Tuesday, November 18, 2008

Debt Rattle, November 18 2008: He'll Have To Go

John B. Trevor The Century Ahead 1921
Trevor family trip through western United States

Ilargi: I’ll make way today for something my partner in crime Stoneleigh wrote a few days ago as a comment on Garth Turner's site, GreaterFool.ca. Coincidentally, they're supposed to meet today for the first time, somewhere in southern (?!) Ontario where Stoneleigh will sternly lecture the crowds on biogas and grid transmission.

First, though, there's this.

Hank Paulson was in Congress again this morning, and again he was let go with lots of so-called hard questions and angry words that amounted to no more than an exceedingly bad soap opera. This charade is starting to seriously undermine the legitimacy of the entire US political system. Paulson changes and interprets laws wherever and however it suits him. But as Secretary of the Treasury, that is by no means part of his job description: the executive branch. That, says the Constitution, is the job of Congress, the legislative branch.

But Congress interprets the Consitution at will as well, however it pleases the elected representatives. It passed a law allowing Paulson to buy $700 billion worth of bad assets, ostensibly for the good of the taxpayer, and he then turned around and used it for something else: propping up banks. In the process, he and his buds slipped a tax law change into the plan, that few in Congress knew was there, which allows another $140 billion hand-out to the same banks. They can now buy failed or failing smaller banks, and use the losses on the newly purchased books to hide their own deep dark pits, all at the cost of, you guessed it, Da US Taxpaya.

The only dignified and honorable thing to do for Congress today would have been to demand Paulson leave, effective immediately, and appoint an interim czar, perhaps Volcker, until January 20. Paulson breaks the law, for Peter Paul and Mary's sake, on a regular basis. He's flipping them the bird anytime he "testifies". If they let him stay, and the spineless proceedings indicate they will, Hank Paulson will do a lot more damage to the interests of the man in the street in the next two months. He can do what he wants right now, and he will, because nobody has the guts to stand up. Obama?!

PS: I just saw after writing this ditty that Financial Times' John Dizard agrees with me: "While I enjoy saying "I told you so", it will be even more pleasurable to see the back of this official." See below under TIPS.

That's enough of me, here's Stoneleigh:

Stoneleigh: A 1930s style depression is not impossible by any means. If governments could avoid a depression merely by printing money, then one would never have happened. Unfortunately, depressions do happen, because ‘money printing’ (monetizing debt) doesn’t cause inflation (ie an increase in the effective money supply) during a hurricane of credit destruction. Traditional money supply measures don’t capture the full picture.

Credit functions as a money equivalent during the expansion phase, but loses the quality of ‘moneyness’ once expansion morphs into contraction. As the vast majority of the effective money supply is currently credit, the collapse of credit will crash the money supply. As is already happening, ‘printing’ merely send money into a giant black hole of credit destruction, thanks to the hoarding mentality that has taken hold amongst banks due to the collapse of trust. Banks know what toxic waste they hold in their own vaults, and certainly aren’t going to trust their colleagues who almost certainly hold the same.

Attempts to stimulate interbank lending are failing miserably, because you can’t ‘print’ trust. Once a deleveraging event has begun, it will proceed to its natural conclusion - the point where the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. All governments can do is to make it worse in the meantime.

We are still in the very early stages of the deleveraging process, where toxic ‘assets’ are being shielded from the harsh light of day, so to speak. Eventually, there will be a mark-to-market event, however hard governments and central bankers try to avoid one, and that will precipitate a firesale of assets at pennies on the dollar.

Such an event cannot be avoided, at least partially due to the creation of perverse incentives in the derivatives market. For instance, allowing a third party to take out a credit default swap against a company they do not own is analogous to allowing me to take out fire insurance on your home, thereby giving me an incentive to burn it down for profit. We have yet to see the ‘burning down for profit’ phase, but it is coming, and when it does, the scale of counterparty risk in the CDS market will also be revealed.

A large percentage of companies will not be able to collect on winning bets, and will therefore not be able to pay out on losing ones in turn. This will turn into a cascade event in a $62 trillion market, the effect of which will dwarf the credit destruction we’ve seen so far.

This event is truly global - thanks to the tight coupling in global financial markets, contagion inevitably spreads. The use of derivatives intended to mitigate risk has in fact led to systemic risk. There’s a reason why Warren Buffet refers to derivatives as financial weapons of mass destruction.

If you follow the global media, rather than just the blinkered North American version, you will see how many countries are already teetering on the brink as a result of the credit crunch. Check out Iceland, or Pakistan, the Ukraine, Spain, the UK, Ireland, much of eastern Europe and many more. Many of those countries had far worse housing bubbles than the US and have much further to fall as a result.

To imagine Canada to be immune from such a conflagration is simply fanciful. Our real estate excesses have been less extreme, but our banking system is vulnerable, and our export economy will take an enormous hit.

Have you noticed the extent to which shipping is collapsing worldwide? Check out the Baltic Dry index for a leading indicator of the effect of the credit crunch on the real economy. The letters of credit that used to be routine are no longer available, so goods do not move. We live in a just-in-time economy and the paralysis of shipping will eventually lead to empty shelves.

This crisis is very much larger than merely real estate. Liquidity, the supply of which ultimately depends on trust, is the lubricant in the economic engine. Without a sufficient supply, that engine will seize up, just as it did in the 1930s.

With no means to connect buyers and sellers, people can starve amid plenty, as they did then. In the 1930s both resources and real skills were plentiful, expectations were nowhere near so inflated and we had none of the structural dependencies on cheap energy and credit that we have now. Without cheap energy and cheap credit, our highly complex socioeconomic system cannot function. A long and painful readjustment is not just likely, but inevitable.

Paulson and Bernanke Claim Bail-Out is Working
The value of the controversial $700 billion financial rescue program has "already been demonstrated," Federal Reserve Chairman Ben Bernanke assured Congress Tuesday. The liquidity injections under the Troubled Asset Relief Program (TARP) are helping to stabilize the banking system, Bernanke said, although he noted that credit conditions "are still far from normal."

TARP underwent a dramatic restructuring last week to the surprise of many on Capitol Hill, sparking angry responses from some legislative officials who felt that Treasury Secretary Henry Paulson had played a "bait and switch" game with Congress. A hearing Tuesday before the House Financial Services Committee puts Bernanke and Paulson front and center along with Federal Deposit Insurance Corporation Chairwoman Sheila Bair as the economic gurus attempt to defend the revamped legislation.

"The value of the TARP in promoting financial stability has already been demonstrated," Bernanke told the committee in prepared remarks. "There are some signs that credit markets, while still quite strained, are improving." He cited actions taken in recent months, including moves by the FDIC to raise deposit insurance limits, stating that efforts have "appeared to stabilize the situation and to improve investor confidence in financial firms."

Bernanke also defended the Treasury Department's new use of TARP funds. Currently, most of $350 billion in the first half has been used to buy equity share in banks and in American International Group Inc. (AIG). Last week the Treasury Department came under fire from a House Oversight Committee subcommittee following news that the department no longer plans to buy troubled mortgage-related assets from banks with the $700 billion financial relief package created last month. The move abandons the original intention of the rescue bill, with Treasury Secretary Paulson saying the focus of the relief program would shift to other areas.

In his remarks, Paulson said that there "is no playbook" for fighting the financial turmoil that the country is facing, he argued that he had to change his focus as a result of the changing nature of the crisis. "There is no playbook for responding to turmoil we have never faced," Paulson told the members. "We adjusted our strategy to reflect the facts of a severe market crisis always keeping focused on Congress's goal and our goal - to stabilize the financial system that is integral to the everyday lives of all Americans."

Bernanke also defended the decision, saying that the actions "might be needed to prevent the disorderly failure of a systemically important financial institution" and "will be critical for restoring confidence and promoting the return of credit markets to more normal functioning." "The ongoing capital injections under the TARP are continuing to bring stability to the banking system and have reduced some of the pressure on banks to deleverage, two critical first steps toward restarting flows of new credit," he added.

Although Bernanke apparently supports the revamp, Bair appears directly at-odds with the Paulson policy decision. She is seeking roughly $25 billion to be set aside to reward lenders who agree to ease terms for as many as 1.5 million homeowners at risk of defaulting on their mortgages. The FDIC posted details of the proposal on its Web site last week, ignoring Paulson's opposition. In his remarks, Bernanke offered his suggestions for stopping the spread of foreclosures.

"Steps that should be taken in this area include ensuring adequate funding and staffing of mortgage servicing operations and adopting systematic, proactive, and streamlined mortgage loan modification protocols aimed at providing long-term sustainability for borrowers," he said. He offered a warning against excessive executive compensation for TARP participants, stating that the government agencies "expect banking organizations to conduct regular reviews of their management compensation policies to ensure that they encourage prudent lending and discourage excessive risk-taking."

Paulson Clashes With Democrats on Using Bailout for Homeowners
Treasury Secretary Henry Paulson rejected using the government’s financial-rescue program as a "panacea" for economic difficulties, clashing with lawmakers who want the funds to help beleaguered homeowners. "The rescue package was not intended to be an economic stimulus or an economic recovery package," Paulson said in testimony to the House Financial Services Committee in Washington. The Troubled Asset Relief Program was designed to stabilize financial markets and the flow of credit and "is not a panacea for all our economic difficulties."

Barney Frank, who heads the House panel, cut off Paulson during the question-and-answer session, saying "the bill couldn’t have been clearer" in also being aimed at reducing foreclosures. Paulson told lawmakers he has no plans to use the second half of the $700 billion program, indicating it will be up to the incoming Obama administration to resolve the matter. "We don’t have a lot of time and I don’t usually do this," Frank said in interrupting Paulson during an exchange on how to deploy TARP cash. "I read sections of the bill that says -- write it down -- give them assistance," Frank, a Massachusetts Democrat, told the Treasury chief.

Representative Carolyn Maloney, a New York Democrat, urged using the funds "to stabilize housing." Democrats are also pursuing legislation to deploy part of the TARP to prevent General Motors Corp., Ford Motor Co. and Chrysler LLC from collapsing due to a lack of cash. "I don’t think this is the purpose of the legislation," Paulson said at today’s hearing. "There are other ways" to help automakers. Federal Reserve Chairman Ben S. Bernanke told lawmakers at the hearing that using the TARP for buying stakes in banks is "critical for restoring confidence and promoting the return of credit markets to more normal functioning." He warned that lending in the U.S. is "still far from normal."

Federal Deposit Insurance Corp. Chairman Sheila Bair, an appointee of President George W. Bush who has been praised by Democrats for her initiatives to help homeowners, also differed with Paulson. "It is essential to utilize this authority to accelerate the pace of loan modifications in order to halt and reverse the rising tide of foreclosures that is imperiling the economy," Bair said today in prepared remarks. She sought support for a mortgage-relief plan using TARP that she said could prevent almost 1.5 million foreclosures by the end of 2009.

Paulson, who has pledged $250 billion of TARP for buying stakes in banks, said capital injections and a "modest" contribution to a Fed program for consumer finance are the best ways to use the bailout money. Paulson has also used $40 billion to help American International Group Inc. "We have seen that capital purchases are clearly powerful in terms of impact per dollar of investment, which is a major advantage under the current circumstances," Paulson said today in his prepared remarks.

Frank countered that "public confidence in what we have done so far is lower than anybody would have wanted to be." He said "there is an overwhelmingly powerful set of reasons why some of the TARP money must be used" for aiding homeowners struggling to keep their homes. "I have reservations about spending TARP resources to directly subsidize foreclosure mitigation because this is different than the original investment intent," Paulson said in opening remarks. "We continue to look at good proposals and are dedicated to implementing those that protect the taxpayer and work well."

Paulson last week abandoned his original plan for TARP, which was to purchase distressed mortgage-related assets from financial firms to unblock lending. He said today there was not enough "firepower" left in the fund to make a difference buying stakes in banks. "It amazes me" that the Treasury eliminated its original proposal, Representative Maxine Waters, a California Democrat said today. "I could not believe it." Waters reiterated her support for empowering Bair to oversee foreclosure-prevention efforts. The FDIC chairman "has discovered how to do these loan modifications," she said.

