral. Property prices – which a few years ago made flats in Riga pricier than apartments in much richer western European cities – have collapsed. The banks will not lend. Jobs are going, wages are falling, the government is cutting. With no hint of a domestic revival, the Balts have to pray for a revival in the world economy. But the Russians and the Germans are not buying. "Our export markets on both sides are closed," says Ms Grybauskaite.

One way to ease the pressure might be to devalue local currencies and so boost exports. But the Baltic states are all grimly hanging on to their "pegs" – fixed exchange rates with the euro. In Latvia about two-thirds of private loans have been taken out in euros. The government fears that devaluation would bankrupt many citizens. But wage cuts could simply provide an alternative route to bankruptcy.

Latvia’s paymasters – the EU and the IMF – seem divided. The IMF has been open to the idea of scrapping the peg. Brussels is firmly against, fearing that it would trigger currency instability, bank failures and competitive devaluations across the EU. The Latvian and Lithuanian governments are adamant that they will not devalue. That is what all governments in their position always say – right up until the moment when the dreaded decision is made. Their reluctance is not simply to do with economic risk. The Balts also worry that if they devalue, they might come to look like second-class members of the European club – a dangerous position for countries that were part of the Soviet Union less than a generation ago.

The rest of the EU is already beginning to feel a little further away. The collapse of the main Lithuanian airline earlier this year means that the number of European cities you can fly to from the capital, Vilnius, has halved this year. I last visited Vilnius in the early 1990s, when the place still felt very Soviet. It is moving and impressive to see how prosperous and cared-for the city now looks – and how many visitors from western Europe are visiting the sights and drinking in the cafés. Riga, too, now looks more like western Europe than Russia.

But, for the first time for a long time, there is a sense that these gains are under threat. The EU authorities in Brussels are well aware of what is at stake and are overseeing Latvia’s recovery efforts with an almost imperial authority. Europe’s fear of the destabilising effects of devaluation is completely understandable. But, in an effort to preserve the impression of stability in the Baltics, the defenders of the peg risk creating the conditions for another almighty economic thunderclap later this year.




Why Don't Health Insurers Care About Their Reputation?
Why don't insurers always fight like hell to avoid paying expensive claims? In the health insurance market, it sure seems like a big part of the insurer's strategy is to delay, deny and confuse. But generally people don't have these complaints with other forms of insurance, such as car or life insurance. Insurers typically want customers and showing that they'll make good on claims is a way to attract customers. Indeed, as Bryan Caplan points out, in the past the zeal of an insurer to protect its reputation by paying out a claim is downright bizarre. During the holocaust, after Kristallnacht (the night when the German government famously destroyed all manner of Jewish-owned property), many Aryan-owned insurers ended up being on the hook for the insurance claim.

It turns out, the insurers had to beg the government for the right to pay out the claims (the government wanted no aid to the Jews), on the grounds that failure to do so would damage their reputation with overseas customers. In the end, they agreed on a scheme whereby the insurers would pay out the claims, though that money was confiscated by the government. Caplan insists that this story is important for understanding the healthcare debate -- contrary to critics who say insurance companies would never have the incentive to pay out claims.

But we think Caplan is overstating his case (by at least a little) and why opponents of healthcare reform still aren't on the right side. The thing is, we don't have much choice when it comes to health insurance. It's hard to get on the private market (as an individual) and one doesn't typically have much choice with an employer -- and it'd be very rare for an individual to decide which employer to go with based on which health plan they like best, though that could happen.



Even if you wanted to comparison shop for health insurance, how would you? Does anyone know of a reliable, human readable way of comparing the customer-service and willingness to pay out claims among various insurers? We have no idea. Dr. Jay Parkinson points to this chart showing that health insurance is basically an oligopoly in many states It's possible that there could be a market, an actual market, in health insurance, and that if there were one, these companies would compete on customer service, statement clarity and willingness to pay. But at the moment we get none. And to opponents of reform who keep talking about wanting to preserve "choice" and plans people like, you've got your talking points all messed up.




Unconscionable Math
The House hearings on rescission – the retroactive cancellation of individual health insurance policies – were over a month ago, but after its initial run through Daily Kos it seems to have waited a bit before popping up on Baseline and Slate.  James Kwak at Baseline described the practice as rare, affecting only 0.5% of the population.  The faint light bulb above my head began to flicker: could that be true…that’s not rare – that is amazingly common.

It is.  In fact, from Don Hamm’s (CEO of Assurant) prepared testimony, with the company logo nicely on the front of it in the original:

Rescission is rare. It affects less than one-half of one percent of people we cover. Yet, it is one of many protections supporting the affordability and viability of individual health insurance in the United States under our current system.


What tangled webs we weave…

To understand why 0.5% of the people Assurant covers is a lot of people – a jarring, terrifying, probably criminal lot – you need to understand a little bit of math.  You need to understand just enough math to understand what Don and his legal team are not telling you.  You need to understand conditional probability.  And the folks at Assurant are counting on the fact that you don’t.

A typical job interview question for aspiring finance folks is the Monty Hall Question.  As typically phrased, you go on a game show and are asked to pick one of three doors.  Behind two of the doors are goats.  Behind one is a shiny new car.  You pick a door.  The host ceremoniously opens a door that you did not pick, and behind it is a goat.  He turns to you while the audience giggles at the goat.  Do you want to change your pick?


As I have pointed out on the Idea Locker comments, this typical phrasing is a bit unfair.  If you haven’t seen the show, you might think the choice of what door the host opened was random, unrelated to the door you picked.  Since there is no correlation, you don’t see why you should change your pick.  If someone asked you to call the third of three coin tosses in a row, you wouldn’t change your pick if the first two were heads, would you?

But the nuance of the game is that the door is not random.  The door that is opened will always meet two conditions:


  • It is not the door you picked originally (or else what would be the point of carrying on)

  • It is not the door with the car (that would certainly bring things to a close)


You had a 1/3 chance of being right in your initial pick.  That means there was a 2/3 chance the car was behind “not your pick”.  Well, if you change your pick now, you cover the entire “not your pick” set – you have seen one of the two doors, know that it’s empty, and now have the payoff from the other.  You should change your pick.

Here’s the health care nuance (2005 HHS report based on 2002 data):

Bar graph shows percent of total expenditure by percent of population: Top 1% (greater than or equal to $35,543), 22%; Top 5% (greater than or equal to $11,487), 49%; Top 10% (greater than or equal to $6,444), 64%; Top 20% (greater than or equal to $3,219), 80%; Top 50% (greater than or equal to $664), 97%; Bottom 50% (less than $664), 3%.

Half of the insured population uses virtually no health care at all.  The 80th percentile uses only $3,000 (2002 dollars, adjust a bit up for today).  You have to hit the 95th percentile to get anywhere interesting, and even there you have only $11,487 in costs.  It’s the 99th percentile, the people with over $35,000 of medical costs, who represent fully 22% of the entire nation’s medical costs.  These people have chronic, expensive conditions.  They are, to use a technical term, sick.

An individual adult insurance plan is roughly $7,000 (varies dramatically by age and somewhat by sex and location).

It should be fairly clear that the people who do not file insurance claims do not face rescission.  The insurance companies will happily deposit their checks.  Indeed, even for someone in the 95th percentile, it doesn’t make a lot of sense for the insurance company to take the nuclear option of blowing up the policy.  $11,487 in claims is less than two years’ premium; less than one if the individual has family coverage in the $12,000 price range.  But that top one percent, the folks responsible for more than $35,000 of costs – sometimes far, far more – well there, ladies and gentlemen, is where the money comes in.  Once an insurance company knows that Sally has breast cancer, it has already seen the goat; it knows it wants nothing to do with Sally.

If the top 5% is the absolute largest population for whom rescission would make sense, the probability of having your policy cancelled given that you have filed a claim is fully 10% (0.5% rescission/5.0% of the population).  If you take the LA Times estimate that $300mm was saved by abrogating 20,000 policies in California ($15,000/policy), you are somewhere in the 15% zone, depending on the convexity of the top section of population.  If, as I suspect, rescission is targeted toward the truly bankrupting cases – the top 1%, the folks with over $35,000 of annual claims who could never be profitable for the carrier – then the probability of having your policy torn up given a massively expensive condition is pushing 50%. One in two.  You have three times better odds playing Russian Roulette.


People lie on their insurance forms, of course, and that is a serious problem.  But let’s not forget that the very nature of the forms is designed to create inaccuracies, and it doesn’t matter in the slightest how minor the error may be once the company comes looking to get out of its policy.  Back to Don Hamm:


I mentioned a story in my comment on the Baseline article, and it’s a favorite of mine, so I’ll repeat it here: Years ago I was walking a casino floor with a casino executive.  It was an incredibly detailed tour, and we got to talking about pretty much everything that came to mind about crowds and gaming.  Now, a clever observer might notice that even the tolerant people of Nevada will not allow alcohol in vending machines – wouldn’t want the little ones to be able to get a Bud Light without a human being verifying their ID.  But there we were in the middle of acres of blinking lights, with absolutely no one making sure that underage kids weren’t walking up to a slot machine.  Indeed, they don’t card for the table games.

The executive told me you are free to play if you are underage, you just aren’t free to win.  You can sit down and pump your money into the slots, and if you look presentable you can drop some chips on blackjack or craps.  However, if you should happen to start winning, the pit boss or security team will come over and check your ID.  The house edge is 100%.

Conditional probability is tough for the human brain.  We tend to think of things as either completely correlated (once the market tanked, McCain had to lose) or completely uncorrelated (coin tosses).  To a certain extent, we make the calculations in everyday speech: when someone says that pancreatic cancer is exceptionally lethal, he doesn’t mean that it is likely to kill an enormous number of people; he means it will kill an enormous percentage of the people who contract pancreatic cancer.  Get a bit more tangential and even very smart people with Nobel Prizes miss things; one of the reasons Long Term Capital Management melted down was that once they started sustaining heavy losses, people bet against LTCM’s other holdings – LTCM itself was the correlation.  Low frequency, high severity events are also difficult for us to process – look at how much we invest fighting air piracy versus the sacrifices we are unwilling to make on drunk driving or domestic firearm violence.

Put them together and the guys with the actuaries working for them have a nearly insurmountable advantage.  I tend to think of traditional banking and traditional insurance as mirror images: when you take out a mortgage, you get a lump sum and make a series of payments; when you get life insurance, you make a series of payments and get a lump sum.  Health insurance is somewhat similar to life insurance, except the payout happens sometime during the payment stream instead of at the end.

When a person intentionally defaults on consumer credit, he is called a “ruthless defaulter” and the system, to the extent that it operates with any sort of efficiency, is designed to try to flush him out of the credit market in the future.  Society can tolerate taking the risk of inadvertent defaults – the people who through some sort of misfortune are unable to make good their promised payments.  The folks who do it on purpose…do it enough and the FBI might step in.

The insurance industry has a bit of a historical difference, in that pretty much everything in health insurance is similar to a liar loan.  I tell the company if I have been sick, just like stating an income on a mortgage application.  For a host of administrative and medical privacy reasons, the insurance industry has not historically wanted a comprehensive inventory of medical records before taking a client.  Few people could probably deliver such a record even with the best of intentions.  There is a problem with liar loans, and it was well described by Tanta (Calculated Risk’s late writing partner) here:

Well, with Number 1 [a liar loan that has gone bad], it’s “clearly” the borrower’s fault. He or she lied, and we can pursue a deficiency judgment or other measures with a clear conscience, because we were defrauded here. We can show the examiners and auditors how it’s just not our fault. The big bonus, if it’s a brokered or correspondent loan, is that we can put it back to someone else, even if we actually made the underwriting determination. No rep and warranty relief from fraud, you know.