‘I have not said no to using TARP for foreclosure mitigation," Paulson responded to Waters. Paulson flagged efforts already under way to prevent foreclosures. Officials have made "substantial progress" in reducing foreclosures where possible, he said. He hailed the Federal Deposit Insurance Corp.’s program with the failed IndyMac Bancorp., as well as new mortgage-servicing guidelines backed by Fannie Mae and Freddie Mac, the home-loan financers now in government-run conservatorship. Instead of pouring money into mortgages, the Treasury seeks to set aside some of the rescue funds for shoring up the secondary market for consumer loans. "By investing only a modest share of TARP funds in a Fed liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit," Paulson said.

In a weird world, yields on Tips point to deflation
Would you believe that we shall actually have significant deflation in the US next year? And the year after that? And flat consumer prices for the year following? That's happened only once in a developed country since the 1930s - when Japan recorded a negative 1.6 per cent consumer price index for 2002. Yet, if you believe the yields on US Treasury inflation protected bonds, or Tips, we shall have a 2.2 per cent fall in prices in 2009, a 2.5 per cent decline in 2010 and only flat prices in 2011. If that turns out to be true, the real interest rate burden on even the highest-rated borrowers will be extremely hard to bear.

As a practical matter, long before we had significant "negative prints" of consumer prices, the Federal Reserve would just flat out buy Treasury bonds and monetise away with "quantitative easing". Gold dealers would replace hedge fund managers at the art auctions, model agency parties and Congressional hearings. What's really going on is another effect of the disappearance of dealer and arbitrageur capital. The dealers can't afford to make efficient markets, given their decapitalisation, downsizing, and outright disappearance. That means anomalies sit there for weeks and months, where they would have disappeared in minutes or seconds.

The arbs, well, they thought they had risk-free books with perfectly offsetting positions. These turned out to be long-term, illiquid investments that first bled out negative carry and then were sold off by merciless prime brokers. So, if you still have cash, there's a lot of credit risk-free value on offer in the US Treasury Tips market. If you could leverage these positions, you'd make a fortune - but that would only be possible in an alternative universe. For example, there is the Treasury inflation-indexed bond with a January 2009 maturity. It is trading at a real annualised yield of 11.85 per cent and an implied break-even inflation rate of -11.7 per cent. That's right. I re-read and checked the numbers, which are based on a price midway between the bid and offer.

The problem is that it is so difficult for dealers to finance these issues that the bid/ask spread is about 190 basis points. So, while the underpricing you get when you punch the numbers into your bond calculator comes to 140 basis points, that is overwhelmed by the market's illiquidity. Fine, let's forget the arbitrages because this is just too illiquid and weird a world. How about just buying the bonds outright? US inflation-linked bonds are the cheapest in the developed world; we'll leave emerging market risk to others for the moment.

This is in part due to the indexation of pensions in most other advanced countries, which leads to an enormous built-in demand for longer-dated paper and consequent overpricing. Along the US Tips curve, the best values would be at the seven-year part of the curve, where there was the most forced unwinding of leveraged positions. By one measure, (comparative yields on asset swaps), seven-year Tips bonds are asset swapping at 130 basis points over Libor, agency bonds from housing entities are asset swapping at 50 basis points over. You actually pick up quality selling the agencies and buying Tips since Tips bonds are full faith and credit obligations of the US government, while the agencies have either an "effective" guarantee or an "implicit" guarantee, depending on which official is speaking on which day.

Mike Pond, an inflation-linked bond strategist at Barclays Capital, says: "A lot of people call the move in nominal Treasuries [without the inflation indexing] a flight to quality. But it is a flight to liquidity. Tips have the same credit as nominals but the nominals are much more liquid. If you believe the most dire scenarios, then we would have low inflation in the near term but the combined stimulus from fiscal and monetary policy should lead to a steeper curve in the longer term" - as inflation picks up. The relative scarcity of Tips should increase. Mr Pond says Barclays estimates that issuance of nominal Treasury bonds next year should be about $1,400bn while Tips will account for just $56bn of gross issuance. That 25-to-1 ratio compares with a 2008 ratio of 15-to-1.

So if you are a "real money" person who doesn't finance your bond positions, the relative values are pretty striking. If you listened to Treasury secretary Hank Paulson speak on November 12, you heard him admit that, by the time the rescue/bail-out bill was signed into law on October 3, he had realised that the supposed purpose of the troubled asset relief programme fund, buying distress-price mortgage backed paper, was not the best way to spend the money. The honest thing to do would have been to share that observation with the taxpayers who were putting up the cash. He did not. This column was alone in pointing out, the next business day, that Tarp, as laid out at the time, would simply not happen and that the money would go to buy preferred stock. While I enjoy saying "I told you so", it will be even more pleasurable to see the back of this official.

Cancel the 'blank check'
U.S. Sen. Jim Inhofe said Saturday that Congress was not told the truth about the bailout of the nation's financial system and should take back what is left of the $700 billion "blank check'' it gave the Bush administration. "It is just outrageous that the American people don't know that Congress doesn't know how much money he (Treasury Secretary Henry Paulson) has given away to anyone,'' the Oklahoma Republican told the Tulsa World. "It could be to his friends. It could be to anybody else. We don't know. There is no way of knowing.''

Inhofe's comments, unusually pointed even for a senator known for being blunt, come on the heels of Paulson's shift in how he thinks the bailout funds should be spent. Last week the Treasury secretary announced he was abandoning his plan to free up the nation's credit system by buying up toxic assets from troubled financial institutions. Instead, Paulson wants to take a more direct action on the consumer credit front. "He was able to get this authority from Congress predicated on what he was going to do, and then he didn't do it,'' Inhofe said. "So, that's enough reason right there.''

Inhofe recalled earlier comments opposing Paulson's plan because the administration's point man did not have answers for a number of questions. He also recalled questioning the rush to get the bailout passed. "I have learned a long time ago. When they come up and say this has to be done and has to be done immediately, there is no other way of doing it, you have to sit back and take a deep breath and nine times out of 10 they are not telling the truth,'' he said. "And this is one of those nine times.''

Inhofe has laid out his legislative plans for this week on the bailout package in a letter to his Senate colleagues. He wants to freeze what is left of the initial $350 billion — reportedly $60 billion, but Inhofe concedes he does not know for sure. Then he wants a provision requiring an affirmative vote by Congress before Paulson can get his hands on the second $350 billion of bailout money.

Current law lays out a scenario where President Bush submits a plan on the second half of the funding. Lawmakers have 15 days to disapprove it, but Inhofe questions that wording. "Congress abdicated its constitutional responsibility by signing a truly blank check over to the Treasury Secretary,'' he wrote. "However, the lame duck session of Congress offers us a tremendous opportunity to change course. We should take it.''

In the interview, the senator said his plans can provide "redemption'' for those senators who supported Paulson. Inhofe's plan appears to be a long shot at this point. Senators originally approved the bailout plan by a 74-25 vote. He does not know how much support he has among his Republican colleagues, and he concedes Democratic leaders could block it. Bush also could veto it if it were to make it out of Congress.

Neither Senate Majority Leader Harry Reid's office nor the Treasury Department commented. Reid, D-Nev., wants to use the upcoming lame duck session to push economic issues such as extending unemployment benefits and aid to the nation's ailing auto industry. Inhofe opposes both. "You don't stimulate the economy by giving away more money,'' he said.

In response to concerns expressed by some that allowing even one of the big automakers to fail would be too much of an economic hit for the nation, Inhofe said reality must be accepted. "If we keep on nursing a broken system, then we can't expect to have a different result come later on,'' he said. "I just think we have to draw the line someplace, and the time is here.''

US Producer Prices Post Record Drop As Commodity Prices Slide
U.S. producer prices posted a record drop last month, sliding for a third straight month as raw material and energy prices tumbled. While core prices remained higher, price pressures deeper in the production pipeline continued to decline sharply. Raw materials registered another record drop in prices, while energy prices posted the biggest decline in over 22 years.

The report suggests the weakening economy and falling energy prices should continue to drag down inflation in coming months, which should allow the Federal Reserve to keep its focus on spurring growth and containing the financial crisis. The producer price index for finished goods slid 2.8% on a seasonally adjusted basis in October, topping the previous record drop of 1.6% in October 2001, the Labor Department said Tuesday. The index fell 0.4% in September. The drop in October was also substantially more than the 1.8% decline predicted by economists in a Dow Jones Newswires survey.

Still, the PPI remained up 5.2% from October 2007, reflecting big increases in the spring, when energy prices were at record highs. The core PPI advanced 0.4% last month from September, compared with expectations of a 0.1% increase. It was up 4.4% from a year ago. Last week, a government report showed a record drop in import prices in October. Consumer prices to be released Wednesday are also expected to fall amid an ongoing drop in oil and commodity prices. With the U.S. economy considered by most economists to already be in a recession and credit markets remaining severely strained, many market participants expect the Fed to continue to cut rates.

Late last month, the Fed slashed the fed funds rate by another 0.50 percentage point to 1%, its lowest level in four years. The statement said declines in energy and other commodities, combined with a deteriorating economic outlook suggests inflation will "moderate in coming quarters to levels consistent with price stability." Last week, Philadelphia Fed President Charles Plosser considered somewhat of an inflation hawk, said falling energy and commodity prices have "reduced my own concern about rising inflation expectations -- at least in the near term."

The PPI data showed energy prices posting a 12.8% drop last month, its biggest decline since July 1986, after falling 2.9% in September. Wholesale gasoline prices slid a record 24.9%. Food prices, meanwhile, were down 0.2%. Prices of passenger cars fell 1.7%, while light truck prices gained 2.6%. Deeper in the production pipeline, declining prices suggested that disinflationary pressures should continue. Prices of raw materials, known as crude goods, fell a record 18.6% on the month. Core crude goods prices also posted a record decline of 17.0%. Intermediate goods prices fell an unprecedented 3.9%. Core intermediate goods decreased 1.8%.

Volcker issues dire warning on slump
Paul Volcker, the former chairman of the US Federal Reserve, has warned that the economic slump has begun to metastasise after a shocking collapse in output over the past two months, threatening to overwhelm the incoming Obama administration as it struggles to restore confidence. "What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.

"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this [government] protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial." His comments come as the blizzard of dire data in the US continues to crush spirits. The Empire State index of manufacturing dropped to minus 24.6 in October, the lowest ever recorded. Paul Ashworth, US economist at Capital Economics, said business spending was now going into "meltdown", compounding the collapse in consumer spending that is already under way.

Mr Volcker, an adviser to President-Elect Barack Obama and a short-list candidate for Treasury Secretary, warned that it is already too late to avoid a severe downturn even if the credit markets stabilise over coming months. "I don't think anybody thinks we're going to get through this recession in a hurry," he said. He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."

Mr Volcker is a towering figure in the US, praised for taming the great inflation of the late 1970s with unpopular monetary rigour. He is no friend of Alan Greenspan, who replaced him at the Fed and presided over credit excess that pushed private debt to 300pc of GDP. "There has been leveraging in the economy beyond imagination, and nobody was saying we need to do something," he said.

"There are cycles in human nature and it is up to regulators to moderate these excesses. Alan was not a big regulator." Even so, he said the arch-culprit was the bonus system that allowed bankers to draw forward "tremendous rewards" before the disastrous consequences of their actions became clear, as well as the new means of credit alchemy that let them slice and dice mortgage debt into packages that disguised risk.

Treasury pays $33.56 billion to 21 banks
The government said Monday it has supplied $33.56 billion to 21 banks in a second round of payments from the $700 billion rescue program. The Treasury Department confirmed the second round of government stock purchases designed to bolster the balance sheets of the nation's banks to combat the worst financial crisis in more than seven decades. The new payments follow an initial $125 billion designated for nine of the country's biggest banks. The rescue program has earmarked payments of $158.56 billion with officials working to get more payments out to banks in coming weeks.

Treasury Secretary Henry Paulson announced last week the administration was abandoning the initial centerpiece of the rescue program, the purchase of troubled mortgage-backed securities from banks in an effort to bolster their balance sheets. That was the only program Paulson mentioned as Congress debated the rescue package, which was approved on Oct. 3. However, Paulson said that the severity of the financial crisis made him realize it would take too long to get the troubled asset program into operation. In its place, he announced on Oct. 14 that the government would buy shares of bank stock as a way to inject fresh capital into the institutions quickly.

He pressured nine of the largest banks to participate in the program during an Oct. 13 meeting at the Treasury Department, arguing that these institutions should go along with the idea in order to remove the stigma other banks might feel in getting money from the government. The rescue program has drawn a significant amount of criticism from lawmakers who have objected to the sudden switch in emphasis, what they see as a lack of restrictions on the funds, which means banks can simply hoard the fresh capital or use it to pay dividends to their shareholders or acquire other institutions rather than using it to boost their lending.

Paulson and Federal Reserve Chairman Ben Bernanke were scheduled to testify before the House Financial Services Committee on Tuesday to answer questions that have been raised about the bailout program. The Treasury announcement on Monday said the largest stock purchase in the second round was $6.6 billion paid to U.S. Bancorp of Minneapolis. The smallest stock purchase in the second round was $9 million paid to Broadway Financial Corp. of Los Angeles. Many of the banks in the second group of 21 had already announced that the government was purchasing stock once they had reached preliminary agreements. Treasury does not make any announcement until after the final legal documents are signed, a process that can take a month from when the preliminary agreements are reached.

The deadline for banks with publicly traded stock to apply for funds was Friday. However, Treasury has said it will extend the application period for some 6,000 banks which do not have publicly trade stock because Treasury is still working on a modified application form for these institutions. The Treasury noted that the $10 billion scheduled to be paid to Merrill Lynch & Co. has been deferred pending the completion of that company's merger with Bank of America Corp.

Sorry folks but industrial production screams recession
Today the Federal Reserve reported an unexpected 1.3% surge in October industrial production. Capacity utilization increased to 76.4%, and production in manufacturing, mining, and utilities grew 0.6%, 6.1%, and 0.4%, respectively. Consumer goods production increased 1.3%, while business equipment production fell another 2.2% (following a September 7.1% decline). Sounds great, right? Wrong.

One could curtly say that the downward trend is broken, but alas, we are in a recession right now, and good news is for the birds.

September industrial production growth was revised downward almost 1.0% to a 3.7% contraction. And furthermore, the Boeing strike and Hurricanes Gustav and Ike played their part in upward-biasing the data.

The chart (click to enlarge) illustrates monthly industrial production spanning 2006-2008 in levels (the index) and in annual growth rates (for all you y/y buffs on the right axis) as reported by the Fed and also without the effects of the Boeing strike and Hurricanes Gustav and Ike.

Without the super sizing effect of the strike and hurricanes, industrial production continued its nose dive that started in August and is down almost 12% 6% over the year. This is a significant and negative development in the only monthly measure of U.S. production.

The October industrial production release is just another piece of the recession puzzle for the National Bureau of Economic Research’s (NBER), where one more of its five major indicators - labor, wholesale and retail sales, industrial production, gross domestic product, and personal income – show that the economy is neck-deep in a recession.

The Great Bailout Debate
In the headlong rush here this week to devise a way to keep the Big Three automakers alive, it might be worth pausing for a moment to ask what this latest bailout exercise is intended to accomplish. Are we trying to save General Motors, Ford and Chrysler? Have Americans given up on the companies themselves, but want to preserve as many jobs as possible for their workers and suppliers? Or are we simply trying to forestall the shock of huge bankruptcies and layoffs at a moment when the economy cannot take another hit?

So far, all three goals have been jumbled together. But as the chiefs of the carmakers begin two days of congressional testimony today — with most attention on Rick Wagoner, the chief executive of G.M., the most imperiled of the automakers — it is possible to imagine very different kinds of bailouts, from those that simply buy time to those that might force the industry to make the kinds of changes that a generation of competition with the Japanese have failed, remarkably, to bring about.

"The problem right now is that everyone is trying to accomplish in a few days something that no one has been able to get the auto industry to do in a few decades," Mickey Kantor, a former United States trade representative, who was a central player in the Big Three’s negotiations with the Clinton administration in 1992, which also vowed to help Detroit and preserve jobs. "You are not going to protect everyone, find new leadership for the car companies, force innovation — and get Congress home for Thanksgiving."

This would be a difficult debate to have at any time. But it is virtually impossible to sort out priorities when the president is focused on surviving the last 64 days of his term and the president-elect is in Chicago running a government-in-waiting that wants to avoid specifics until he has the constitutional authority to act. At the same time, the Senate seems unlikely to be able to put together the votes for a truly large bailout. So far the only real money on the table is $25 billion that Congress authorized in September as part of an energy bill to help the auto industry re-tool their factories to make high-mileage vehicles, something the Big Three have resisted for a quarter of a century.

Back in the 1980s and 1990s, a government-financed initiative like that would have been called "industrial policy," which real capitalist democracies were supposed to avoid. When the Japanese perfected this approach — with a mix of research help, tax incentives and government "guidance" — American presidents would dispatch negotiators to demand a halt to the practice. The Japanese took them out to nice sushi dinners, gave them a police escort back to the airport, and ignored them. But in the past few days, the talk about using the government’s money to retrofit factories has begun to fade. Suddenly, the $25 billion is being talked about as a cash infusion to avoid layoffs or bankruptcies for the next few months.

On Monday, Dana Perino, the White House spokeswoman, said President Bush would be willing to release the money if the Big Three "can show viability and a willingness to make tough decisions to restructure themselves." A few minutes later, though, she made it pretty clear that this was not like the Chrysler bailout of the 1980s, or even the Mexican bailout of the 1990s — emergency loans on which the taxpayers ultimately made a profit. This is a giveaway, she acknowledged, saying there was virtually no chance that "the taxpayers would actually be paid back." Suddenly, this sounds like money to stop the bleeding, not pay for retooling. If so, is this the best way to save jobs?

David Yermack, a professor of finance at New York University, made a case the other day in The Wall Street Journal that with the $465 billion Ford and G.M. have invested in their factories over the past decade, they "could have closed their own facilities and acquired all the shares of Honda, Toyota, Nissan and Volkswagen." Of course, the Japanese and the Germans weren’t selling. But the professor was making a deeper point: If the huge inefficiencies, the wrong mix of cars, the union contracts and the work rules leave no hope of saving G.M. and Ford from eventual bankruptcy, maybe the debate should explore alternative ways to spend the $25 billion and whatever follows.

Professor Yermack’s half-facetious suggestion of "cutting each worker a check for $10,000" would not solve the problem, but there has always been a debate about whether helping foreign carmakers take over some of the American-based production facilities, and the dealer networks, might, in the end, save more jobs in the United States. It might also save the automotive suppliers, who would be among the first casualties if G.M. and Ford are forced into bankruptcy. President-elect Barack Obama has said his goal is to make sure there are jobs, and automotive production facilities, inside America’s borders.

To President Bush, that always meant promoting American-owned companies; early in his term, when he invited carmakers to show off their innovative technologies on the South Lawn of the White House, foreign manufacturers who were the first to put hybrid cars on the streets were left off the guest list. So it was telling that on Monday, at the end of the Bush administration, there was a ribbon-cutting to open a new car plant in the United States in Greensburg, Ind. It belongs to Honda. The company has already begun hiring 2,000 workers to build four-cylinder Civics, including one model fueled by natural gas.

Why Bankruptcy Is the Best Option for GM
General Motors is a once-great company caught in a web of relationships designed for another era. It should not be fed while still caught, because that will leave it trapped until we get tired of feeding it. Then it will die. The only possibility of saving it is to take the risk of cutting it free. In other words, GM should be allowed to go bankrupt.

Consider the costs of tackling GM's problems with some kind of bailout plan. After 42 years of eroding U.S. market share (from 53% to 20%) and countless announcements of "change," GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer). As for its more successful competitors, Toyota (19% market share) has three, and Honda (11%) has two.

GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota's.

Foreign-owned manufacturers who build cars with American workers pay wages similar to GM's. But their expenses for benefits are a fraction of GM's. GM is contractually required to support thousands of workers in the UAW's "Jobs Bank" program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it's not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month.

Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is. And therein lies the problem: The cost of terminating dealers is only a fraction of what it would cost to rebuild GM to become a company sized and marketed appropriately for its market share. Contracts would have to be bought out. The company would have to shed many of its fixed obligations. Some obligations will be impossible to cut by voluntary agreement. GM will run out of cash and out of time.

GM's solution is to ask the federal government for the cash that will allow it to do all of this piece by piece. But much of the cash will be thrown at unproductive commitments. And the sense of urgency that would enable GM to make choices painful to its management, its workers, its retirees, its suppliers and its localities will simply not be there if federal money is available. Like AIG, it will be back for more, and at the same time it will be telling us that it's doing a great job under difficult circumstances.

Federal law provides a way out of the web: reorganization under Chapter 11 of the bankruptcy code. If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM's viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn't be easy but, unlike trying to bail out GM as it is, it wouldn't be impossible.

The social and political costs would be very large, but if GM fails after getting $50 billion or $100 billion in bailout money, it'll be just as large and there will be less money to soften the blow and even more blame to go around. The PBGC will probably need money to guarantee GM's pensions for its white- and blue-collar workers (pension support is capped at around $40,000 per year, so that won't help executives much). Unemployment insurance will have to be extended and offered to many people, perhaps millions if you include dealers, suppliers and communities dependent on GM as it exists now. A GM bankruptcy will make addressing health-care coverage more urgent, which is probably a good thing. It would require job-retraining money and community assistance to affected localities.

But unless we are willing to support GM as it is indefinitely, the downsizing and asset-shedding will have to come anyway. Even if it builds cars as attractive and environmentally responsible as those Honda and Toyota will be building, they won't be able to carry the weight of GM's past. GM CEO Rick Wagoner says "bankruptcy is not an option." Critics of a bankruptcy say that GM won't be able to get the loans it will need to guarantee warranties, pay its operating losses while it restructures, and preserve customers' ability to finance purchases. While consumers buy tickets from bankrupt airlines, electronics from bankrupt retailers, and apartments from bankrupt builders, they say consumers won't buy cars from a bankrupt auto maker. But bankruptcy no longer means "liquidation" or "out of business" to a generation of consumers used to buying from firms in reorganization.

GM would guarantee warranty support with a segregated fund if necessary. And debtor-in-possession (DIP) financing -- loans that provide the near-term cash for reorganizing companies -- is very safe, because the DIP lender has priority over all other claimants. In normal markets, it would certainly be available to a GM that has assets to sell, including a viable overseas business. Such financing is probably available even now. In any event, it would be lined up before a filing, not after, so any problems wouldn't be a surprise. As a last resort, we could at least consider a public DIP loan to support a reorganizing GM with a good chance to survive -- as opposed to subsidizing a GM slowly deflating.

The fate of Daewoo -- the Korean auto maker that collapsed in 2000 after filing for bankruptcy, leaving about 500 dealers stranded in the U.S. -- is often cited as "proof" that a GM bankruptcy won't work. But Daewoo was headquartered in a part of the world where bankruptcy still carries a major stigma and usually means liquidation. Daewoo's experience is largely irrelevant to a major U.S. company undergoing a well-publicized positive transformation, almost certainly under new management. GM as it is cannot survive without long-term government life support. If it gets that support, it can't change enough and won't change fast enough. Contrary to Mr. Wagoner's brave declaration, bankruptcy is an option. In fact, it's the only option that merits public support and actually has a chance at succeeding.