It is in the health insurer’s interest to have application fraud, not only because it saves time and expense on the front end, but also because it lets them get out of any policy that isn’t going well for them. If the health insurer had to verify the information – if, in essence the insurance company had to behave as an accredited investor with adequate expertise to make a decision without reliance – it wouldn’t have the opportunity to bail out.  It would catch more genuine liars, but many of these liars would have turned out to be healthy, profitable customers, and what the carrier really wants is a population devoid of expensive claims, not devoid of liars.

Years ago, the shameful business was the tobacco industry.  There was a certain roguish charm to them; they had great ads and were fun outgoing people, and of course they made a product that if used as directed would kill you.


Say this for the tobacco folks: they printed the dangers right there on the pack.  Few people who took up smoking after World War II did so with ignorance of the health consequences.  Society wants tobacco, it might as well be produced in clean factories and wrapped in cellophane as opposed to sold on street corners.  I hope we legalize marijuana and let Altria and RJR make joints and put the Mexican cartels out of business.

No, the health insurance companies sneak around.  They have nice facades, they speak in the bureaucratic language of statistics few understand, and they make the eminently reasonable argument that they just need to protect themselves.  They promise great coverage, and when many years later it comes time to pay out and the petitioner is sick and unable to function, sorry, wish we could do better, but there was an error and rules are rules.  We’re keeping the premiums.  It’s actually far more like this guy:

Bernard%20Madoff%20large.jpg

Bernie Madoff made people promises, and people believed them, because was it really possible that the former chairman of the NASD was running a scam?  Come on.  But he was, and his reputation was no more a shield to the defrauded than the huge balance sheets of the health insurance companies mean an individual claimant is going to get covered.  The minute he began transferring money from one account to another and then raising external capital to try to square the numbers, he knew exactly where this was going.  The insurance companies know too; they just know well enough to avoid outrunning the law.

I don’t know if this case is going to be the lever the Democrats need to get meaningful healthcare reform.  The Democrats don’t even seem to be able to line up on the same side, which is probably a necessary precursor to getting something passed.  The Taunter Drug Plan for lower prescription drug costs doesn’t seem to have taken the Internet by storm, so I give this post low odds of breaking through.  But I will make this simple point in the hope some speechwriter pressed for a deadline picks it up: if a bank manager went to half of his highest net worth clients and said “sorry, you misspelled your address when you opened your account, I’m confiscating your balance,” he would be lucky to get himself assigned to minimum security.





China's bubble won't last
Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.
 
Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast. Liquidity isn’t a constraint yet. Even though loans grew by 24.4% in the first half or Rmb 7.4 trillion, loan-deposit ratio increased only to 66.6% in June 2009 from 65% in December 2008. It means that many loans have not been spent in real economic activities and have merely supplied leverage for asset market transactions. China’s property market is very similar to Hong Kong’s in 1997.
 
The origin of the asset bubble in China is excess liquidity as reflected in high level of foreign exchange reserves and low loan deposit ratio. The low interbank rate defines how serious excess liquidity s. The massive buildup of liquidity in China was due to weak dollar and strong exports. As dollar entered a bear market in 2002, China’s Rmb followed it down. The appreciation expectation drove liquidity to China. One fourth of China’s foreign exchange reserves could be due to this factor.
 
China’s productivity rose rapidly after it joined the WTO. The massive buildup in infrastructure and the relocation of manufacturing sector to China pushed up Chinese labor’s productivity rapidly. At the same time, Chinese currency declined as it rose against the dollar less than its decline. The combination of rising productivity and weak currency led to the massive export growth. The resulting dollar earnings pumped up China’s monetary system.
 
While China is experiencing weak exports now, the weak dollar allows China to release the liquidity saved up during the boom in the past five year without worrying about currency depreciation. How far would the bubble go and for how long? It is not too hard to understand when the bubble would burst. When the dollar becomes strong again, liquidity could leave China sufficiently to pop the bubble. What’s occurring in China now is no different from what happened in other emerging markets before. Weak dollar always led to bubbles in emerging economies that were hot at the time. When the dollar turns around, the bubbles inevitably burst. 

It is difficult to tell when the dollar will turn around. The dollar went into a bear market in 1985 after the Plaza Accord and bottomed ten years later in 1995. It then went into a bull market for seven years. The current dollar bear market began in 2002. The dollar index (‘DXY’) has lost about 35% value since. If the last bear market is of useful guidance, the current one could last until 2012. But, there is no guarantee. The IT revolution began the last dollar bull market. The odds are that another technological revolution is needed for the dollar to enter a sustainable bull market.
 
However, monetary policy could start a short but powerful bull market for the dollar. In the early 1980s Paul Volker, the Fed Chairman then, increased interest rate to double digit rate to contain inflation. The dollar rallied very hard afterwards. Latin American crisis had a lot to do with that.
 
The current situation resembles then. Like in the 1970s the Fed is denying the inflation risk due to its loose monetary policy. The longer the Fed waits, the higher the inflation will peak. When inflation starts to accelerate, it would cause panic in financial markets. To calm the markets, the Fed has to tighten aggressively, probably excessively, which would lead to a massive dollar rally. This would be the worst possible situation: a strong dollar and a weak US economy. China’s asset markets and the economy would almost surely go into a hard landing.
 
How far the bubble would go depends on the government’s liquidity policy. The current bubble wave is very much driven by the government encouraging banks to lend and the super low interbank interest rate. As the Fed’s interest rate is zero, the dollar is weak, China’s foreign exchange reserves are high, and the loan deposit ratio is low, China could increase liquidity, which would expand the bubble further. However, other considerations may motivate the government to cool it off.
 
If the government pumps all the liquidity it can, it wouldn’t have any ammunition left to revive it when it comes down. If the global economy has revived then, Chinese economy may have a soft landing with strong exports. The asset markets will certainly have a hard landing. However, if the global economy remains weak then, which is my view, both asset markets and the economy would have a hard landing. The political cost may be too great for the government to risk it all now.
 
A less risky approach is to adopt a stop-and-go approach. The government releases a wave of liquidity like now and then turns off the tap. Markets will run out of steam when it is all absorbed. When markets fall low enough, the government could release another wave to revive them. This approach makes the ammunition last and limit the bubble size, which contains the damage when the bubble eventually bursts. I suspect that that would be the government’s policy. If the global downturn remains for the next few years, we could see that China’s property and stock market experience big fluctuations every year. The downward movement of the current wave may happen around the National Day.
 
Many would argue that China isn’t experiencing a bubble. The high asset prices just reflect China’s high growth potential. One can never make an ironclad case to pin down an asset boom as a bubble. An element of judgment based on experience is inevitable when one calls a market boom a bubble. I have had a reasonably good record at calling bubbles in the past. I wrote my doctoral thesis arguing that Japan was a bubble in late 1980s, a long report at the World Bank in earl 1990s arguing that Southeast Asia was a bubble, research notes at Morgan Stanley in 1999 calling dotcom boom a bubble, and numerous research notes from 2003 onwards arguing that the US property market was a bubble. On the other hand I have never called something a bubble that turned out not to be a bubble.
 
I want to make myself perfectly clear on China’s asset markets today. They are a big bubble. Its bursting will bring very bad consequences for the country. However, as so many are enjoying what’s going on, I don’t think the government would act preemptively to eliminate the bubble. Indeed, many, if not the majority, in the policy circle argue that the bubble is good for reviving the economy. This sort of thinking seems to work because the dollar is weak, as the bubble can be revived with more liquidity when it cools off. When the dollar revives, China’s asset markets and, probably, the economy would have a hard landing. I hope that the people who advocate the benefits of the bubble would stand up then to accept the responsibilities for the damages.
 
The most basic approach in studying bubbles is to look at valuation. For property the most important measures are price to income ratio and rental yield. China’s average price per square meter nationwide is quite close to the average in the US. The US’s per capita income is seven times China’s urban per capita income. The nationwide average price is about three months of salary per square meter, probably the highest in the world. As far as I can tell, a lot of properties can’t be rented out at all. Those that can bring in 3% yield, barely compensating for depreciation. The average rental yield, if one including those that can’t be rented out, is probably negligible. China’s property price doesn’t make sense from affordability or yield perspective. Some argue that China’s property is always like this: appreciation is the return. This is not true. The property market dropped dramatically from 1995-2001 during a strong dollar period.
 
A special angle in China’s property bubble is its role in local government finance. As land sales and taxes from property sales account for a big portion of local government revenues, they have powerful incentives to pump up the property market. Land sales are often carefully managed to spike up expectation. For example, those who bid extraordinarily high prices for land are laurelled as land kings. Lately, the land kings are often state-owned enterprises. When state-owned enterprises borrow from state owned band and give the money to local governments at land auctions, why should the prices be meaningful? The money circulates within the big government pocket. Tomorrow’s non-performing loans, if land prices collapse, are just today’s fiscal revenues. If private developers follow the SoEs to chase the skyrocketing land market, they could be committing suicide.
 
The stock market is in a final frenzy again. The most ignorant retail investors are being sucked in by the rising momentum. They again dream of getting rich overnight. As in the past, retail investors usually lose, especially like the ones jumping in now. The final frenzy usually doesn’t last. The turning points in China are often related to political calendar. Retail investors hold the popular belief that the government won’t let the market drop before October 1, the 60th anniversary of the PRC. Last time it was the 17th Party Congress in October 2007. This sort of belief is self-fulfilling in the short term. The market tends to roll over around the time. If the past is of meaningful guidance, this wave will taper off before October.
 
The idea that the government wouldn’t let the market drop is rooted in Chinese market psychology. In financial jargon, it is called a put option. During the Greenspan era, financial markets believed that he would always bail out markets in a crisis, which was the so-called Greenspan put. The belief in China should be called the Panda put. However, in reality, the government couldn’t reverse the market trend when it turns. Chinese stock market has big ups and downs in the past, which shows the government’s inability to stop the market from falling. Nevertheless, this imaginary put option remains deeply rooted in popular psychology.
 
Many policy thinkers believe that bubbles are not that harmful. One popular theory is that in a bubble money is passed from one person to another and, as long as it remains in China, no permanent harms can be done. Hence, if people are happy now and unhappy tomorrow, they just cancel each other. They should look at Japan and Hong Kong to see how much damage a bubble can do even without leaking money out of a country.
 
In a bubble resources are diverted to bubble making activities. The resources will be permanently wasted. For example, businessmen in China are reluctant to focus on real economic activities and are devoting time and energy to market speculation. It means that China wouldn’t have many globally competitive companies in the future. Even though China has had three decades of high growth, few companies are globally competitive. The serial bubble making in the Chinese economy may be the reason.
 
A generation of young people is not interested in real jobs and is addicted to stock market speculation. They see their holdings changing in value in a day more than their monthly salary and have the illusion that they would make a lot of money in the market. Of course, most of them will lose everything and may take extreme actions afterwards. The social consequences could be quite serious.
 
A property bubble usually leads to overbuilding. The empty buildings represent permanent losses. Most people would laugh at such a possibility in China. After all, 1.3 billion would need unlimited properties. The reality is quite different. China’s urban living space is 28 square meters per person, quite high by international standard. China’s urbanization is about 50%. It could rise to 70-75%. Afterwards the rural population would decline on its own due to its high average age. So China’s urban population may rise by another 300 million people.

If we assume they all can afford property (a laughable notion at today’s price), Chinese cities may need an additional 8.4 billion square meters. China’s work-in-progress is over 2 billion square meters. There is enough land out there for another 2. The construction industry has production capacity of about 1.5 billion square meters per annum. Absolute oversupply, i.e., there aren’t enough people for all the buildings, could happen quite soon. When it happens, the consequences are quite severe. Property prices could drop like Japan has experienced in the past two decades, which would destroy the banking system.
 