How zombie companies suck the life from an economy
Why driving is now safer thanks to the recession

One of the minor irritations of the recession is all these newspaper columns talking about how good the downturn will be for us all. You know the ones I mean. They usually prattle on about rediscovering "what matters in life", and purging ourselves of our consumerist cravings, as if the recession was some strange new diet fad – a kind of All-Bran for the soul. Yet they’re almost always written by hugely well-paid columnists who will never need to worry about losing their jobs and who already enjoy a standard of living far and above that of the average person.

But that’s not to say that there aren’t some bright sides to the downturn. It seems that driving has become safer for one thing... The recession has apparently slashed the number of cars on the road, according to Accident Exchange. The company provides rental cars for people who have been in a crash. But because people are cutting down on journeys to save petrol, and using public transport more, the company’s business has suffered. "Reduced traffic volumes" mean "reduced accident volumes." And not only is driving safer, but if you do have an accident, you’ll get your car fixed more promptly. That’s because of "improved efficiency in the speed of vehicle repairs arising from greater capacity within the repair industry, which itself has arisen from reduced accident volumes."

Of course, this recession silver lining is bad news for Accident Exchange shareholders. And it’s not great for the already beleaguered car industry. Accident Exchange is just yet another big customer that presumably won’t be replacing its fleet as rapidly as it once would have. Meanwhile, car rental group Avis Europe says it is having to raise car rental prices to "offset falling profits", reports the Evening Standard. Again, I imagine that the downturn will mean lower fleet turnover for Avis as well. So demand for cars is dropping off. Sales are nosediving. Most of the time, this would mean car companies going to the wall. And certainly, it’s bad news for dealerships.

But the car manufacturers aren’t going down without a fight. They want their share of the money that the government has stumped up for the banks. In the US, politicians are currently wrangling over a bill to lend at least $25bn to General Motors, Chrysler and Ford. This is the problem when you bail out one industry. You can argue that some banks were too big to fail. That’s a problem that must be rectified in the future. But it makes it much harder for politicians to refuse to bail out other industries. And of course, politicians aren’t thinking about the economy. They’re thinking about votes. They’re thinking about local special interest groups with lots of power.

Yet there’s no way that you can argue that car manufacturers are too big to fail. The retail sector in the US employs far more people – is anyone going to cough up to bail out Circuit City for example, or try to portray it as vital to the US economy? Didn’t think so. The trouble is, the more money you spend on propping up companies that should go to the wall, the more you squeeze out new companies and industries that should be arising in their place. Constant bail-outs hamper the process of "creative destruction" that capitalism relies upon.

Once a company needs state aid to remain viable, it becomes a monster. The usual justification for government backing for an industry is that it’s a temporary measure, just to see it through the hard times. But income tax was also a temporary measure when it was first introduced. State funding is addictive and debilitating. The money isn’t the company’s so it tends to spend it unwisely. And then it comes back for more. And eventually, you reach the point where the industry becomes so bloated that it really is "too big to fail", without causing massive unemployment and hardship.

The financial sector is the perfect example of this in action. In recent decades, the finance industry has had the implicit backing of governments and central banks on both sides of the Atlantic – in fact, in most developed countries. Backed by the faith that central banks would always cut interest rates at the slightest hint of any trouble, banks were able to send their tendrils into every nook and cranny of the global economy. They were playing with other people’s money after all. It was as if risk had been abolished.

And with the focus purely on expansion, cheered on by governments and consumers who happily mistook debt for wealth, the financial sector grew and grew, sucking in resources that could have been more productively employed elsewhere. We all know where that has left us – with a bankrupt financial system that’s swallowing money as fast as we can pour it in. We already have enough zombie companies consuming our resources. Let’s not create any more.

Ford Tallies Potential Losses
The debate over the job loss attached to the potential failure of Detroit's Big Three auto makers took another turn as an internal document from Ford Motor Co. showed thousands of workers in every state could be at risk. The state-by-state tally detailed the number of workers directly employed by Ford, the number of auto parts suppliers who work with the company and the amount they spend to support their business.

To demonstrate the far-reaching tentacles of the industry, Ford also outlined the number employed at its dealerships and the total amount of health care spending related to those who work for the nation's second largest U.S.-based auto manufacturer. According to the analysis obtained by The Wall Street Journal late Monday, 25 states could lose 3,000 Ford-related jobs or more if the auto maker were to disappear. To be sure, the job loss would be felt most acutely in the nation's Rust Belt. In Michigan, Dearborn-based Ford employs 38,380 auto workers and relies on 3,111 auto parts suppliers, according to the document. In Ohio, the numbers are also high, with 8,540 workers at Ford. But a state like Kentucky would also feel the pain, with 5,615 employees working directly for Ford. Thousands more employees who work for suppliers and dealers at Ford would only add to the potential job loss.

The tabulated data is part of a concerted and intense public relations effort before the chief executives at General Motors Corp., Ford and Chrysler LLC testify in front of Congress Tuesday in support of a proposal to extend $25 billion in low-interest loans to the ailing auto makers. After skepticism voiced by some U.S. representatives and senators from outside the states where Detroit's Big Three reign, GM, Ford and Chrysler launched a broad media campaign to prove to a national audience that their survival is key to the nation's economic health. It was unclear late Monday whether the analysis compiled by Ford would be presented to members of the Senate Banking Committee, the first of two congressional committees to explore the crisis in the auto industry at hearings this week.

As part of the public relations blitz, Ford Chief Executive Alan Mulally is expected to make his case in half-dozen separate national television appearances Tuesday, according to those familiar with the matter. After years of restructuring that has closed dozens of plants and shed thousands of workers, Detroit's Big Three auto makers are now turning to governments around the world to fund a vast downsizing of their industry. The companies' poor earnings posted earlier this month make it clear Ford and GM are running out of money to finance their Michigan-based businesses, with GM the sicker of the two. Less is known about Chrysler, which is privately held.

At Ford, the auto maker hopes to improve its cash position with or without additional governmental loans. It said it will boost its position by between $14 billion and $17 billion by the end of 2010, through a mix of job cuts, reduced benefits, lower capital spending, selling assets and new financing measures. GM also announced it would bump up its plan for $15 billion in liquidity initiatives outlined in July 2008 by another $5 billion of incremental actions. More worrisome than the crippling, billion-dollar losses posted by GM and Ford earlier this month was the greater-than-expected cash burn at each company. Ford plowed through $7.7 billion, seeing its liquidity position plummet to $18.9 billion.

Ford said the cash outflow has been greater than anticipated, but Chief Financial Officer Lewis Booth told reporters earlier this month the company is "comfortable with its liquidity position." The company expects the amount of cash burn in the fourth quarter to be less than the third quarter. GM on the other hand has said that it could run out of the funds it needs to operate the business as soon as the end of the year without a massive infusion of cash or a radical improvement in auto sales. Critically, Ford also has available credit lines of $10.7 billion to supplement its gross cash of $18.9 billion at the end of the third quarter. Mr. Booth has said Ford doesn't expect to tap the loan revolvers, noting that the company will continue to aggressively reduce costs and manage cash with discipline.

Ford is in a better position than its rivals in terms of liquidity in part owing to a decision in late 2006 by Mr. Mulally, who had just recently joined the company, to raise more $23 billion in debt using almost all the company's assets as collateral. Despite those moves, Ford has registered $24 billion in net losses since the start of 2006, and its stock price has traded at multidecade lows in recent months. All auto makers have been stung by a steep decline in demand from consumers grappling with mounting economic woes and reduced availability of credit in recent months. For much of the year, Ford and its peers were hurt primarily by the sharp decline in sales of trucks and sport-utility vehicles as fuel prices hit record highs. But just as fuel prices started receding, the financial crisis sent consumer confidence reeling, keeping potential buyers out of showrooms entirely

Ford Shakes Mazda's Tree For Pennies
The Detroit automaker sells much of its stake in the Japanese carmaker, in the process relinquishing control; to whom it is selling remains in question. As Detroit's Big Three scramble to raise capital for survival in an economy that has brutalized their sales and profit margins, Ford Motor will relinquish its 12-year control of Japan's Mazda Motor for a pittance--a few hundred million dollars that it will quickly burn through while awaiting the outcome of congressional deliberations on a potential Washington bailout of the carmakers.

Ford will sell a 20.0% stake, reducing its holdings of Mazda, which it rescued from bankruptcy in 1979, to 13.4%. Mazda said Tuesday it will buy back 6.9% of its own shares, at Tuesday's closing price of 184 yen ($1.91), for up to 17.9 billion yen ($185.3 million) on Wednesday morning. More than 20 unidentified "strategic business partners" will acquire the rest, the Japanese car manufacturer said. Mazda noted that Ford would gain more than 52 billion yen ($540.3 million) from the stake sale overall.

"The sale of Mazda shares by our partner, Ford, will not result in any change in Mazda's strategic direction," Mazda chief Hisakazu Imaki said. "We will continue our strategic relationship through our ongoing joint ventures with Ford." "The big question is who they sell it to," said Andrew Phillips, an analyst in Tokyo for KBC Securities. Ford would theoretically be reluctant to sell its holdings to a rival automaker because that would jeopardize the operational tie-ups and platform cooperation that Ford wants to maintain with Mazda. "Partners such as suppliers or trade companies or life insurers may take part in a cross-shareholding arrangement," he added. Possible candidates include trading firms Sumitomo Corp. and Itochu Corp., insurer Tokio Marine Holdings, and a Mazda auto parts supplier, Denso Corp., according to a Nikkei report.

Ford and Mazda will "continue our successful strategic relationship," and the sale helps "fund our product-led transformation," Ford CEO Alan Mulally sought to assure shareholders. In addition to losing board seats, Ford will be forgo some of its freedom to use Mazda as a proving ground for up-and-coming execs. Congressional testimony begins Tuesday as the Detroit automakers seek a $25 billion government lifeline. "If Ford is standing in line for federal government money, I guess you've got to show you've done everything you can and have run out of choices," Phillips concluded.

S&P 500 Index's 'Retest' of Low Fails to Spur Rally
The Standard & Poor's 500 Index is poised to extend this year's 42 percent drop after a rally from last week's five-year low lasted just one day, say analysts who study charts of trading patterns and prices to forecast changes in stocks. After rebounding 11 percent Nov. 13, the benchmark index for American equities slipped 6.6 percent during the last two days and will probably keep falling past 818.69, its lowest level since 2003, according to three top-ranked technical analysts. The S&P 500 declined below its Oct. 10 low of 839.8 before rallying last week, making it a ``retest'' to chart readers.

``Historically you would've had a better charge from the bulls at this point, and it hasn't developed,'' said Jeffrey de Graaf, a senior managing director at ISI Group Inc. in New York, in a telephone interview. ``The buyers haven't presented themselves in a meaningful way to show that there's a sustained move to the upside, so the concern is that you just drift here.'' The 11 percent trough-to-peak gain in the S&P 500 on Nov. 13 was one of six ``key reversals'' in the past 40 years, according to de Graaf, who defines the term using intraday levels and moving averages. Its 4.2 percent retreat a day later was the worst showing after such a turnaround by a factor of seven, he said.

De Graaf, the highest-rated technical analyst in Institutional Investor magazine's survey the past four years, said other indicators suggest stocks will keep falling. They include declining stocks outnumbering rising ones; higher trading volume when the market is falling than when it's rising; and two- year Treasury note yields near record lows at 1.17 percent, an indication investors are seeking to avoid risk. The S&P 500 tumbled 44 percent this year to a five-year low on Nov. 13, and dropped 48 percent from its October 2007 peak, according to data compiled by Bloomberg. Stocks were dragged down by almost $1 trillion of writedowns and credit losses at financial companies globally stemming from the collapse of the U.S. subprime mortgage market.

The index is headed for its biggest annual decline since the Great Depression, when it fell 47 percent in 1931. Of the 30 stocks in the S&P 500 that traded at $100 or higher at the peak, 24 now trade under that threshold, and eight fetch less than $50, according to data compiled by Bloomberg.The Nov. 13 slide pushed the S&P 500 below its previous intraday low for the year on Oct. 10. The gauge climbed 0.9 percent to 857.99 as of 10:44 a.m. in New York today. ``The final low will be much lower than this,'' and may not occur before the fourth quarter of next year, de Graaf said.

At a minimum, stocks are likely to revisit their lowest levels of 2002 and 2003, when a 51 percent slide from the March 2000 peak sent the S&P 500 as low as 768.63, said Mary Ann Bartels, chief market analyst at Merrill Lynch & Co. in New York. ``You need patience and a lot of time to build a base'' from which the market can rally, said Bartels, who ranked second in the Institutional Investor poll this year. ``This is still a very young base. If you want to use a football analogy, we're in the early part of the first quarter.''

The process can take from five months to a year, and is likely to take a year this time, Bartels said. One indication is a proprietary measure showing sellers driving volume rather than buyers, she said. ``What we need is buyers to come back into the market and we don't have that,'' she said. The S&P 500 is likely to fall to around 680, 20 percent lower than yesterday's close, probably by the end of the year, said John Roque, senior technical analyst for New York-based brokerage Natixis Bleichroeder Inc. ``Every low hasn't held yet, so why should I assume this one's going to?'' Roque said.

Yen Strengthens Versus the Euro as Recession Curbs Carry Trades
The yen gained against the euro for a third day as the prospect of a global recession prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan's currency.Japan's currency also strengthened against the Brazilian real as Asian stocks followed Wall Street lower. The Australian and New Zealand dollars declined on concern recessions in the U.S., Europe and Japan will crimp demand for the commodities exported by the South Pacific nations.

``We're not likely to see any good economic news for some time,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Stocks and commodities show we're in a recession. In this environment the yen is likely to gain.'' The yen may rise to 121 per euro and 95.50 against the dollar today, Ishikawa said. Japan's currency rose to 42.3042 per Brazilian real from 42.4243. In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's benchmark rate of 0.3 percent is the lowest among major economies.

``The yen continues to benefit from risk aversion,'' wrote currency strategists led by Zurich-based Mansoor Mohi-uddin at UBS AG, the world's second-largest foreign-exchange trader, in a research report yesterday. ``Our core view remains that the low- yielding safe haven currencies will stay supported as the central banks of higher-yielding currencies are forced to cut interest rates further.'' UBS forecasts the yen may strengthen to 90 against the dollar and 108 versus the euro in one month.

The Federal Reserve Bank of New York said yesterday its general economic index fell this month to minus 25.4, the lowest level since records began in 2001. Readings below zero signal New York State manufacturing shrank. The MSCI Asia Pacific index of regional shares fell 1 percent after U.S. stocks tumbled yesterday, extending a two-week decline. Japan's economy entered a recession in the third quarter as corporate spending and export demand slumped, data showed yesterday. The 15 countries that share the euro are also in a recession, a report showed last week.

The pound depreciated to $1.4557 on Nov. 13, the lowest level since June 2002, and 86.63 pence per euro, the weakest since the 15-nation currency's 1999 debut, as the U.K. economy fell into a recession. Sterling will drop early next year to $1.28 per dollar, the lowest since 1985, as U.K. banks shrink foreign borrowings and the country's policy makers favor a weaker currency, wrote Paul Meggyesi, a foreign-exchange strategist at JPMorgan & Chase Co., in a research note Nov. 14. Sterling will weaken to a record 92 pence per euro, he wrote.

The yen has advanced 14 percent versus the dollar, 33 percent against the euro and 53 percent against the Australian dollar in the past three months on slumping global economies. Gains in the yen may erode Japanese exporters' earnings by eroding the local-currency value of their overseas sales. The yen's 16 percent appreciation against the dollar this year contributed to companies including Toyota Motor Corp. slashing profit forecasts and cutting investment. Toyota, which makes more than three-quarters of its sales abroad, forecast profit will fall this fiscal year by almost 70 percent. The automaker will fire 3,000 workers by March, and the Nikkei newspaper reported this month that it will delay adding capacity at a domestic plant that makes Lexus sedans.

Citigroup falls on concern job cuts won't fix bank
Citigroup Inc shares fell as much as 6.4 percent to a nearly 13-year low on Tuesday amid concern that a plan to shed 52,000 jobs might not go far enough to restore the banking giant to health. Chief Executive Vikram Pandit announced plans on Monday to eliminate the jobs by early next year in an effort to reduce operating costs at the second-largest U.S. bank by up to 20 percent in 2009.

About one-half of the jobs will be cut through asset sales, and one-half through layoffs and attrition. The reductions would reduce Citigroup's work force to 2005 levels. Citigroup offered few specifics on where the cuts will be made, except to say that they will be global and affect a wide array of business lines. Some analysts believe the New York-based bank may be hard-pressed to turn a profit in 2009. Citigroup has lost $20.3 billion in the last four quarters.

"The earnings picture is likely to be tough until there are signs of a stabilization in consumer credit quality, which at this point appears unlikely until at least the back half of 2009," CreditSights Inc analyst David Hendler wrote. Richard Bove, a Ladenburg Thalmann & Co analyst who rates Citigroup stock as "buy," said investors "still do not trust the company's balance sheet," and focused on the cuts as a sign of more troubles ahead, especially given the bank's exposure to many non-U.S. economies that are also under pressure.

He said investors should instead focus on the bank's diverse operations, which rivals cannot replicate. "This leads to the conclusion that despite loan losses and writedowns, earnings will recover," he wrote. "If this is the case, this stock is cheap." Citigroup shares were down 33 cents, or 3.7 percent, to $8.55, after falling as low as $8.32 earlier in the session on the New York Stock Exchange. They fell to a 13-year low of $8.28 on November 13. Through Monday, the shares were down 70 percent this year.

Call for probe into ex-Goldman executives
A senior Republican senator is seeking an investigation into potential conflicts of interest among former Goldman Sachs executives serving at the US Treasury and whether any officials exceeded their authority by implementing a controversial tax change without the approval of Congress. Chuck Grassley, the most senior Republican on the Senate finance committee, asked Eric Thorson, inspector-general of the Treasury, to investigate the "independence" of several Treasury officials who formerly worked at Goldman Sachs and serve as advisers to Treasury secretary Hank Paulson, the former chief executive of the Wall Street bank.

Mr Grassley said in a letter to Mr Thorson that there was reason to be concerned that “relationships” between the officials and board members at two merging banks, Wells Fargo and Wachovia, gave the “appearance of preferential treatment”. Mr Grassley singled out Robert Steel, a former Goldman official who worked under Mr Paulson at the Treasury before he became chief executive of Wachovia. Mr Grassley is specifically concerned with a change in the tax code the Treasury initiated in late September that saved some institutions tens of billions of dollars and paved the way for Wells Fargo's acquisition of Wachovia.

Citigroup was at the time also bidding for Wachovia, but was ultimately trumped by Wells Fargo, in part because it would not have received any benefit from the tax change because of its losses. The September 30 “notice” by the tax authorities, which fall under Treasury's jurisdiction, altered a section of the tax code that had previously prevented tax-motivated acquisitions of loss-making corporations. In effect, the notice eradicated a limit on the amount of taxable income an acquiring bank could deduct after a takeover. It has been estimated that the change could save Wells Fargo nearly $20bn (€15.9bn, £13.6bn).

Mr Grassley, who has a reputation for aggressively uncovering and pursuing tax evasion, has a previous working relationship with Mr Thorson, who served as chief investigator for the Senate finance committee and whom Mr Grassley once praised for having “integrity and courage”. Last week, Mr Paulson defended the code change and said it had been done through an “administrative process” that was “quite legal”. The Treasury secretary said that the previous tax policy was “impractical and unworkable” in the current economic environment. The Treasury said on Sunday it was reviewing the letter. Wachovia said “to the best of our knowledge” the company was not involved in the tax change. It added that Mr Steel did not have a severance agreement.

China's oil demand falls sharply amid global crisis
China's demand for oil is falling sharply and inventories are surging as the global economic downturn is gradually being felt, said China National Petroleum Corp (CNPC). Production at the nation's top oil producer has been affected "adversely" as the international financial crisis has continued to take its toll on the country, according to a statement on the company's website.

"The impact has become even more clear since September," the statement said, citing CNPC president Jiang Jiemin, who was speaking at a recent company video conference. "It manifests itself in tougher sales due to sharply contracting consumption, difficult production planning because of surging inventories, and slumping prices of oil and petrochemical products," he said.

Economic growth in China slowed to nine percent in the third quarter, the lowest level in more than five years. Industries such as the home appliance and steel sectors are seeing decreasing orders, with many steel makers suspending or cutting production, in turn leading to weakening demand for oil and gas, earlier Chinese reports said. Sinopec, the country's number one refiner, said in its third quarter report that sales of oil products between July and September went down by 3.2 percent from the second quarter to 31.8 million tonnes.

China downturn risk growing: central bank
The risks of a downturn in the Chinese economy are on the rise and will require steps to ensure adequate liquidity in the banking system, the central bank said on Monday. In its third-quarter monetary policy report, the People's Bank of China (PBOC) said that inflationary pressures had eased alongside falling commodity prices, and that it would focus on preventing deflation in the short term.

The PBOC said it would use open market operations to help increase liquidity, and would ensure that adequate credit is available in the financial system to complement the government's fiscal stimulus policies. "Uncertainties in the domestic economy are increasing, and the risk of an economic downturn is getting bigger. China's macroeconomic controls are facing a more complicated and fast-changing situation," the central bank said in the report. Annual economic growth slowed to 9 percent in the third quarter from 11.9 percent all of last year, and indicators for October showed factory output and investment slowing further.

The central bank singled out the property sector as one facing troubles, cautioning that problems there could spread to other parts of the economy. However, it did not provide specific economic forecasts. The central bank's assessment follows the cabinet's announcement earlier this month of a 4 trillion yuan ($586 billion) fiscal stimulus package, which came alongside a shift to an "appropriately relaxed" monetary policy. The central bank has already cut interest rates three times since mid-September to support growth, as well as encouraged banks to lend more to worthwhile projects.

Deputy central bank governor Yi Gang signalled last Friday that the central bank had shifted its focus to avoiding deflation, saying the risk of inflation had virtually disappeared. In its report on Monday, the PBOC cautioned that it had to tread carefully to make sure that its current stimulative policies did not sow the seeds of inflation down the road. "Monetary policy should prevent deflation in the short term but prevent inflation in the long run," it said, adding that rising labour costs and the potential for a rebound in resource prices could eventually put upward pressure on prices.

Lower inflation could provide more room for reform to the pricing of energy, transport, power, gas and water, the central bank said. The government currently controls such prices, which analysts say often leads to market distortions. The central bank noted that a global economic slowdown could strike a blow to the export sector, which is an important driver of growth. Data in recent days has confirmed that both Japan and the euro zone are technically in recession.

"The United States, Europe and Japan are facing recession, and emerging economies are also seeing a bigger risk of slowing down, which may have a relatively big impact on external demand for Chinese products," it said. The central bank did not provide forward-looking comments on the yuan's exchange rate, but it said that it would promote the currency's convertibility on the capital account. It is currently not freely exchangeable for purely financial transactions.

IMF agrees $518 million line of credit with crisis-hit Serbia
The International Monetary Fund has agreed a 518 million dollar line of credit for Serbia to help the country weather the global financial crisis, IMF chief Dominique Strauss-Kahn has said. Strauss-Kahn said in a statement Monday the proposed 15-month standby arrangement would be available for Serbia to draw on if needed amid the financial turbulence. He noted the loan agreement was made under regular procedures and not the streamlined emergency process available to countries struggling with the worst financial crisis since the Great Depression.