The most serious damage that a property bubble inflicts is in changing demographics. High property prices bring down birth rates. When property prices decline after a bubble bursts, the low birth rate culture cannot be changed. Hong Kong, Japan, Korea, and Taiwan all went through property bubbles during their development. Their birth rates dropped during the bubbles and didn’t recover afterwards despite government providing incentives. China’s one-child policy alone will lead to a demographic catastrophe in two decades. The property bubble makes the trend irreversible: when the government abandons the one-child policy, there wouldn’t be meaningful impact on birth rate. Within two decades Chinese population could be very old and declining. Of course, property prices would be very low and declining also.
 
In addition to net losses the redistribution aspect of a bubble has serious social consequences too. In the stock market bubble most households lose and a few win big. China’s wealth inequality is already very high. The bubbles make it worse. A sizable or even the majority of China’s population may not have meaningful wealth even after China’s urbanization is complete. It will lead to an unstable society. A market economy is stable and efficient when the majority has meaningful wealth and, hence, has a stake in the system.
 
In summary, the market frenzy now won’t last long. The correction may happen in the fourth quarter. There could be another wave of frenzy next year as China can still release more liquidity. When the dollar recovers, possibly in 2012, China’s property and stock market could experience collapses like during the Asian Financial Crisis.




A Yard Sale in Chernobyl
by Joe Bageant

It's only a system," she said, as we floated through the sprawling supermarket's gleaming commodity lined indoor streets. "THE HELL IT IS! It's a goddamned air conditioned zombie hell of waste and gluttony," I thought to myself, before the usual vertigo completely enveloped me. Just back from Central America's simple, comprehensible mercados, bodegas and street cart vendors, the effect of this most common American shopping venue was, as always, one of vertigo.

Head splitting light beats down on pyramids of plastic eggs, as if to incubate their hatching of the ladies stockings within, dozens of kinds of toothpaste, well scrubbed dead chickens, lurid baskets of too-perfect flowers, plastic wraps, tissue for faces, asses and wrapping gifts, row upon row of polished vegetables and fruits standing like soldiers waiting for the annihilation of salads or the ovens of casseroledom.

And all those hushed and not so hushed shopper cell phone conversations, this one consoling someone at the home base pod: "Oh I am so sorry, baby, but I think they've quit making the Ranch flavored Pringles. Yes I know you don't like the jalapeno Pringles. I am so sorry. Really I am." Both parties seemed genuinely distraught. And I imagine Allen Ginsberg in this supermarket, as he once imagined Walt Whitman in a supermarket in California and wonder, as Allen wondered, "What sphinx of cement and aluminum bashed open their skulls and ate their brains and imaginations?"

The meat department workers in blood stained white smocks recite their corporate programmed litany: "Welcome to Food Lion. How can I best serve you today?" I cannot help but politicize such moments, so I say, "Humiliating, isn't it, to say that a thousand times a day to people who just want to be left alone to shop." Once in a while I get a knowing glance back, but usually they do not respond, because cameras cover every inch of the place. Only the Mongoloid bag-faced boy seems happy to be here. His smile is a deep mysterious void. What it must be like to be so unfazed, to be in another country of the mind? What sphinx rules his Republic of One? Does it have the same unknowable corporate face as governs our obedience to this one?

It was to the spectral triumph of corporatism Allen Ginsberg referred in the epic poem, "Howl": Moloch, whose mind is pure machinery! Moloch whose blood is running money! Moloch whose fingers are ten armies! Moloch whose breast is a cannibal dynamo! Moloch whose ear is a smoking tomb! The world at that time, 1956, understood what Ginsberg was saying. Around the planet, Howl, remains the most well-known American poem of the twentieth century. Here in the Republic of Amnesia though, "Howl" is all but lost amid the crackling digital noise=2 0of the immediate moment. Allen's hairy assed existential yalp for humanity just doesn't go well with the body waxed décor of our current American aesthetic.

President Obama understands the featureless not-so-new American aesthetic. So well that he had the world's most politically correct, authority sanctioned, but absolutely worst poet, Elizabeth Alexander, read at his inauguration. ("We encounter each other in words, words spiny or smooth, whispered or declaimed, words to consider, reconsider") Like the soothing, ambiguous language of the Super Corporate State, it sounds as if it means something. Which is close enough for government work.

More importantly, she has been vetted by proper authorities and is credentialed and licensed by Yale University to practice poetry. The marketing theme of the event was Obama's s alleged blackness. Alexander is a sorta black too, but not black enough to scare away business. Welcome to the domination of the business aesthetic. Literate people all over the world found Alexander's reading to be like one of those eye watering farts you just wait through until it blows away. Still, millions of Americans listened and cried, in accordance with the marketing theme almost on command, "happy to be born in America, where a black man can be elected president." Personally, I was sorry as hell I'd sworn off bourbon for the month.

If you ask, you will find that most of our citizenry are indeed "happy to be born in America" -- Fat City, the beacon of bacon. The great 24/7=2 0all-you-can-eat buffet republic, where you can walk in without a cent in your pocket and buy a car, or, until the credit meltdown, even a house. People immigrate here for just that: to possess more commodities and goods than previously available (as in none, zilch); or to accumulate money to ensure such goods in the future. Or to escape political machinery that deprives them of goods, and sometimes kills them if they object. "Your basic lack of democracy," as we're constantly reminded. I've met a few genuinely starving people in my day, and to be truthful, democracy was the last thing on their minds.

However, they usually believed the American free market sell job about a profoundly bountiful place with plentiful opportunities, or at the very least, plenty of edible commodities. And from their experience and perspective, there surely is truth to the claim. For the most part, these immigrants are utterly unconcerned about the resource depletion or ecocide inherent in a superheated capitalist system designed to burn up as much of the planet as possible as fast as possible, in order to generate as many commodities as possible for the quickest buck possible. Show'em the money and the meat! If I were an average citizen in Haiti or Somalia, I'd feel the same way. 

But even more fortunate people among them believe the hype. My Central American friend Rodrigo, who is in no danger of starving because he owns a couple of tamale and panade street carts, says, "A new car, that's what I want to go to America for. A car and an apartment with one of those things that go up and down inside the buildings."
"An elevator?" "Si! An elevator. A glass one!"

When I get back down there, I'll be sorry to tell Rodrigo that we went bust before he got his glass elevator ride. But if he needs an eight-bottle Pier 1 wine rack or a particle board book shelf that leans decidedly to the right, we can fix him right up. America is one big yard sale now, as we close out the books on industrial capitalism, only to discover that all our neighbors were as broke as we were. That it was all "on the plastic," the furniture, the wines, the digital toys, the camping gear that never got used. There is something eerily sad in these tens of thousands of suburban Saturday morning sales. There are seldom any buyers, not even many "free box" takers -- only sellers. An uncharacteristic silence hangs in the air, and there is the feeling of some unspoken recent disaster of immense proportion, some Chernoybl like thing that left everything standing.

"It's only a system," I told myself during the 24/7 blanket coverage of Michael Jackson's corpse, deeply suspicious that that so many millions of Americans were really distraught over the loss of this weirdly mutated media flesh puppet. Morbidly curious maybe, but not distraught. There were the high ceremonial triubutory rituals, the carefully written and rehearsed incantations as to how Jackson pushed the global cause of racial eq uality to new heights. Even Nelson Mandela said so. Why am I not sharing in this great and tragic stirring of the masses? This news event apparently of massive import?

A politician dips his pecker in the wrong honeypot, and it plays for days, dies down, then returns months later when the honeypot sues him for support, his wife sues him for divorce. A congressman offers a black dude a blowjob in a public restroom because, "I was afraid of him and wanted to accommodate the situation." Cheap spectacle and the distractive buffoonery of folly, along with the latest reasons we should be afraid, these are primary grist for the media entertainment divisions called "news."

But seldom to never do we get news and information as to the global scale of the genuine emergency facing humankind. Bad news is bad for business, therefore said to be bad for you and me. We all accept that consumer confidence is the foundation of the whole shebang, the confidence game that is capitalism. Thus confidence and cheery optimism is mandatory among the citizen consumer-producer marks. Willingly we self-police our behavior, shunning, criticizing or mocking what we perceive as "negative people." We drive past the empty parking lots, abandoned housing developments, through networks of cameras and cops with radar guns, stun guns and real guns every few blocks, numb to it all, listening to government commercial propaganda officialized by Katie Couric and Ben Bernanke. Just like us, they have internalized the system as a matter=2 0of education and "professionalism." But unlike us, they've done it to such an effective degree as to warrant seven figure remuneration.

Somewhere waaay down the ladder of the propaganda machinery, we find the anonymous guy or gal who writes the crap that keeps the front page of our web browsers running so slowly. The top story on my browser yesterday was: "Is Facebook hurting American productivity?" (begging the question as to whether there is any production to hurt). On one level you gotta wonder who the hell put that story there and for what reason. On the other hand, the story carried a link to Facebook. Was that a small act of personal rebellion at AOL? A corporate state message? Or a Facebook plant to direct traffic in its direction? In all likelihood though, it was just another piece of meaningless shit, generated by some kid news editor at AOL, a guy who has one of those rare things in America these days, a job, because he's already internalized the system far too well. In any case, my attention was momentarily diverted, sucked into AOL World, snared away from what other world I do not know, but certainly one fraught with paranoia, or at least hyper suspicion, if a browser screen can arouse so much speculation as to its motives.

Speaking of motives, there are those who worry about an American authoritarian police state one day rounding folks up, shuffling them off to geographically remote camps, such as the Department of Homeland Security's scattered FEMA Camps. But physical geography isn't the only geography. There is geography of the mind too, where another kind of hellish internment may be conducted. One without razor wire or sirens but surely as confining and in its own way, as soul chilling as any concentration camp. One with plenty to eat and filled with distractions and diversions enough to drown out the alarms and sirens that go off inside free men at the scent of tyranny. If a round up of Americans is real, then it began years ago. And as far as I can tell, everyone went peacefully, each one alone, like children, whose greatest concern on that day when the gates were closed, was the absence of Ranch flavored Pringles.


105 comments:

Dr J said...

Ilargi: "When stories such as this are still considered newsworthy in August 2009, even by my own readers, I must admit I despair a little."

Can I cheer you up a little by telling you that we thought it was interesting, not because it was news to us, but because it had appeared in a prominent MSM publication?

Anonymous said...

"One even might call the situation tragic, except a closer look at the sordid spectacle of what American culture has become -- a non-stop circus of the seven deadly sins -- suggests that we deserve to be punished by history..."

Jim K's latest pronouncement is dead on.

Who put the Duh in Duhmerica? Look around you folks in shock and awe at your fellow citizens.

My brother was in Hawaii years ago on the partially cooled lava fields. There was a wire barrier across a section that was particularly close to the sexy red hot lava flows. It said, "Danger Do Not Enter".

It was like the warning signs of cheap credit ten years ago: Danger Will Robinson, don't buy that overpriced, poorly constructed McMansion.

Anyway, some guy hopped over the wire to "get a better look" at the lava show out in the restricted area. My brother was watching him watching the lava at a much closer distance in the danger zone.

He was beginning to wonder what the big deal was with the warning sign on the wire and was just about to join the guy for a closer view until he noticed that the guy's shoes had caught fire due to the incredibly hot surface tempature of the ground in the danger zone.

Something that had been less than clear from the warning sign to the area.

By the time the moron realized his shoes were on fire, it was too late to escape with no burns. He ran like hell for the safety zone but that just fanned the flames on his shoes to catch his pants on fire.

My brother said he never saw someone run so fast, not even in the Olympic 50 meter.

The guy was screaming as he ran and my brother said it looked like the mythic figure of Mercury, but with a Hawaiian shirt and mullet haircut.

Duhmerica is going to look like the guy shortly.

Better put on your asbestos socks folks.

Ilargi said...

I know Dr. J, but that would have been interesting 5 years ago, not now. Now it just takes us further into left field. Oil is not the story anymore. It will be again in 10 or 20 years, but in an entirely different sense than it has been. Birol and others now have visions of oil causing financial crises, but that's just because in their worlds oil is the centre of everything.

Bukko_in_Australia said...

Ilargi, you seem irritated that the financial fakery has gone on longer than the Rules of Universal Justice suggest it should have. When I think about this, I go to medical analogies.

The human body has many buffering mechanisms to stave off catastrophe. If your breathing is crap and your blood should be turning acidotic, your kidneys can release bicarbonate so you don't stew in your own juices. If you're an out-of-control diabetic, your body will piss ketones in a last-ditch attempt to unsweeten your bloodstream. People like Dr. J can explain this better than a lowly nurse like me.

Point is, the human body will fight to stay alive longer than it reasonably should. And the body is bound by strict laws of physiology. The world economic system will likewise try all sorts of tricks and buffers to keep churning along.

In hospital, we run into many people who try to violate the rules. People with congestive heart failure who don't adhere to the fluid restrictions we place on them, or diabetics who keep gorging on carbs. They deceive us medical staff about what they do, even as their blood glucose skyrockets or their legs get grossly swollen with retained fluid.

I have a saying: "You can lie to the staff. You can lie to yourself. But you can't lie to Mr. Death." Eventually, these people come back to us with feet blackened by gangrene, or gasping out pink froth from lungs that have filled with excess water. We see them dying by degrees.

Can the fiscal system pull it off unlike the physical system? The fiscal makes its own rules, after all. But my view is that reality cannot be denied forever, even with an artificial construct such as money. There are limiting factors, such as the amount of CO2 in the atmosphere, the number of barrels of oil in the ground and the shrinking schools of fish in the sea. Sooner or later, "reality will out."

In the meantime, don't be aggravated that the sham goes on. Enjoy the false summer while it lasts, because it gives you more days under the good times, and more months to prepare for the bad.

Nassim said...


The silver 1 oz coins are price as "spot + x cents"
Anyone know exactly where I locate the "spot price" and how it is defined?


I cannot answer this question for silver. However, for gold, the nearest thing to a spot price that is publicly available for free it this.

BullionVault.com

If you watch it for a while, you will see transactions actually taking place. The buy/sell difference is usually under 1% so I think it is pretty good.

TAEfan said...

ilargi, it's all important.

What "disheartens" me is the bitterness you express whenever anyone even mentions "oil."

I find it all interesting, and important. I don't live in an either/or universe.

I regularly toggle between TAE and The Oil Drum.

el gallinazo said...

I remember the good old days when one killed a car honestly and with overt violence. Take the late Richard Prior who got arrested for liquidating his BMW with a .357 magnum.

But it seems that the state has now entered the scene with the automotive equivalent of Zyklon B.

http://tinyurl.com/nw8qnt

Ilargi

Thanks a lot for that Niall Ferguson video. My MacBook is still spanking new, and now I have to clean coffee vomit off the keyboard. You should really be more discerning. Hope the chips aren't fried. Maybe there is a lawsuit in this like that Bronx pseudo-college.

Vaughan said...

Ilargi said:

"Oil is not the story anymore."

Not thinking about Birol here. I do think that oil, today, is the same story.

There are still illegal and useless wars being waged for it right now with Afghanistan being the oldest of them which is about enter it's 8th year this October.

That 'war' is spilling and escalating into Pakistan. The Iraq fiasco never will be 'ended'. In all millions have been killed and rendered homeless due to these 'wars' for a resource that is depleting. The more this resource does deplete; the worse, wider and longer those 'wars' will become.

But pulling away from the subject of war...oil is what 'drives' everything. Economies are based upon it. It is the symbol of power, wealth and control to those who use it as such, and at last count, there are far too many of them around.

So, to me, it is the same (old) story. And it has been going on for far too long.

DIYer said...

Haha, if UK's prices drop just a leetle bit more, perhaps the Middle Kingdom could buy them and make them a colony. Rent it back to them for 99 years or so.

(why they would want to do that I have no idea)

snuffy said...

As Dr j said,That the information is "mainstream"is of interest,...not the basic theme/meme Ilargi.That the MSM is printing one flavor of doomer porn....This may open their minds enough of a fraction to let some other thoughts in...
I am still amazed that the financial game continues unabated.One would believe that the "near-death" experience that many of those in that field had would have warned them away from the games people play...but like the anoni-mouse @1:41 example of the lava field....they just have to get a little closer....Asbestos socks hell,these fools had better get asbestos underwear.There is no telling what small bit of news will trigger the long smoldering rage of the public. You know its there...with muttered comments and sideways glances when certain topics are raised...like bonus money to bad bankers...I think maybe this fall when weird stuff start to happen...like a new war,or another round of gasoline hikes to 4$+...or something as small as a bailout of a "deserving"company with future tax payer funds...or the simple exposure of some more of the more egregious actions of the fed...When that rage comes out..it will be in spades..

That the O-mans administration has refused to install needed REAL reforms I would lay directly at the feet of L.Summers,and the other 2.{It ain't gonna happen with this crew}As a very wise man observed once...you can"t fix a problem by the same thinking that caused the problem in the first place....Folks that are "outside the game"need to set the rules...not the players...But true to his wall street backers needs,its insiders who will set-up the next collapse.And,hopefully who will be blamed.

Some ideas for those who wish to "covertly" prep for the coming events.
The space under a bed can hold a amazing amount of food
So can a unused closet...
To quietly increase the stores,buy a extra bit[couple of cans] every trip.
Making use of sales to "stock up"on various can goods is acceptable to even the most consecutive[unimaginative] spouse to save money.
Remind same spouse of Katrina response,and insert whatever local hazard exists[fire,flood earthquake ect.]
Bukkos analogy of how the body fights to stay alive is a good example to use when contemplating the actions of a administration,or society trying to thwart the natural processes one should expect from over-indulgence
Mr Death comes to all things,including the dreams and aspirations of a people who have lost sight of their collective wisdom ,and who allow a legal fiction..to become a "person".To take the rights of a person,and create a construct that create a immortal,soulless being, that takes the very worst part of any and all who become part of it,is to create in a very real sense of the word,a demon.
I think if you examine the actions of most corporations,their effects on their surroundings,those who "climb the ladder"of success to the effect of working for a hellish boss..the word "Demonic"would be a good fit.There can be indifferent demons,and hostile demons,and even playful,beneficial demons.... But at the core...it has no soul..and exists only in the fact of a legal document,and has the power to warp the soul and mind a flesh and blood person.
Our forefathers were wise to kill such constructs after they had served their intended purpose.That we have allowed them to spawn...and begin to rule our lives was one of the biggest mistakes I think we[mankind]have ever made...

...of to work for my master,[a reasonably mild one]

snuffy

Taizui said...

Thanks Ilargi - great job as always!

I assume that the number of news stories that could qualify as TAE material is increasing exponentially, even though many may not be "newsworthy" for your well-informed audience.

Do you still have time to read as much as you'd like, or to do anything else?

DIYer said...

About the oil story:

The point Ilargi & Stoneleigh have been making is that, on its current trajectory, the economy will contract faster than oil supplies. It will take oil depletion a few years to catch up, isn't that a cheery revelation? They aren't saying that oil and other FFs don't matter.

And there was some mention of catabolic collapse yesterday. The bad news is it's going to continue for a long time. The other bad news is that it happens in spasmodic fits. It isn't like descending a ramp, it's more like being dragged down a flight of stairs by your tail... :-)

Taizui said...

Re Snuffy's recent post and yesterday’s discussions of preparations and defending supplies:

Every time I try to get serious about "stocking up," I realize that even at subsistence levels, each person consumes a lot of food in a year. Now how many are in our “tribe?” And how many friends and family do all our tribe members have? And how resilient may the psychological foundations of all these people be in crisis mode, given that so many of us can’t even get family and friends to envision anything beyond Kunstler's “Happy Motoring and Wishes Upon a Star?”

Besides this extended tribe,” and long before gunmen arrive, destitute parents carrying crying babies may beg at our stockroom doors. Will we feed or shoot them?

I have no answers – and have walked out of Sams empty-handed more than once.

Taizui said...

Snuffy yesterday,

OK beans and rice are more compact and less perishable. How long might they last in 5-gallon cans? How do you stop bugs from making their own tribes in the contents?

Anonymous said...

Typical dutch arrogance coming out...?!

Why bring up the oil story factor then ? (to make your own point ??)

However, when, last week, someone brings up the possibility (or not) of predictions on the site rendering from past actions/events/research it is quickly 'nipped in the bud'. ?!?!

Come on, fair do's etc, etc

Anonymous said...

http://economictimes.indiatimes.com/US-cos-turn-to-offshoring-to-achieve-cost-savings/articleshow/4855084.cms

So personal incomes are down, the ability to increase wealth and incomes is being depleted and the debt engine is broken. Where is growth and recovery, or the simulcrum of the same going to come from? Oh and because of all of the debt and malfeasance capital, that will be needed to re-create the real wealth generating enging, is being destroyed. Recovery? What recovery? I don't see how or when it can actually happen, just looking at the facts.

Anonymous said...

Taizui asked:

How do you stop bugs from making their own tribes in the contents?

Freeze them for 48 hours at the lowest temperature setting of your freezer. We have done this for years with wheat, rice and pasta and have never had an infsetation problem.

Mike said...

I've made some good progress with my wife to move further into lifeboat prep mode.

A long conversation bordering on a college seminar spanning peak oil, trillion dollar credit contraction, upcoming deflation, depression era elliot wave graphs, kunstler, mish, ilargi, stoneleigh, george ure & clif, toss in an earthquake scare and off we go. It was no mas at the end. lol

Stockpiling has stalled but to continue in ernest shortly. And have reached a compromise on moving whatever 401k we can into conservative fixed accounts and short term securities for now, until we peek at the next downturn to determine the next move. I've at least planted the possible next steps if things do get worse, including cashing out portions of 401ks and taking a tax hit for the sake of cash in hand. We are not there yet.. but like Obama's Rat Pack, I've planted the thoughts.

As I bring myself up to speed on the financial doom and shenanigans, I find myself playing catch up on Peak Oil, any article recommended by a fellow TAE'r is is always worth a read imho. Still hard to believe we've let it come to this after the serious scares of 35+ years ago.

DIYer said...

Mike,

http://www.theoildrum.com/

There are some tutorials and such in a table at the top of the page.

The thing that makes this different from the oil shocks of the '70s is that there isn't any north slope, and there isn't any middle east to plunder. This time it's a planet-wide peak in the oil supply and the economics of growth no longer makes any sense.

The painful part is that TPTB are all acolytes of the growth religion, and will attempt to keep it going at any cost. The dissonance between the religion of growth and the reality of decline is going to hurt.

RC said...

I appreciated the story about the .5% secret of health insurance and also the Lewis commentaries.