"The global financial turmoil has begun to spill over to Serbia, and this abrupt shift in the international environment is likely to slow down credit flows and economic activity across the region," Strauss-Kahn said. "While the banking sector's capital and liquidity buffers are substantial and should help weather the financial headwinds, strong policies will be important to maintain investor and market confidence. The IMF managing director said the agreement reached by an IMF staff mission and the authorities of the government of Prime Minister Mirko Cvetkovic was subject to approval by IMF management and the executive board.

"In view of Serbia's comfortable international reserve position and continued access to external financing, the arrangement is being considered under regular, not exceptional, procedures and access limits," Strauss-Kahn said. "The Serbian authorities do not intend to draw on the resources made available under the arrangement unless the need arises." Strauss-Kahn said the proposed stand-by arrangement was designed to support "a strong and comprehensive program" designed by Serbian authorities "aimed at maintaining macroeconomic and financial stability."

Hard hit by capital flight amid the global financial turmoil, Serbia has downgraded its economic growth forecast for 2009 to 3.0 percent from an earlier estimate of up to 7.0 percent. The IMF mission helped the Serbian government draft a 2009 budget which anticipates a maximum deficit representing 1.5 percent of gross domestic product (GDP). The 2008 budget deficit was 2.7 percent of GDP. The government measures also include structural reforms to boost the economy's growth and export potential, Strauss-Kahn said.

World stock markets dismissed a weekend Group of 20 financial crisis summit in Washington, convened by US President George W. Bush to address the worst financial crisis since the Great Depression. Investors and analysts appeared unimpressed with a pledge Saturday by the leaders of the G20 industrialized and emerging economies to cooperate to galvanize growth and overhaul the world's financial architecture. The group stopped short of announcing specific steps such as coordinated stimulus spending.

Cities Cut While Hoping for Government Aid
On Cities' Chopping Blocks: Libraries, Police, Firefighters, After-School Programs

What does a cash-strapped American city look like? Think fewer libraries, fewer public works projects, fewer after-school programs, fewer police officers and fewer public employees overall. Thanks to the whimpering economy, some city officials say such reductions will match their significantly smaller budgets. But they're also hoping the federal government will be able to ease at least some of the pain. "What we're saying is these are some ways that you can help us so we can help shore up the economy at the local level," said Atlanta Mayor Shirley Franklin. "It's a win-win."

A host of city leaders have made their case to federal officials recently. Franklin joined Philadelphia Mayor Michael Nutter and Phoenix Mayor Phil Gordon last week in signing a letter asking U.S. Treasury Secretary Henry Paulson for help. They want new aid for cities in the form of loans to help them operate their pension plans and address other costs as well as the allocation of $50 billion from the government's $700 billion bailout plan to be used for infrastructure projects. Separately, the Detroit City Council passed a resolution last week pushing for a $10 billion bailout for the city. Detroit Mayor Ken Cockrel Jr. will be in the nation's capital this week to push for money from a second stimulus package.

The U.S. Conference of Mayors, meanwhile, approached Congress a couple of weeks ago. The conference called for $89 billion over a 12- or 14-month period to use for deferred building projects. "We have had incredible joblessness that's gotten worse," said Tom Cochran, the CEO and executive director of the U.S. Conference of Mayors. "Mayors are responding that they can effectively utilize these funds to put people back to work." While the request from Atlanta, Philadelphia and Phoenix's mayors is distinct from that of the conference's proposal -- U.S.C.M. said it does not want to use money from the $700 bailout package - Gordon said that their plan is also about jobs.

A number of Phoenix projects, from an airport runway extension to a water treatment plant, have been stalled for lack of funding. If the government provided money for those projects, he said, they could be up and running quickly and would provide jobs for hundreds, maybe thousands, of local residents. For now, however, Gordon said city officials are bracing for possible cuts in everything from after-school programs to sanitation. "I think every day we wait, the crisis gets worse and worse," Gordon said, "especially when cities are able to put people to work today."

If federal officials decide to provide more aid to local governments, there are different opinions about the best way to do it. Mark Zandi, the chief economist and co-founder of Moody's Economy.com, said that the most efficient way for the government to deliver help would be by distributing aid to the states first -- governors, like California's Arnold Schwarzenegger and New York's David Patterson have already called for federal support -- and relying on them to use existing formulas and mechanisms to provide funds to cities and towns. It would be more effective, he said, than providing funding directly to municipalities.

"The states have got that infrastructure set up," he said. "To ask the fed[eral] government to do it would be extraordinarily costly and too complex. It just wouldn't get done." But Pat Hagan, the national audit partner for state and local government at Deloitte and Touche LLP, said that providing help to municipalities through existing federal programs -- such as low-income housing and social services programs -- could also prove successful. "That's probably an easier route" than creating a new program, he said.

Philadelphia Budget Director Stephen Agostini said that, for now, the city is preparing its budget with the assumption that the assistance won't come through. To help close a $108 million budget gap for the current fiscal year -- which ends this June -- Philadelphia is preparing to close 11 libraries and seven fire companies. It also lay off some 200 city worker and will not fill 200 vacant police officer positions. "We have to have a balanced budget," Agostini said.

Other cities are making similar cuts. Here is a breakdown of recent and proposed cuts in eight cities, courtesy of the U.S. Conference of Mayors:
Trenton, N.J.
• Layoffs, demotions and the elimination of most personnel vacancies, including 16 police officer and 13 firefighter vacancies and the demotion of 13 fire captains.
• An overall elimination of 10 percent of the city's workforce.
New York City
• So far, the city has cut $1.1 billion from last year's budget, $1.3 billion from this year's and $1.2 billion from next year's.
• Mayor Michael Bloomberg recently ordered city agencies to come up with another $1.5 billion in cuts.
• The city Department of Education will be cut by more than $580 million, in addition to $180 million in cuts to public schools last February.
• The police department budget will also be reduced by $286 million.
• Mayor Richard M. Daley has proposed laying off 929 city workers and eliminating 1,346 vacant jobs.
Oakland, Calif.
• Mayor Ron Dellums is proposing shutting down City Hall one day a week, eliminating 84 city jobs, imposing hiring freezes and cutting other services.
• Cuts to 130 positions in the city's fire department.
• 4,600 city employees will have their hours -- and pay -- cut by 10 percent each week.
• The pay and hour cuts, which begin Dec. 1, affect 4,600 city employees.
• The city earlier this year laid off 372 employees, eliminated about 900 jobs and cut some services.
• An immediate hiring freeze for most city agencies, including the police department.
• Seattle Mayor Greg Nickels and the city council have suggested reducing the mayor's proposed youth violence prevention initiative by $1.3 million.
• Reducing proposed new funds for building housing units for homeless people by $500,000.
• Shrinking the public safety program to install cameras in parks by $300,000. Cameras would be installed in fewer parks than planned.
• Eliminating several transportation projects, including the Renton Avenue South roundabout and participation in the county's South Park Bridge environmental study.
• Eliminating a hiring incentive program that pays for uniforms for new recruits in the Seattle Police Department.
Washington, D.C.
• Proposed cuts would impact transportation projects and affordable housing programs, among other things.
Sacramento, Calif.
• The furlough of 889 non-union city employees, about one-fifth of the city's approximately 5,000-person workforce: They will be required to take one unpaid day off per month.

Europe's officially in recession: bad news for shares
The end of last week saw the global economic crisis notch up another first. The eurozone has gone into recession for the first time since the single currency came into being almost ten years ago. And while the economic backdrop is a bit different to either Britain or the United States, the end result will be more or less the same. Euro interest rates look ready to fall a lot further. Even so, company profits – particularly in Germany - are set for serious suffering. That's bad news for share prices…

The end of last week saw the global economic crisis notch up another first. The eurozone has gone into recession for the first time since the single currency came into being almost ten years ago. And while the economic backdrop is a bit different to either Britain or the United States, the end result will be more or less the same. Euro interest rates look ready to fall a lot further. Even so, company profits – particularly in Germany - are set for serious suffering. That's bad news for share prices…

The final confirmation of a European recession – two consecutive quarters of declining GDP – arrived on Friday, as annual output across the 15 euro nations dropped 0.2%. Output had also been 0.2% down in the previous three months. Germany - Europe's largest economy – had already confirmed that it was officially shrinking. Third quarter GDP was down a much faster-than-expected 0.5%, following a 0.4% slide over the previous three months. Ireland was the first eurozone "negative growth" candidate in September, Italy has now slipped into its fourth recession in less than a decade and Spain has contracted for the first time in 15 years. Only France has bucked the trend.

This sort of slowdown normally means massive central bank interest rate cuts. Though so far, the European Central Bank (ECB) has trimmed just 0.75% off its key interest rate. This compares with an overall 4.25% reduction by the US Federal Reserve and a total base rate cut of 2.75% by the Bank of England. So having hiked loan costs as recently as July to fight inflation, it looks as if the ECB's softly-softly approach is about to change, helped by October's inflation rate easing to 3.2% from 3.6% in September as energy-price rises cooled.

Short-term interest rate futures are implying the ECB will cut its key rate by at least another 0.5% at its 4th December meeting. Further, economists at Fortis and Morgan Stanley reckon benchmark ECB rates will drop to 2% next year, while their counterparts at Deutsche Bank see 1.5% for the first time ever. That suggests a serious recession. And ironically, it looks like Germany – the real core of the eurozone - would actually be one of the worst sufferers, because it's the world's biggest exporter. "Germany is now 'leveraged' to the downturn in China, the Gulf and Eastern Europe", says the Telegraph's Ambrose Evans-Pritchard, "so has been hit first - and hardest – because of its reliance on industrial exports".

"We expect the German economy to contract by 1.2% next year, the worst in the euro area", says Jacques Cailloux at RBS. So can Germany do a Gordon Brown and try to spend its way out of recession? After all, its government has a balanced budget, it hasn't gone through the same house price boom as Ireland and Spain – and so has avoided the inevitable bust – and its households are nowhere near as badly in hock to the banks as those in the UK and the US. Answer: yes, it can - in theory. But it's much less likely to do so in practice. So far the coalition government has produced just a £10bn public spending package - "a pop gun", says Evans Pritchard, "pocket change for Europe's biggest economy".

"Germany is at a tipping point", says Giles Moec at Bank of America, "it needs a fiscal plan of about 1% of GDP (that works out at about £22bn) right now…but culturally Germans don't like big fiscal boosts". In the meantime, the recession is forcing painful shocks on to German companies. The auto industry, which employs one in five of the nation's workforce, is having to shut down plants. 17,000 jobs are going at Siemens. Similar action is being taken at chemicals supplier BASF, whose chief executive officer Juergen Hambrecht said two weeks ago that: "the financial crisis has arrived in the real economy." All of this is very bad news for these companies' profits. "The situation is likely to get worse before it gets better", said Nick Kounis at Fortis, "there'll be no real recovery before 2010".

OK, China's recently announced $600bn public spending boost will help a bit. But as the FT's Lex says, China accounts for just 6% of world output and is just not powerful enough to save the world economy by itself. One day, German exports will help to lead Europe from recession, and German stocks will be worth buying again. But despite the stock market dropping over 40% from the 2008 high, it still looks too soon for investors to plunge back in. The same applies to other European markets, too.

And there's another long-term factor to consider. The eurozone recession "may well turn out to be a litmus test for the functioning of the economic and monetary union", says ECB board member Jurgen Stark. In other words, we'll find out if the single currency glue that has stuck Europe together in the Noughties is going to hold – or if the eurozone is going to end up with fewer members than it has today as the economic strains really show. Though maybe that's a story for another day…

UK rents fall as properties flood the market
The buy-to-let market is being flooded with properties that desperate home owners are unable to sell, triggering a fall in rents for the first time in more than five years, a survey has revealed. The latest lettings survey from the Royal Institution of Chartered Surveyors said frustrated home owners were unable to sell their properties due to a lack of buyers created by the drying up of mortgage finance.

It has resulted in an oversupply of rental properties and rental prices falling for the first time since April 2003. The number of estate agents reporting an increase in properties being put on the rental market has reached a record high of 56 per cent, according to RICS. The strongest growth in new instructions took place in the Midlands and the North, it said. The figures come amid a housing slump that has seen the average price of a home drop by more than £30,000 over the past year, according to Halifax.