Mr Taizui: If you can get a small tank of nitrogen gas {at a general gas supply} what you do is set your buckets in a large plastic bag with no holes, let the nitrogen into the bag until it fills all the buckets {it is heavier than air}and at that point close the lids. Any tribes that decide to hatch out in there or that manage to invade will be lacking oxygen.
You can get a pressure gauge and calculate the amount of gas you are releasing. The other method is to fill a collapsed empty bag, rest the opening on two chair backs and then set the buckets inside. Others here who use nitrogen may wish to offer their methods. Take precautions and do the filling in an open but not breezy area. Lack of oxygen kills humans too.
A large rubber mallet may be useful for closing the lids. Don't store near heat or high humidity.
Find buckets with nice neoprene seals. Rats can gnaw plastic and do. Monitor your storage and own a cat.
Rotate your stocks. Read Sharon Astyk. Incremental activity is always better than wasting years having thoughts. Thoughts are so very low calorie.

Mike said...

DIY,

Yes thanks, like TAEfan I do toggle between here and The Oil Drum, but not nearly as much over there as over here. I do now get the gist of what I&S are inferring to as why they left TOD. The oil crisis comes 2nd to the financial crisis in timeline status.

Still, its pretty incredible to think that these large nations could not put together a plan to ease our way out of this mess decades ago.

Actually it started with Carter some, I recall whatver Alt Energy plans he had funded were gutted by Reagoncorps quickly. There goes that.

In my elective Higher Ed course of TAE 101, the the picture becomes clearer. Power, greed and corruption run deep. Show me the money baby.

Slowly I begin to understand the rules of the game.

We are all chum to the elite power.

We are on our own, the quicker we can band together and figure out local real world solutions like Kunstler alluded to in this weeks CF report, the better off we will all be.

But ouch this is going to hurt.

pigrider said...

Ok, so I'm gonna open up a nice little can o' worms, mostly b/c it relates to an issue I'm tussling with.

Firearms.

First, some context: Live in a hyper rural area, on a small farm. Everyone around me is armed, either for reasons of sport or sustenance. I own small caliber (.22) arms for purposes of livestock slaughter.

I fully accept the coming craziness. What I have a harder time accepting, is the notion that I might need to defend my stores against others. We live in a very close-knit community; it is very hard to imagine my neighbors on the prowl for carrots and cabbage.

But then, I think it is hard to imagine just how different things are going to be in a few years.

So I ask: What do you think? Stoneleigh, you seem to be about as rational as anyone in the blogosphere, and particularly in the sector that relates to economic/societal collapse. You seem to be preparing with thought and tremendous foresight. You seem to be kind and peaceful (hell, you live in Canada: you MUST be kind and peaceful).

Are you packin'?

Of course, thoughts from other commentators are also welcome.

Greenpa said...

Here is a story from The Washington Post, which may be useful. It's an in depth study of an "average" American family on its way down. And out. Highly personal, and long.

It might in fact be useful in converting recalcitrant spouses. Around in the middle somewhere, the obese father tells the reporter he "doesn't want to wind up in a bell tower somewhere." - a reference to an old mass shooting/murder incident. And obviously- he's thinking about finding a bell tower.

Then, later, as they are moving out of the mobile home they can no longer afford to rent, and into mother's basement, previously used mostly as a cat toilet, they get around to the bit about his packing and moving his "two hunting rifles."

A story told of idiocy and moronic choices; delusional expectations, full of whimpers and hopelessness, signifying... our future.

Where will these guys wind up next year? In a bell tower, or in a local warlord's army?

It should terrify anyone.

Nowhere to go but down

Look quick; the WaPo has a tendency to change its links very soon after publication.

RC said...

Taizui, the freezing idea assumes a freezer. The nitrogen gas requires the gas vendor to have electricity, but you need neither electricity nor a freezer for the gas method. Readers may have other and better ideas. I'm listening. BTW, the plastic buckets are very fragile when frozen so if you freeze and remove them, don't set them down on concrete roughly.

Max said...

When China prepares its « Great Escape » from the dollar-trap for the end of summer 2009 - Excerpt GEAB N°34 (April 16, 2009) -

Ilargi said...

Look, I still appreciate a few people at TOD, got together with Nate not so long ago, but the oil-centred thing is just not where's it's at right now. Oil won’t drive financial events. They drive themselves at the moment and will continue to do so through the years to come. No matter what the price of oil may be, no matter how much money governments spend to cover up losses already incurred, the dice have left the hand and are rolling cross the table. Rien ne va plus.

Stoneleigh in her "40 ways" says oil wil become unaffordable within 5 years, and that may well be too long a timeframe. What we're trying to say here is that soon it won't make any difference if oil is $4, $400 or 40 cents per gallon, because people won't have either sort of discretionary cash, except perhaps for emergencies. And when I say that oil will return as a major story, but in a different sense, in 10-20 years, maybe that is too long as well.

Oil will become a story not of convenience or riding on the highway or freedom or world travel or even simply running machinery, it will become the number one story of power. Modern armies run on oil, and who gets caught without it will be largely defenseless. I say largely because of the joker in the deck that is asymmetrical warfare. And somewhere in there is an as yet undefined role for nuclear weapons, which may rewrite the whole script in a matter of minutes or hours.

For now, though, going into this fall and 2010-11, the one tale that matters far more than anything else for "ordinary people" is that of unwinding and disappearing credit and accumulated debt. The cost of oil is but a bit player on that stage.

scandia said...

Thanks to all who posted preparation ideas! I can see that I had lost my focus, got discouraged. With a return to prep and A LITTLE BIT OF LUCK...I have a bounce in my step again. The next step of the plan is to cull the useless excess and create space for " covert" storage. Small tradables are good for those of us living in small spaces. Silver is good...
Greyzone, As a Cdn I don't think I could get a permit to own a gun? Anyone out there know? I'd prefer pepper spray or some other less lethal deterrent. Any suggestions? A taser gun would suit me better than a gun with live ammunition. Don't think anyone but law enforcement can purchase a taser?

Anonymous said...

With all due respect to Jim K--I’m a big fan--what American “culture’ is he talking about?
Or is he even talking about culture per se? If he is referring to the legendary tool manufacturing prowess of America in the mid to late nineteenth and early twentieth centuries, well I would have to agree--I have more than a few Miller Falls and Stanley hand planes.

As far as American culture proper, nearly every trace of original and authentic American cultural is an echo of the African-American slave tragedy, that is too say, tilled in the fields of pain, sorrow, and oppression. The Abstract Expressionist movement, distinctly America in development, was in many ways an two-dimensional extension of the Jazz movement.

When reading the complaints of a declining American culture, I wonder if we are really reading the laments of consequence come full circle as the slow wheels of KARMA turn and grind past historical events into the dust that blinds future eyes from seeing the right turn to take in the ensuing intersections of crisis.

Well, nobody wants to look in the Treaty of Guadalupe Hildago or legacy of broken treaties or years and years of systemic racism mirror--” that’s in the past, man”-- so I won’t push the issue.

I will, however, post a link to some real American culture-- the great Count Basie and Oscar Peterson

http://www.youtube.com/watch?v=3drqJ1bUmEA

Aesthete

Stoneleigh said...

DIYer,

The point Ilargi & Stoneleigh have been making is that, on its current trajectory, the economy will contract faster than oil supplies. It will take oil depletion a few years to catch up, isn't that a cheery revelation? They aren't saying that oil and other FFs don't matter.

Exactly. Once oil depletion and supply contraction due to 'above ground factors' catch up though, watch out. Oil prices will fall first as money supply collapse knocks price support out from under everything, but that will be followed by supply collapse and sky-high prices at a time when very few will have access to money. Oil will become the province of the elite as ordinary people will be priced out of the market.

People definitely need to think about energy dependency and how to heat, cook and get around without fossil fuels. They need to think about finance first though, or they won't have the means to prepare for anything else.

And there was some mention of catabolic collapse yesterday. The bad news is it's going to continue for a long time. The other bad news is that it happens in spasmodic fits. It isn't like descending a ramp, it's more like being dragged down a flight of stairs by your tail... :-)

This is a good analogy. Catabolic collapse does unfold over quite a long time (I have suggested decades for the upheaval resulting from this credit crunch), but there are periods of rapid contraction, and it is one of these that is approaching. We are about to bang our heads hard on that next step down.

RC said...

WHOA. Like tax avoidance, your cache of weaponry, your means of avoiding forensics, your non-weapon strategies {hidden goods}, your medieval strategies {leaves covering a deep pit, rebar in your roadway} and many other topics {dear to my heart} are best left never publicized and kept obscured. Oh, I have left all the good stuff out. Otherwise, what value have they? I certainly hope we will not be "going there". I'm not so sure I am ready for tanks and drones, but the neighbors don't seem to be stockpiling those. The best defense is to be the holder of some talents that the community can't do without. Stoneleigh keeps saying that. Don't ask her about weaponry. It just is not polite and borders on boorishness. Don't ask me either.
Thanks, and have you tried the Google?

thethirdcoast said...

@ Greenpa:

Great catch on the Wapo article, that's probably one of the best pieces they've printed in years, and it is incredibly scary.

@ Ilargi:

I agree that the financial situation is going to moot peak oil, and I'm pretty sure that you and Stoneleigh had correctly arrived at that conclusion before 99% of analysts.

As for TOD, my very personal opinion is that the site has moved too deeply into navel-gazing mode to continue as a worthwhile investment of my time.

Stoneleigh said...

Pigrider,

I fully accept the coming craziness. What I have a harder time accepting, is the notion that I might need to defend my stores against others. We live in a very close-knit community; it is very hard to imagine my neighbors on the prowl for carrots and cabbage.

But then, I think it is hard to imagine just how different things are going to be in a few years.

So I ask: What do you think? Stoneleigh, you seem to be about as rational as anyone in the blogosphere, and particularly in the sector that relates to economic/societal collapse. You seem to be preparing with thought and tremendous foresight. You seem to be kind and peaceful (hell, you live in Canada: you MUST be kind and peaceful).

Are you packin'?


I will be. I'm rather 'allergic' to weaponry other than for hunting, and I am very much a peaceful person, but I fully accept the reasons why it will be necessary to be able to defend what we have. I'm going to need some lessons though. For time time being I have a guard dog and am planning to have a pack of them. Breeding guard dogs could be a useful activity in a depression.

Punxsutawney said...

“Even if you wanted to comparison shop for health insurance, how would you? Does anyone know of a reliable, human readable way of comparing the customer-service and willingness to pay out claims among various insurers? We have no idea.”

Speaking from very recent experience of buying health care for the wife and kids on the open market (Thank god they’re very healthy), trying to compare plans is extremely difficult. I would say it took effort, research, and spreadsheet skills well beyond what the average person would be able to put in to it.

Now to hope that they aren’t rescinded in the middle of some major health emergency because of some unintentional error on the application.

One thing was easy though. If the provider was a large for profit enterprise, it was immediately excluded.

Anonymous said...

@Scandia,

Any Canadian can own a gun, you just have to register them. In February I got my Possession and Acquisition License and I now own a handgun and a shotgun. I got my PAL via a weekend course at a community centre for $250. If you don't have a history with firearms you really should take classes in shooting and join a range for practice.

Mike said...

on a lighter note..

not exactly calvin, far side or bloom county in their prime...

but I got a chuckle out of this one one from the wizard of id..

http://comics.com/wizard_of_id/2009-08-03/

If we are faced with such dilemmas as defending our stuff with weaponary, at some point you say at what cost.

If we can't figure out a new cooperative way in dealing with each other why bother switching to organic?

Ahimsa said...

@ Mike

We use mylar bags for storing beans and grains. We place the ziplock mylar bag inside a food grade plastic 5 or 6 gal. bucket, then fill the bag up with grains or beans, place a few oxygen absorbers on top of the food, then close the ziplock.

I prefer using gamma seal lids on the buckets, which are much easier to open and close than the regular lids that come with the buckets. I also rotate the food supply. We've never had a problem with bugs, even in South Florida.

See:

https://www.usaemergencysupply.com/information_center/packing_your_own_food_storage/mylar_bags.htm

Anonymous said...

GE Pays $50 Million to End SEC Claims It Manipulated Earnings
http://tinyurl.com/m79yt9

White colar crime pays of again. Blatant fraud, no one admits guilt, no one goes to jail, the insiders who cashed out at the top get to keep the loot and they get to pay the fine with taxpayer money.
What a deal.

el gallinazo said...

Stoneleigh

How do you see precious metals pricing over the next 12 months with the hypothetical assumption that the equities market crash will begin around Nov. 1?

My best guess is that gold will shoot up immediately as people panic. Silver will be less upwardly volatile. I think the equities crash will act as a catalyst for other financial crises with massive deleveraging and debt defaulting. Hedge funds and investment banks will be forced to unload anything of value to cover bad bets, and the first thing of value will be precious metals. However, when people discover that there is a lot more paper PM than physical, this will tend to buoy prices.
(Just as the USA has a lot more horses' asses than horses). I see silver talking a serious pricing hit over the next 12 months after the initial panic with pricing less than half the current spot market quite possible.

How do you see it?

As someone entering the Lost Continent as a nomad with two suitcases, a laptop and occasional beaky smile, right now I feel that the only meaningful preparations I can make are financial. Hope to convert money and PM into real goods in a new home before the great inflation sets in.

Spice said...

Just taking a break from my writing and usual lurking.

Stoneleigh and others worried about guns,

I have grown up around weaponry of all sorts. My father is a high ranking military official. (That's all I'll say as to not give too much of my real identity away.)

I will admit that even after hours of safety courses and a lifetime around guns and hunting, I still fear firearms.

That's not to say that we don't have them, we do, but I think it's healthy to fear them.

If you're a peaceful person and see the writing on the wall as far as firearms are concerned, I recommend getting safety instruction from military, former military or law enforcement sources. They know exactly how destructive these tools can be!
Weekend warriors are way too into their guns and being Dirty Harry.
I wish everyone looking into firearms the best and hope that we never have reason to regret our choice to aquire them AND never have the need to use them against another human. (Though I doubt the human aspect in the future we will all be living.)

Ilargi said...

"My father is a high ranking military official. (That's all I'll say as to not give too much of my real identity away.)"

Oh, my dawg!

Caught me on the wrong foot there!

Spice is Liz Cheney. Which makes Greenpa....??

RC said...

Stoneleigh, although I have stated that I am very reluctant to engage in discussions about security issues as those airings tend to defeat the advantage of secrecy, I would like to point out that dogs {and I have owned and deployed the very most intimidating, the Fila} are not bullet proof, can be easily poisoned, can be neutralized in netting, can lead to very sad unintended consequences {child entering yard and attacked is very common} and worst of all, you become attached to them so that when they meet their fate defending your material goods in your absence, you find yourself rethinking the concept as you mourn man and woman's best friend and feel more than a little guilt about the event. Dogs are excellent for sounding warnings and intimidating the bush league bad actors, but geese are pretty good at that too. Unfortunately, if the location is remote, warnings don't provide any protection at all if no one is there to act on them. I much prefer other methods {yes I have used the other methods, I lived in a Jungle for ten years, no communication systems in those days} but you'll have to research them on your own. I really like dogs and that is why I do not have one at the remote location now. Too risky for the dog.

Anonymous said...

When China prepares its « Great Escape » from the dollar-trap for the end of summer 2009

http://www.leap2020.eu/when-china-prepares-its-great-escape-from-the-dollar-trap-for-the-end-of-summer-2009_a3582.html

scandia said...

Gallinazo, Please add me to your travelogue list;
ideashared@rogersdotcom
See you'll be travelling light. You have made one admirable preparation that you didn't mention. Language skill. I believe you'll be speaking the lingo on arrival?

Spice said...

Illargi:

LMAO

Sometimes you can say something that really makes me laugh! It's a rare treat in such times. Thank you.

Nope, not Liz Chaney. They scare me! And Greenpa.

Dad stayed in the military after Vietnam, because to the fiasco that Westpoint and Annapolis graduates perpetrated on the world through their basic lack of understanding of the horrors of war and the greed of politicians.
Having seen horror, he felt duty bound to stay. (Don;t ask me, I really don't understand it)

He's actually very disgusted by this latest rabid militarism in the US and the "War on Terror" (Iraq & Afganistan). Let's just say he has a unique view on the military's role in the world.

Dr J said...

Spice - I find there is often a tendency to default to the meme of the military as a monolithic instrument of evil. Thanks for reminding us that this is not necessarily the case. Your father sounds interesting. Too bad you aren't able to tell us more.

ogardener said...

Blogger Bukko_in_Australia said...
August 4, 2009 3:40 AM

In the meantime, don't be aggravated that the sham goes on. Enjoy the false summer while it lasts, because it gives you more days under the good times, and more months to prepare for the bad.

Bukko, that was an outstanding post.

el gallinazo said...

Scandia,

The first rule to owning a firearm for protection against humans, is that you are absolutely sure that you would use it lethally if circumstances warrant. As an ethically challenged scavenger, I don't have a problem in this regard, but from reading your posts, I suspect you would have a serious problem. If this is the case, you are just giving your attacker a lethal weapon to be used against yourself.

However, if you did chose a weapon, as an apartment dweller, I would chose a 12 gauge pump "riot gun" with the stock replaced by a pistol grip, loaded with #4 or 6 shot. This would avoid killing a neighbor in an adjoining apartment, as it would have limited sheet rock penetrating power. In the USA these are legal if the breach and barrel measure more than 18 inches. I have no idea about Canada. They are considered a long arm, but it use to fit nicely under the seat of my car.

My preparation in Spanish are pathetic because I am losing cerebral neurons at such a great rate. It's two words in, three words out. However, I can get by as long as the conversation doesn't drift to Kant or Spinoza.

I agree totally with my Caribbean island plumber compadre vis-a-vis dogs. My motto is to never invest lethal forces in an entity that has even less functional intelligence than I have. Better to go with attack geese. They will warn you and then gum the intruder to death. I was once attacked by a swan - a white swan at that. Very scary.

Anonymous said...

There are a lot of comments on survivalism on this and other boards. Please recognize that there are boards dedicated to survivalism that have extensive writings on nearly any survivalist topic you may have. This includes all of the many ways of storing food and their advantages and disadvantages. "Dare to Prepare," by Holly Deyo, is also an excellent beginner book.

Greenpa said...

Mike: "If we can't figure out a new cooperative way in dealing with each other why bother switching to organic?"

Are you kidding? I've got all my organic neighbors mapped out. When it's cannibal time; I don't want to be eating people who've been hogging down fast food!

Anonymous said...

Four of the top five models sold so far under the U.S. “cash for clunkers” program, aimed at boosting the auto industry, are made by foreign automakers, the Transportation Department said today.
http://tinyurl.com/m73ghc

LMAO

Anonymous said...

Four of the top five models sold so far under the U.S. “cash for clunkers” program, aimed at boosting the auto industry, are made by foreign automakers, the Transportation Department said today.
http://tinyurl.com/m73ghc

LMAO

Anonymous said...

Four of the top five models sold so far under the U.S. “cash for clunkers” program, aimed at boosting the auto industry, are made by foreign automakers, the Transportation Department said today.
http://tinyurl.com/m73ghc

LMAO

RC said...

Ilargi, your Greenpa comment ranks amongst the best you have made.

Anonymous said...

From the Washington Post Story:

"How will three adults, a teenager and a child share a single bathroom?"

??????? We are DOOMED !!!!!!!!!!!

Greenpa said...

Just in case you need to see PHOTOS of the 3 winky-glueing gals.

http://www.thesun.co.uk/sol/homepage/news/2570530/Lovers-glued-rats-manhood.html

I SWEAR- I just tripped over it; didn't go looking.

The phrase "What IS the world coming to??" comes to mind.

Mike said...

Greenpa,

I know I hate dealing with the real world.

I've got a set of Golf Clubs and a couple of Aluminum Bats.. I guess I start with those as my first line of Defense..

I really hate thinking about that fortifying defense crap...

One step at a time I suppose...

But when I started looking at firearms, I asked myself the question, would I actually use it?

Scary question.

Anonymous said...

Happy Two trillion dollar day. As of 7/31/2009, the US has spent more than $2 Trillion since Sept (the begining of FY 2009).

Anonymous said...

Illargi Wrote:
"Oil is not the story anymore. It will be again in 10 or 20 years, but in an entirely different sense than it has been."

Sure it will, without abundant credit, new Oil production projects will cease, causing a dramatic plunge of oil production. The lack of cheap oil will accelerate the economic collapse. You can not simply ignore energy because demand has fallen because of the recession or border line depression.

Weaseldog said...

"Birol and others now have visions of oil causing financial crises, but that's just because in their worlds oil is the centre of everything."

In my world, things are governed by matter and energy. Finance is a virtual world, layered upon that, but still bound by the same physical rules.

It might be convenient to pretend that matter and energy no longer apply. As you do though, try a simple experiment. Ignore the gas gauge in your car and see if energy becomes an important consideration again.

Ten years ago, I came to the conclusion that post peak, the USA would engage in a series of bailouts for the financial industry, while real world physical industries languished and died. I wrote about this tinfoil hat conspiracy on many news groups (remember USENET?) and other forums.

And the logic was very simple. If energy supplies are not growing, then industry cannot grow. If industry cannot grow, then it cannot repay loans with interest. If it cannot repay loans, it can't get credit.

Further... If industry cannot grow, then it is a lousy investment from a financial perspective. It becomes stupid to invest in real world enterprises if you can't expect a profit from them.

So the money, must chase pure finance as profits in pure finance can come from pure financial chicanery. At the very least, investing in inflation beats investing in people and jobs.

Because of this, post peak oil ushered in a new age of finance. We are now entering a period in which finance will attempt to become completely virtualized and isolated from the physical world. Already we see earnings plummeting and we're told that if they aren't plummeting as fast as expected then this is good news and that's why the markets are buoyed up. This is akin to investing in Michael Jackson 2010 concert tickets, on the news that his corpse is decomposing at a slower than expected rate.

When we do have a recovery that is obviously being impacted by oil, it will be further down the slide. We have to fall further, so that we have room to come back up a bit.

To do this, our financial decline must outpace the oil decline. If it doesn't, then the oil decline will prevent a recovery, but at the same time, pricing will oscillate within a historically normal range.

But a historically normal range of pricing oscillations right now, is devastating.

I previous periods when production peaked and declined, our economy shook off the fat and waste. The strongest entities survived and grew again when production increased again.

We are at a stage now, when there is no more fat to shed. The weak are gone and the strongest are starving to death. Every little fluctuation in pricing has magnified effects up and down the supply chains. As we get leaner, smaller and smaller changes, see their impacts magnified.

If we had sustained global oil production growth, we might well see real green shoots in under a decade.

But that will not happen.

As far your argument that oil will become important in a decade or two... I'll take that to mean, that it will be obvious that it will be important again. But I'm not sure this is a given. We have to sink much deeper into the depression, then see a physical real world recovery in industry, that strains oil supplies, so that we can hit the supply and demand relationship with some velocity. This will drive a price spike, that will be obvious.

I think that it is possible that we will instead continue to ratchet down over the next two decades, without seeing any meaningful recoveries. As fuel prices rise a little, they will clamp industry and force a steady stream of small bankruptcies. Smaller signals will do increasing damage.