James Scott-Lee, a spokesman for RICS said: "The market place has become more and more competitive as many vendors have been forced to become amateur landlords, creating an inevitable downward pressure on rents." It follows a warning by credit agency Standard & Poor's that up to 40 per cent of buy-to-let borrowers face falling into negative equity by the middle of next year. It said the market is likely to deteriorate further because it is "more sensitive" to the difficult credit environment.

James Gubbins, a RICS member based in Westminster, said: "Renters are not looking to spend as much. Supply is outstripping demand. Rents are reducing as vendors turn to rentals." And Francis Brown, a RICS member based in Richmond, said: "It is taking longer to let property. Tenants have more choice. More vendors who can't sell are turning to the letting market until better times."

Florida pension fund loses 33%, $62 billion, in 13 months
The State Board of Administration, which manages many of Florida's public investments, has seen its assets plummet by $62-billion, a third of their value, in the last 13 months. The decline — the steepest in the agency's 65-year history — reflects both big investment losses in the global financial crisis and the decision by hundreds of local and state agencies to withdraw money from shaky SBA accounts.

In both cases, the SBA plowed money into higher-risk investments with the potential for bigger profits. But in the ongoing financial meltdown, they generated big losses instead. Combined, the investment losses and withdrawals slashed SBA assets from a high of $187.5-billion on Sept. 30, 2007, to $125.4-billion as of Oct. 31. The SBA manages 34 public funds. The largest is the state's retirement system pension plan for almost 1-million public employees, retirees and their family members.

The SBA also handles investment accounts for the Florida Lottery, the state's hurricane catastrophe fund and a local government investment pool where nearly a thousand counties, cities, school districts and other state and local entities keep surplus cash. In the last 13 months, the state pension plan lost more than a quarter of its value, or $37.9-billion. It peaked at $138.4-billion on Sept. 30, 2007, and was worth $100.5-billion on Oct. 31. The local government pool, which was once the largest in the country, shrank by $21.2-billion, from $27.3-billion to $6.1-billion, largely because of withdrawals.

Spokesman Dennis MacKee said all SBA funds are built to survive losses in the market, even severe ones, adding that they will recoup those losses over time. "We remain confident with the long-term soundness of the funds we manage,'' he said. MacKee also said the benefits of pension plan participants and retirees are guaranteed by the state. Florida is better off than many states, he said, because its pension plan has more than enough money to cover future retirement benefits. But that surplus has been declining for the last eight years — not because of poor performance, the state says, but because government employers were allowed to make smaller contributions to the plan.

If the surplus disappears, the Legislature might have to turn to government employers — and taxpayers — to increase contributions to meet benefit obligations. The SBA, which employs about 160 people, is governed by a three-member board of trustees who also make up a majority of Florida's Cabinet — the governor, the attorney general and the chief financial officer. Gov. Charlie Crist did not respond to an interview request. Chief Financial Officer Alex Sink was traveling for two days and unavailable, an aide said. Attorney General Bill McCollum said Florida is "doing pretty well compared to the market overall." "It's going to have down years and it's going to have up years, and we've had a lot more up years,'' he said. "The overall result of this pension fund is still very good — better than the norm. Will it be lower this year? Yes. But it has still been beating the market.''

Florida isn't alone. Across the country, the financial crisis is wreaking havoc on public pension funds and investment agencies. The meltdown is spurring a debate over whether those government agencies are gambling too much. "In the current environment, we should replace the reach for yield with a return to basics,'' said Thomas Tew, a Miami securities lawyer. Earlier this year, he was hired by the Legislature to review the near-collapse of the SBA's local government investment pool. "That means less aggressive investments and less risks.'' Like big banks and mutual funds, the SBA and other public investment agencies are complex financial institutions. But unlike banks and mutual funds, they face no comparable oversight. There is no requirement that they fully disclose their finances, and they don't have to undergo annual, independent audits.

"It's appalling that those whose public pensions are at risk don't have the same disclosure that a retiree who owns mutual funds would have,'' Tew said. In September, some members of Congress called for more oversight of public and private pension funds after a federal study found more of them were putting money into higher-risk, lightly regulated investments. Sen. Charles Grassley of Iowa has long raised concerns about opaque investments creeping up in Americans' pension plans, and whether they pose a danger to workers' retirement security. "We don't have the facts about these swaps and derivatives and hedge funds and whatever they are,'' said Grassley, the top Republican on the Senate Finance Committee. "It's one thing when a $5-million investor buys these investments. It's quite another when it involves pension funds of your average middle-class person.''

Florida's investment problems came to light late last year after reports that the SBA held billions of dollars of securities tied to bundles of loans that included subprime mortgages, which are loans granted to risky borrowers with poor credit histories. In November 2007 alone, nervous counties, cities and school districts withdrew $12.2-billion from the local government pool. Citizens Property Insurance, the state-run insurer of homes and condos, pulled more than $5-billion this year and closed several SBA accounts. It still has about $743-million in the local government pool. The city of St. Petersburg has withdrawn more than $111-million from the local government pool since mid November 2007. "We won't make any more investments in the SBA until we have assurances that it's as safe an investment as where we have our dollars now,'' said Tish Elston, the city's first deputy mayor.

The SBA "put whole school systems in jeopardy'' when it temporarily froze the account to prevent it from collapsing, said Jackie Pons, superintendent of Leon County school district. He says he had to call a local banker late at night to get a $10-million loan to meet payroll for school employees. "Everybody's lost confidence in this account and everybody wants their money back,'' he said. But bank failures of recent months may be changing things. Take the Hillsborough County Tax Collector's Office. It decided to reinvest with the SBA in June after commercial banks began struggling. "The SBA started looking good,'' said Scott McAlister, an auditor in the tax office.

The SBA has not acknowledged losses from the subprime mortgage debacle. MacKee said the information was too difficult to get. But the agency is still holding about $2-billion in troubled securities. That means the tax collector, the pension plan and many state and local agencies that invest with the SBA face losses. The SBA also has sustained big losses in the stock market. With more than half of its assets invested in stocks, Florida's state pension plan lost about 15 percent in value, or $23.9-billion, for the year ended Sept. 30. It lost another $14-billion, or an additional 12 percent of value, in October. That decline roughly parallels the performance of other large public pension funds. The market turmoil wiped out 22 percent of the value of domestic stocks in Florida's pension plan. Foreign stocks dropped 29 percent.

One factor in the sharp decline of the SBA's assets appears to be a recent change in its investment strategy. In the last few years, the SBA — like many other investment agencies around the country — has invested in complicated, sophisticated tools with the potential for dramatically higher gains. They have names like structured investment vehicles, 130/30 funds, derivatives, credit default swaps and private equity investments, and they are lightly regulated, unpredictable and not routinely reported to the public. Instead of big payoffs, however, the new tools have apparently produced big losses for the SBA. The size of the losses are difficult to determine, partly because some of the investments are traded privately and are notoriously hard to value. In addition, the SBA says it doesn't focus on prices of individual assets. Instead, it tracks the entire fund or asset category and compares the performance to established objectives and other large pension funds.

But congressional committees and the Securities and Exchange Commission are now examining the role some of these higher-risk investment tools have played in the global financial turmoil. The SBA's executive director, Ash Williams, says he, too, plans to review some of the more aggressive strategies. "When you're talking about investments that are still in process, you don't know where they will end up,'' said Williams, a former Wall Street investment fund manager who recently joined the SBA. "It's sort of like being at a football game in the second quarter. You don't know who won the game because it's not over.''

Record Losses Hit Pensions of Big Firms
The nation's largest corporate pensions had record losses in October and won't meet federal-funding requirements without a massive infusion of cash, improved asset values or a change in law. In October, the 100 largest corporate pensions lost $120 billion, their largest one-month loss in assets since consulting firm Milliman Inc. began tracking the numbers eight years ago. After adjusting for liability gains, the net result was a $59 billion loss in funded status.

"There will definitely be companies in this group which, without relief or massive contributions, will have to freeze their plans, probably by Oct. 1 next year," said John Ehrhardt, principal and consulting actuary at Milliman in New York. He said the pension of the average company in the index was 100% funded in January, but is expected to fall to 76% by the end of this year. If the value of assets doesn't increase or the Pension Protection Act funding rules aren't changed, pensions may end up being frozen and benefits may be affected, he said.

The situation is more serious for some companies. Mr. Ehrhardt said the bottom 10% of companies were only 73% funded at the beginning of 2008 and are expected to be only 57% funded in 2009. He estimated that the 100 companies in the index would have to contribute $92 billion for 2009, as opposed to $32 billion in 2008, to meet the minimum funding requirements under the Pension Protection Act. This is the first year that private businesses will need to meet the law's more stringent requirements, which include pension-funding levels of 92% in 2008 and 94% in 2009.

When a plan drops to below the 80% funding level, the plan can't make amendments to increase benefits. Additionally, workers can get only up to 50% of the lump-sum distribution when they leave. They would receive the remainder of their pension benefit in an annuity. Business and consumer groups are lobbying Congress to amend the changes to prevent plans from freezing.

Ilargi: The global media still have no clue what "the facts" are. This is Canada. The level of doodoo is hard to fathom.

Face the facts: It's going to get ugly
The global economy, to put it bluntly, is stuffed. We are long past the point where liquidity injections, loan guarantees, bank recapitalizations and bailouts will deliver a quick fix to a global economy reeling from a vicious triple hit --housing, banking and financial market meltdowns.

Leaders meeting at the Group of 20 summit in Washington over the weekend seemed to finally recognize this. They laid out detailed proposals for a major overhaul of the global financial system in a bid to prevent such crises from spreading so rapidly again, but did not deliver specific or coordinated fiscal measures to boost global demand. Individual countries were encouraged to deliver tax cuts or spending measures as they see fit.

More taxpayer money will undoubtedly be spent across the globe, including here. After vowing not to go into deficit throughout the election campaign, then admitting the global slump may put us in the red by accident, Prime Minister Stephen Harper said on Saturday that the government was considering "sufficient" stimulus measures, but only as part of the global recession-fighting brigade, don't you know.

(Mr. Harper cannot win this one. Those who will gleefully chide him for flip-flopping and plunging Canada into recession will be the same calling for massive auto-sector aid. Still, if he had chopped spending at the same time he cut the GST, he might not have found himself in this mess.)

None of these global stimulus measures, however, will prevent the unwinding of leverage, debt and excess that is now so viciously underway. It will be ugly. Alan Greenspan, former chairman of the U. S. Federal Reserve, who still crunches numbers when he is not flitting around the globe on speaking engagements, recently said figures show the U. S. economy is contracting at more than a 3% annual rate.

The last time it registered anything like that was in the fourth quarter of 1990. What's more, the pain is expected to be prolonged. A survey of economists by the Wall Street Journal predicts the U. S. economy will contract not only in the third and fourth quarter of this year, but in the first quarter of next year as well, marking the first three-quarter-long contraction in half a century. Some analysts forecast the U. S. unemployment rate will top 8% when all is said and done, up from 6.5% now.

The heat is coming out of the global economy so quickly as commodity prices crash and retailers slash prices, that the U. S. consumer price index is expected to plunge 0.8% in October when figures are released on Wednesday, the biggest decline since 1949. As for the Canadian economy, it is "still being flattered by the vapours of the first-half rocket ride in resource prices," says Douglas Porter at BMO Capital Markets. But as go commodity prices, so goes the Canadian economy.

Mr. Porter expects corporate profits to drop 10% in 2009 from 2008. With total oil sands investment set to fall 20% next year, the 70,000 jobs that have been created in the patch will be severely pruned, driving Canada's unemployment rate to 7% from 6.2% now, he says. Mr. Porter forecasts the federal budget deficit to hit US$6-billion to US$7-billion in 2009/10, although some see it as high as US$10-billion. The major economies of Europe are now contracting, and Chinese growth has dropped to 9% from a 12.6% peak in mid-2007.