I don't know if oil will be an obvious problem in two decades. It may be as obscured then, as it is now. Perhaps the bulk of our economy in two decades will be much more reliant on human labor.

pigrider said...

Re: the Wapo story.

The dude's drinking SIX BEERS in a bar in the early afternoon? And hasn't sold his dirt bike? And is chugging Pepsi by the liter?

My god. People have no idea what true frugality is.

RC, thank you for your thoughts on self-defense. Don't fret: I won't be boorish and ask your advice. But then, you volunteered the info, so it ain't hard not to.

Sam Dug said...

"The banks lobby like hell against these changes, because it cuts into their fees, notwithstanding the systemic benefits such changes could have on the global financial markets. Banks now lobbying with US taxpayer dollars against changes that could protect the US taxpayer from more harm in the future. Something is terribly wrong with this picture, yet all anyone wants to talk about are executives getting paid too much. It's called missing the forest for the trees, and it is a fixture of both those trying to sell newspapers (get clicks) and run our Government, and it pisses me off."

Immediate regulation of the financial sector is needed and can be done. Why are they (the large banks) calling the shots?

TPTB knows exactly what is needed and how it can be accomplished. There is no one in the administration with the balls to do it? Is it a combination of being enmeshed with these criminal banks (and profiting) plus a lack of true leadership and sense of obligation to the American people?

Obama isn't even advocating true reform and yet they are STILL balking at this gutless "reform" and refusing to cooperate in the slightest.

It's really quite insane and the public is asleep or, at best, distracted with the sideshows.

RC said...

Mike, Firearms are vastly overrated. Try to think way out of the old ammo box. I'm not fond of being investigated so I can't help much more than that, but if you ever meet me, I've some experiences I could relate. Well, more than some. Any I would mention would be already past the prosecutable dates.
I think my outlook comes from living in a country where policing exists mostly to give some folks who might otherwise be troublemakers a job, a structure for their hours and a nice PPK to wear. The Policia here don't actually deter criminals. I think libertarians designed this system if you could call it a design.

Farmerod said...

How do you see precious metals pricing over the next 12 months with the hypothetical assumption that the equities market crash will begin around Nov. 1?

Gold is an outlet for money supply just like all other securities. Chart GLD with ^DJI somewhere (not yahoo, doesn't work). The correlation is pretty close.

With the $Cdn doing so well at the moment, I'm thinking about buying as many things sold in $US (you're welcome, Americanos) like tools, tractors, seeds, etc.

The gold and silver can wait until next year. Maybe never.

Weaseldog said...

So oil isn't a part of the story because finance is so crazy?
Is this a bit like saying that ocean doesn't matter, it's the big waves driven by the storm that matters?

As to dogs...

Yeah, dogs can be poisoned, stolen, shot, and have many other kinds of accidents...

If someone is determined to invade your property, and dogs are your first line of defense, then the dogs will be taken out prior to the burglary.

Some breeds of dogs can be trained to avoid a lot of these traps. you can train them not to take food from strangers, not to get in a car with strangers etc... But you can't make them bullet or spear proof.

Having said that, outside of this, if you don't look like a target, then potential burglars may skip your home for easier pickings if they see an aggressive dog.

On my street, myself and most of my neighbors have large dogs. As the number of large dogs trended upwards over the years, the foot traffic from strangers dramatically decreased. As did mysterious fires and burglaries.

Keep in mind the breed of dog is important too. I have friend that has always kept golden retrievers. He was recently burglarized and he said his dog didn't seem traumatized at all. The dog loves everybody.

My Shar Pei mix on the other hand, doesn't like anyone, until I make it clear they are welcome. And she likes to tell people she doesn't trust them.

bubba said...

Greenpa said...

Mike: "If we can't figure out a new cooperative way in dealing with each other why bother switching to organic?"

Are you kidding? I've got all my organic neighbors mapped out. When it's cannibal time; I don't want to be eating people who've been hogging down fast food!

-------------------

Aha! Greenpa is Cormac McCarthy! Will "The Road" movie be released in time for the zombie apocalypse this fall?

Because we have decided lentils and grains are too high in carbs we will consider this an instructional how-to video.

In the meantime I would suggest investigating "The Contented Poacher's Epicurean Odyssey: Tales and Recipes from a Gourmet in the Wilderness " by Elantu B. Veovade

Excellent book with a good raccoon recipe.

I highly recommend Havahart live traps. I have several of each size from squirrel, through rabbit, up to raccoon size. If you are a city dweller, they are also good for dogs, cats and rats.

(Quite seriously, they are very effective, well constructed, and made in the USA!)

Also, a good crossbow with extra arrows is better for poaching than a rifle if law enforcement is a concern, and a wind-up flashlight also has it's uses.

Sorry, forgot to take my meds this morning.

Anonymous said...

Dow rally for real? 'Big money' thinks so - study

NEW YORK, Aug 4 (Reuters) - Pension managers and mutual fund houses have been among the biggest buyers of the Dow Jones industrial average in recent weeks, underscoring the growing belief the recession is over, according to an analysis conducted by Thomson Reuters.
http://tinyurl.com/nrz5kg

Uh-Huh

Coy Ote said...

Ilargi,

It's true! Yes! You do have a sense of humor!

Spice as L Cheney and Greenpa as the GREAT HUNTER! That's great!

(However, you should apologize to them both. ;-) )

To the survivalists I would just add that it is less in the details of what weapon, what food storage, what particular site prep, etc. than it is the fact that you plan and prepare. It's a journey of which there is not a destination.

Prepare for the worst at the logistics level, but think positively; keep the mind in yes mode and remind yourself of the best in human nature. We're here, we might as well try to make it interesting!

As to the oil vs financial crisis comments, I am very glad I&S went into TAE, mainly because I can understand the depleting oil situation readily, with just a modicum of physics and math and reading such as TOD.

The financial mess though, is much more difficult for me to get my mind around. So much of it is hidden and in virtual forms that require explanation to regular folks like me. So I come here to TAE to get that information!

Bigelow said...

Money trouble will snare the average person before energy will. Energy is the foundation of everything we do, money however still allows for adaptive choices like getting a woodstove or more insulation or blankets to cope with a future of less available energy. Economists seem to think their B.S. exists independent of the rest of the universe; that is not the case here.

BTW had a lovely wolfhound mix dog weighing in at a cool 151 pounds. Sadly large breeds live short lives and often have health issues. Get some geese (they almost drowned my idiot poodle once).

bluebird said...

Stoneleigh said "People definitely need to think about energy dependency and how to heat, cook and get around without fossil fuels."

I've been thinking about this, and there doesn't seem to be any alternative that compares as well to electric and natural gas and petroleum. :(

Solar panels are too expensive, and they would be like a target on my house for anyone in the neighborhood. :(

We have a fireplace, but no source of firewood unless we drive to a forest. :(

Spouse isn't concerned at all because he feels the government won't let the grids malfunction (unless under bad weather conditions). Besides, he really wants a new car using the 'cash for clunkers'.

Anonymous said...

“How do we return to the good old days when "Truman, Acheson, Forrestal, Marshall, Harriman, and Lovett" could unite on a policy of global intervention and domestic militarism as our "common purpose," with no interference from the undisciplined rabble?

The crucial task is "to restore the prestige and authority of central government institutions, and to grapple with the immediate economic challenges." The demands on government must be reduced and we must "restore a more equitable relationship between government authority and popular control." The press must be reined. If the media do not enforce "standards of professionalism," then "the alternative could well be regulation by the government" -- a distinction without a difference, since the policy-oriented and technocratic intellectuals, the commissars themselves, are the ones who will fix these standards and determine how well they are respected. Higher education should be related "to economic and political goals," and if it is offered to the masses, "a program is then necessary to lower the job expectations of those who receive a college education." No challenge to capitalist institutions can be considered, but measures should be taken to improve working conditions and work organization so that workers will not resort to "irresponsible blackmailing tactics." In general, the prerogatives of the nobility must be restored and the peasants reduced to the apathy that becomes them.”
Radical Priorities, 1981

Ahimsa said...

Bluebird,

Check out solar ovens. Ours worked well -- baked potatoes, cooked rice and veggies, warmed foods, etc. -- when we lost power for a week in aftermath of Hurricane Wilma.

Stoneleigh said...

Anon @1:40,

From the Washington Post Story:

"How will three adults, a teenager and a child share a single bathroom?"

??????? We are DOOMED !!!!!!!!!!!


I laughed at that one too :)

We have one and a half bathrooms for 6 adult-sized people, and it's no problem at all. We used to have another bathroom, but I decided few years ago that a small sewing room was more important. I'm sure we would be fine with far more people than currently live here. It's just a matter of taking turns.

The notion that en-suites are an essential item is laughable.

Weaseldog said...

One more thought on oil...

It is true that finance is really where the news is going to be at.

I agree with the point that this is really going to impact people's lives.

But if I take oil out of the equation, then why not have hope that a full recovery is in the near future? If you assume that political will is the only thing holding us back from real reform, then one can envision how this change in political will could occur. This thinking then could well define the parameters of how you live and what you do.

But if you put oil back into the equation, the picture changes dramatically. You can no longer assume that there will be a recovery. At least no recovery to days as good as these.

If you were to plan your future based on these differing scenarios, would you come up with different plans?

Ahimsa said...

Stoneleigh @ 3:34

I laughed at that, too. We have 1 bathroom for 4 adults. We do keep a chamber pot, just in case someone cannot "hold it." We have used it a few times! :)

Stoneleigh said...

Farmerod,

With the $Cdn doing so well at the moment, I'm thinking about buying as many things sold in $US (you're welcome, Americanos) like tools, tractors, seeds, etc.

Go for it. The resurgence of the Canadian dollar will probably coincide with the rally and the temporary recovery of oil prices (as the Canadian dollar is a petro-currency). Expect the Canadian dollar to decline in value again once the rally is over and the fight to safety boosts the US dollar again.

Sam Dug said...

Mr. Ritholtz’s book, “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy”

from nytimes article about the book:
http://www.nytimes.com/2009/08/02/business/economy/02shelf.html

"It all started to change in 1971, Mr. Ritholtz writes, when the government dished out $250 million in loan guarantees to Lockheed, which was ailing because it had submitted low bids to win government military contacts...."

"But the bailout he finds particularly abhorrent is the Federal Reserve’s rescue in 1998 of Long-Term Capital Management, the hedge fund that nearly collapsed under heavily leveraged bets on exotic securities. He concedes that Long-Term Capital’s lenders — everybody from Bear Stearns to Merrill Lynch to Lehman — would have felt pain if the fund had gone belly-up. But, he says, that would have been a “ripping good lesson” in risk management.

Instead, he writes, the Fed sent these banks the implicit signal that they, too, could expect to be saved if they took on too much risk. “In sum,” he says, “Long-Term Capital Management was the dress rehearsal for the great credit crisis of 2008 — and a missed opportunity to prevent the ongoing tragedy.”

Anonymous said...

Regarding LTCM, see Kevin Philips for discussion of what he suggests was an explicit decision to abandon support for industrial production and put all eggs in the financial basket, despite full knowledge of history of earlier British and Dutch empires following the same pattern.

I wonder though if they had not gone this route, would it have altered only the timing and "fairness" of the decline of the American Empire?



"But the bailout he finds particularly abhorrent is the Federal Reserve’s rescue in 1998 of Long-Term Capital Management, the hedge fund that nearly collapsed under heavily leveraged bets on exotic securities. He concedes that Long-Term Capital’s lenders — everybody from Bear Stearns to Merrill Lynch to Lehman — would have felt pain if the fund had gone belly-up. But, he says, that would have been a “ripping good lesson” in risk management.

ogardener said...

Blogger Greenpa said...

Are you kidding? I've got all my organic neighbors mapped out. When it's cannibal time; I don't want to be eating people who've been hogging down fast food!

Good luck with that.

el gallinazo said...

KD, borrowing some of zerohedges's brainpower, demonstrates that the current rally is a deliberate "ramp job" conspiracy between the big banks and the NY Fed. Most of the money going into the market is not money market "sideline" money. The banks have taken their cash for trash and leveraged it to boost the market. It is a deliberate bubble. Of course they are trying to entice the pension fund and 401-k managers to come along for the ride. It will pop with devastating consequences but exactly when is hard to figure.

Anonymous said...

Since this site seems to morphing into a gun and dog-training club, I will post a clip of a real American gun fighter--and one who lived to regret his profession:

http://www.youtube.com/watch?v=AFquzxwYoeE

Aesthete

bluebird said...

"The Royal Scam" by Anonymous Correspondent posted to Charles Hugh Smith blog.

Well, after reading this, you have to wonder if there are such evil greedy #@*#@*#@* that would bring down entire nations.

http://www.oftwominds.com/blogaug09/KaPoom2CHS.htm
or
http://tinyurl.com/l2f232

Anonymous said...

Aesthete:

So it's okay for us to read oodles on how evil we meat eaters are to the agony of all, including our hosts, but when we begin discussing the nitty gritty pros and cons of guns and survival it's not cool?
Do you realize that almost everyone here IMHO doesn't really want anything to do with guns and pushing our hungry neighbors out, but we do have to be practical.
Wow I'm impressed.

Anonymous said...

Nonstop corporate bond rally raises eyebrows
http://tinyurl.com/pcnq5z

Ya think?

el gallinazo said...

If I could only figure out why does the porridge bird lay her eggs in the air? Then I would know when to short the market.

Anonymous said...

Hi,

I keep hearing on the blogs that these rising markets are trading on light volume but when I look at Yahoo Finance history the volume is much larger now than in 2006. Between one and two billion shares in 2006 and now it is between four and five billion daily, this on the S &P 500. What gives?

Spice said...

el gallinazo,

Because the porridge in the custard tree is feral of course and tends to drip from the bird's beak.
So you just have to look at the slimiest, most disgusting company on the S&P and wait until it sinks to new levels of depravity.
That's when you make your move!

;-)

VK said...

@ bluebird

One interesting thing to note is that Argentina is still locked out of International Debt Markets 7 years later after it's massive default because creditors refused to accept a 2005 haircut and the Paris Club of lending nations has also prevented Argentina from selling debt in overseas markets.

The only way it can access International markets is through the issue of US dollar denominated bonds called the Boden 2012 bonds. Think of it as a risky corporate bond in effect.

While it is true that the Argentine Economy grew at nearly 8% pa from 2002-2008, it has pretty much stagnated now and the Government massively understates inflation as well. While July retail sales were down 16.1% yoy, economists (yes those con men) expect the economy to contract by 3.3% this year.

VK said...

@ El G

Look to Asia for your indicator. The Chinese market started rallying well before the DOW began it's rise and during March of this year it was the Nikkei that stubbornly refused to fall below 7,000 and started rising even though the DOW fell. I think these countries could very well lead the way towards the next collapse.

The China article suggest Oct 1 as there is a big 60th Anniversary conference on that date. So late September, early October could well be a good date eh?

Bigelow said...

@ El G

When to get your toes damp? That would be Friday, October 23, 2009.

VK said...

A powerful article by Rolfe Winkler,

http://blogs.reuters.com/rolfe-winkler/2009/08/04/buffetts-betrayal/

But it turns out much of the story is fiction. A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee.


The American dream has turned into the Chinese Bailout.

Coy Ote said...

El G - Here's my "shorting" suggestion...

September 30 - Do it "In Cold Blood"

Truman Capote's birthday

Anonymous said...

http://urbansurvival.com/week.htm
“The best overall sense of things (which is where the marriage of long wave economics, Elliott Wave and predictive linguistics can be used to sort of 'box in the future' might suggest a scenario something like this:
• September 16 (arbitrary date on my part) market begins to seriously fall. That's when we may get some bank closings and market holidays.
• October 25th either we get the Israeli attack on Iran in here or the WHO says 'shut off all international air travel' and the future of globalism becomes really sketchy and the markets drop to (or below) their 6,626 lows on a weekly closing basis we saw in March.
• Things come down through November and into early December only to be followed by a modest rally in the early part of 2010. But not for long because...
• Super Crash happens in March/April of 2010. That's the one where I may come out on the winning side of an option short play in a huge way, but the 'winnings' are really meaningless since the inflation rate will be going moonward in there.

Think of it this way: Say you take $1,000 and make an incredibly good option decision on the short side and you lay on the trade in late August of this year. Next April/May, your option has 'hit' and you collect $5,000. But suppose now, also in that period of time, that the price of a gallon of gasoline has gone from $2.50 to $9.00. Ask yourself: "Am I really ahead?"

The answer appears to be yes...by a little bit. Until, that is, you figure out the capital gains taxes, which we you figure it all out, might take that paper trading and make it meaningless.”

Chaos said...

Sounds like KD has had a little of TAE injected into his latest couple of posts...for the guy to disclaim being a doomer, but can't ignore the coming meltdown seems kind of significant in my book.

Anonymous said...

Corporation should be put to death.

All of them, no exceptions.

In their place, a legal entity may exist, temporarily, to fund a project of fixed length, then it to is put to death.

The very word, corporation, should be destroyed by a campaign of association it with things like pedophilia, and necrophilia and beastality.

The word, corporation should evoke visions of corpulent rotting, bloated corpses and criminal copouts.

Destroy the very concept of, as Snuffy said of allowing "a legal fiction..to become a "person".

Associate the very idea of Corporation with cancer, because that is what it is at it's core, a tumor feeding on a host.

The modern corpulent corporation is the very definition of organized crime.

It has in fact superseded even the notion of corrupt governments.

Corporations now rule all governments by way of their having metastasized into the body politic.

snuffy said...

Taizui,

Lots of folks have given you pointers on the food storage stuff...I would suggest you head over to a place called "latoc""Life after the oil crash".. pure doomer porn 24-7.

I am a 12 gauge kinda guy.When I was young I got into "combat"shooting,having 2 brothers that were marines...one who later became one of the the local lawman .{For 25 years}.Its hard to shoot against someone who was required to run 50 rounds a week thru his duty piece.For awhile we shot as a group...but its a spendy habit.
As far as house security,good dog,geese,Guinea hens,a sixfoot electrified fence[soon to be eight.]and more than a few tricks not discussed.

I picked a place at the end of a dead end road...in the middle of 200 acres of forest...near a national forest.I am surrounded by 20'high "living bob-wire" Himalayan blackberries on 3 sides.Very few folks besides family know my house.

I have "security arrangements"with all my neighbors...all who share a apocalyptic mindset...it would be very foolish for Anyone to come up here and get stupid.We look out after each others places ect.I just sort of casually noticed one neighbors range markers on a 300yard driveway the other day

You cannot get this kind of gig overnight.I am still considered a "newbie" here after nearly 17 years...[two neighbors I have have been feuding longer than that..!!..]

I expect I will have my share of stupids to deal with.Such will be life...but I made a point of trying to minimize the traffic to my house over the years,and expect that to pay off..big.

Old bird ,be careful hauling loot around...money belts in your britches is a good ,solid feeling..

tired...
snuffy

Taizui said...

Snuffy, Ahimsa, RC, others,

Thanks for food preservation tips and links.

el gallinazo said...

Thanks for all the tips, but the nesting habits of the porridge bird laying her eggs in the air is the key to psyching out gollum sucks. Perhaps also the Indian rope climbing trick.

Snuffy, thanks for the advice. I am cautious and alert when traveling. I even put my Hawaiian shirts, plaid shorts, and white wing tips in storage. With all the clunkers being ravaged, there is no longer a place for a traditional used car salesman anyway.

I am naturally dark blond with very little gray and am considering dying my hair black to blend in better down south. In Peru 99% of the men have black hair but 50% of the women are blond. I think it's a sex linked recessive gene thing.

DIYer said...

el g,

you were asking about metals, well fwiw Jesse's Cafe has a brief discussion of some of the metals funds.

Anonymous said...

DIYer-

If you are going to buy metals, you want the actual coins. Stay away from ETF.

Anonymous said...

Is not this rush to weaponry jumping the gun? Both parents survived GD1 with only hunting rifles in their families, used only for 4 legged animals. I have never heard stories of zombie attacks. Am I just naive and has society really become that much more dangerous? Most violence in my area is perpetrated by drug-addled relatives of the victims, who know what resources and weapons the victims have.

I used to read Garth Turner's blogs last year and he was also advocating rifles at one time and was predicting GD2. Then, without explanation, he insisted we would not have GD2! I abandoned his blog in disgust at lack of explanation for his reasoning. I don't like the TAE predictions but can accept them as a real possibility because they explain reasoning, unlike Mr Turner. Did he ever come clean with his logic? His change of heart was around the time he read Niall Ferguson's Ascent of Money and seemed to fall under it's spell.

--lambchops--

Anonymous said...

Most people during GD1 had not previously endured decades of vividly depicted TV and movie violence. That exposure to graphic violence acts like a 'monkey see monkey do' template.

For GD2, we will have access to automatic assault rifles and RPGs and grenade launchers and surplus landmines and detailed knowledge of IED's.

*Be there or be square*

Anonymous said...

Some especially good comments today, following a good article.
Thanks TAE for being there.

As for oil...well I used to work on Oil Tankers and was amazed when climbing into an empty ships hold at the sheer amount of volume an average sized tanker has. Multiply that by the number of ships conveying oil around the globe at any one time (and this doesn't even take into account land pipelines)...jesus, there simply can't be that much oil available to be pumped out of the earth for long. Add to that, a quick Google search gives estimates that 150,000 more people enter the world EACH day.

However, that's not my immediate concern. No, what I fear is the day the US can't pay for oil in our freshly printed, increasingly worthless... USD (shhh...don't tell OPEC). Then...TSHTF. Unfortunately, that event appears to be coming our way sooner than oil depletion. Best to situate oneself for that eventuality tout suite.

Switching subjects...
regarding firearms... yes, definitely (but only if its something you can deal with).
Regarding PM...what an interesting topic. Sites such as FOFOA,Jim- Sinclair/Willie are illuminating and I spend time pondering what they have to say. In general, PM makes alot of sense to have on hand. The one fly in the ointment is that central banks and major investment firms seem to have perfected the art of keeping PM contained. While I acknowledge a rapid change is possible, life experience tells me that is unlikely. Thus, I can't embrace PM to the extent I'll inclined to.
You know...too many eggs in one basket.

Ilargi said...

New post up.

Punxsutawney said...

Snuffy -

Yep - 20' of Himalayan Blackberries is one of the best two legged barriers I know. Just about impossible to get through short of a chainsaw or a flamethrower.

MMN said...

@ Nassim

For 'live' Silver spot price try;

www.kitco.com/charts/livesilver.html

http://www.thebulliondesk.com/

http://www.silverseek.com/quotes/

http://www.coinnews.net/tools/live-silver-gold-platinum-spots/

Silver also has an international currency code: XAG - this often works in currency forex rate calculators like Yahoo, oanda.com and xe.com;

http://finance.yahoo.com/q?s=XAGUSD=X

Remember, 'free' is often worth exactly what you paid for it - some of these services are delayed 15 minutes or more. Silver trades 24 hours (almost) and the market moves from NY to London to Hong Kong / Tokyo - some of these free services just report only one exchange and go dormant for periods each day or at weekends.

Marcus