It is called global recession. Once upon a time, before the creative Goldman types started running the U. S. Treasury like the investment banks they are trying to fix, global recessions used to be thought of as part of the normal business cycle. They were a painful but necessary way of purging excess, getting rid of outdated and inefficient ways of doing business and getting rid of products consumers don't want. Canada has been through it before, and it was miserable. In the early 1990s, GDP contracted 6% in one quarter and 3.3% and 2.5% in two others while the unemployment rate hit 12%. It took us several years to dig ourselves out from under the rubble and get incomes growing again. It's just that people don't remember because it was 18 years ago.

This slowdown is not even expected to be as tough as that, although there is little doubt the United States is heading for a brutal one. The G20 announced measures to try to reduce the risk of financial crisis developing and spreading across borders again. One of the key new bodies to be set up will be a "college of regulators" that would strengthen the surveillance of cross-border financial institutions, while the International Monetary Fund and World Bank will undertake "peer reviews" of individual countries' banking sectors. Welcome to the big boys club China and Saudi Arabia. One wonders how they will feel about opening their ledgers to prying eyes.

Yet even this overhaul, while lofty and ambitious, is unlikely to make the global economy accident-free. Each new meltdown always comes from a different corner, whether it be technology, Latin American debt or U. S. savings and loans, and no doubt we will be caught out again. Sometimes you just have to grin and bear it.

Pound's fall may herald recovery not doom
It's an ill wind that blows no good. The US Treasury's decision to bankrupt Lehman Brothers and expropriate the shareholders in Fannie Mae caused the worst financial crisis in history, but it also secured the presidency for Barack Obama and is now transforming the economic and political landscape of Britain. The dithering incompetence of Henry Paulson has, by force of contrast, restored the credibility of Gordon Brown, both as Prime Minister and as an international leader.

The UK economy, which had previously looked more vulnerable to the global recession than any other G7 country, is now likely to suffer less than the rest of Europe, as a result of unprecedented policy stimulus from the lowest interest rates in history, a super-competitive currency and a big reduction in tax. Meanwhile, the Conservative Opposition in Britain has been confused, discredited and splintered by the financial crisis as badly as John McCain's campaign. The last observation links directly to the new economic story that suddenly broke out in Britain this weekend — the fear of a "run on the pound".

This sudden anxiety is a weirdly distorted echo of the great policy debate that raged in Britain throughout the postwar era until it was settled by the collapse of John Major's economic policy in 1992 and six years later by Gordon Brown's decision to keep Britain out of the euro. Since Black Wednesday, almost no British politician or economist has been silly enough to use the "weakness" or "strength" of sterling as a proxy for the state of the British economy, never mind to suggest that a fall in the exchange rate was a portent of economic doom.

In reverting to the economic fallacies of the Major period — which David Cameron was supposed to have put behind him when he left the side of Norman Lamont — the Tories have not only disqualified themselves from any serious role in dealing with the present financial crisis. They have also put themselves on the wrong side of history, alongside the most unexpected of allies - the few remaining euro-enthusiasts who believe that Britain should have joined the single currency and, failing that, should now behave like a shadow member, trying to stabilise its currency and not to deviate too much from eurozone monetary and fiscal policies.

This school of thought is articulated most persuasively by Willem Buiter, the former Monetary Policy Committee member who strongly advocated euro membership for Britain and is now a columnist on the Financial Times. According to Professor Buiter, last week's fall in sterling is symptomatic of a "triple crisis" — a simultaneous loss of confidence in the currency, in the banking system and in the Government's fiscal solvency - that could threaten Britain with an Icelandic-style collapse; this crisis is the price that Britain, like Iceland, is now paying for its stubborn refusal to join the eurozone. Professor Buiter's analysis is obviously more sophisticated than George Osborne's, but rests on the same fundamental arguments: first, that Britain, like Iceland, is a "small economy" that does not have the privilege of using a "reserve currency", such as the dollar and the euro. Second, that Britain's banking sector, like Iceland's, is so big that government banking guarantees endanger the country's long-term fiscal solvency.

I see these arguments as fallacious - and, much more importantly, so do the Government and present members of the MPC. There are many objections to the Buiter argument, but the main one is simply that in the modern world of paper money and floating exchange rates, there is no such thing as a "reserve currency" - only different currencies that are traded and used as stores of value in the same way as other as assets. Investors cannot sell one currency, such as sterling, without buying another, be it the dollar, euro, yen or Swiss franc. The attractiveness of these alternative currencies depends on a host of factors, above all the return on assets in the country concerned, the inflation outlook, the degree of protection for property rights and the tax and legal systems.

The level of government borrowing is only one consideration in investment judgments about a currency - and a very minor one, as evidenced by the strength of the yen despite the Japanese Government's enormous debts. The size of the banking system relative to national income is even less important, as demonstrated by the strength of the swiss franc. The upshot is that, far from being feared as a "punishment" for Britain's monetary independence or long-term fiscal profligacy, the present fall in the pound should be seen as part of the solution to Britain's economic problems. As Mervyn King noted at his press conference last week, the UK needs to revive economic activity and avert deflation, but also to restructure its economy to reduce dependence on consumer spending and housing.

It would also be helpful to reduce the country's reliance on foreign capital inflows. What all these requirements mean, as a matter of simple arithmetic, is that the structure of Britain's trade must shift substantially, to the point where exports either exceed imports or the remaining trade deficit is matched by inflows of capital from foreigners investing in UK property, businesses and other assets, in the expectation of better returns than they can earn elsewhere, either from higher return on capital or a future rise in sterling. The textbook way to achieve such a shift in foreign trade and capital inflows is to combine bold cuts in interest rates, which lead to a sharp, though usually temporary, currency devaluation, with a squeeze on consumer demand. This was precisely the combination that worked so well for Britain in the 1990s after the Treasury's age-old fixation with trying to stabilise or manage sterling was abandoned once and for all.

Britain's aggressive use of monetary policy leads to two obvious conclusions — and one less clear. The first obvious conclusion is that the "collapse" of sterling will not discourage the MPC from continuing to cut interest rates. Most MPC members see sterling's decline as a welcome side-effect of lower rates and a helpful transmission mechanism from monetary easing to the real economy at a time when credit markets remain paralysed. Mr King has now publicly confirmed what I said here last month - that bank rate could easily fall to previously unthinkable levels as low as 1 per cent. The second obvious conclusion is that the present currency weakness, far from reopening a debate in Britain about joining the euro, should be seen as a vindication of the decision to keep an independent monetary policy and a floating currency.

The less obvious issue is whether the pound will continue to weaken against the euro, as the MPC moves farther ahead of the ECB in the cycle of monetary easing and the Government stimulates the economy by cutting taxes. With Euroland now in deep recession and the pound back to the low that triggered a strong economic rebound in 1995, market sentiment may well swing against the euro and in favour of sterling as investors conclude that eurozone policymakers are doing too little, too late, while Mr Brown and the MPC are laying the foundations for economic recovery in Britain.

Petro-Can partnership delays Fort Hills oil sands project
Partners in the massive Fort Hills oil sands project said Monday that the deteriorating price of crude has compelled them to review existing construction contracts as well as halt plans on building a multi-billion-dollar upgrader. Petro-Canada, the second-biggest oil and gas company in the country, as well as UTS Energy Corp. and miner Teck Ltd. said they will take the next several months to find "a cost estimate consistent with the current market environment," while evaluating "opportunities for cost reductions, execution efficiencies and the overall project schedule."

The announcement comes two months after the three firms said material, labour and engineering costs had soared as much as 50% at Fort Hills to $23.8-billion, even as crude prices -- then just under US$100 per barrel -- continued to fall steeply. Contracts for crude were down another 2% in New York on Monday morning, to US$55.80. The original cost estimate, laid out in June 2007, was $14.1-billion to produce 140,000 barrels per day by 2011.

In a call with investors and analysts on Monday, Petrocan vice-president Neil Camarta said current construction at the northeastern Alberta project's mine would remain in place, but added the company was "going back into every contract" with an eye toward lowering the project's cost structure, including the possibility of cancelling some. As for the upgrader, it "will be put on hold and a decision on whether to proceed ... will be made at a later date." Upgraders transform heavy bitumen into more valuable synthetic crude, but are costly. The Fort Hills upgrader is estimated to cost $9.9-billion.

As late as September, some analysts, such as UBS Securities said new oil sands projects need oil prices above US$100 a barrel to turn a decent profit. However, Calgary-based Petrocan has said that Fort Hills would be profitable even if crude was to fall to US$45 a barrel. In the call, Mr. Camarta said Petrocan's long-term outlook for the price of oil was between US$80 and US$90 per barrel. The three companies also reiterated their intentions to keep the project viable. "We remain committed," said William Roach, chief executive of UTS, in a separate statement.

UTS, also based in Calgary, is the smallest of the three partners with a 20% interest in the project. Vancouver-based Teck owns a 20% stake, while Petrocan holds the remaining 60%. Alongside oil's fall, access to credit could be another hurdle confronting the project partners' ability to fully realizing Fort Hills' original plan. UTS's share of the costs is now thought to be in the neighbourhood of $4-billion, a figure that some observers feel is too steep for the junior energy company to come up with as credit markets remain constricted. Yet, "deferring the upgrader reduces UTS's near-term financing requirements significantly," added Mr. Roach.

For its part, Teck's debt-financed takeover of Fording Canadian Coal Trust this past summer has left the company with $10-billion in bridge and term loans that have to be repaid. There is serious concern among analysts that Teck is over-leveraged and would need to sell assets to fulfill its debt obligations.

Pounded by negative sentiment from analysts, both UTS and Teck shares have plummeted in recent weeks. On Monday, shares in Petrocan were off almost 4% to $24.79 at noon, while UTS, whose stock price was trading north of $5 at the end of July, fell almost 9%, to 83 cents on the Toronto Stock Exchange. Teck shares, which have fallen from the $40-range since the end of August, climbed more than 7% to $6.81.

Fort Hills joins multiple oil patch projects that have seen a significant scaling-back as the price of oil collapses. Royal Dutch Shell has postponed a ramping up of production at its Athabasca mine, while Suncor has delayed certain construction at its multi-billion-dollar Voyageur project. Canadian Natural Resources has also stated its intentions to review construction at its Horizon mine and upgrader.

Pine Beetles Spreads, Kills Millions of Acres of Trees in US West
On the side of a mountain on the outskirts of Montana’s capital city, loggers are racing against a beetle grub the size of a grain of rice. From New Mexico to British Columbia, the region’s signature pine forests are succumbing to a huge infestation of mountain pine beetles that are turning a blanket of green forest into a blanket of rust red. Montana has lost a million acres of trees to the beetles, and in northern Colorado and southern Wyoming the situation is worse.

“We’re seeing exponential growth of the infestation,” said Clint Kyhl, director of a Forest Service incident management team in Laramie, Wyo., that was set up to deal with the threat of fire from dead forests. Increased construction of homes in forest areas over the last 20 years makes the problem worse.
In Wyoming and Colorado in 2006 there were a million acres of dead trees. Last year it was 1.5 million. This year it is expected to total over two million. In the Canadian provinces of British Columbia and Alberta, the problem is most severe. It is the largest known insect infestation in the history of North America, officials said. British Columbia has lost 33 million acres of lodgepole pine forest, and a freak wind event last year blew mountain pine beetles, a species of bark beetle, over the Continental Divide to Alberta. Experts fear that the beetles could travel all the way to the Great Lakes.

In the next three to five years, Mr. Kyhl said, virtually all of Colorado’s lodgepole pine trees over five inches in diameter will be lost, about five million acres. “Already in many places, every lodgepole over five inches is dead as far as the eye can see,” he said. Foresters say the historic outbreak has several causes. Because fires have been suppressed for so long, all forests are roughly the same age, and the trees are big enough to be susceptible to beetles. A decade of drought has weakened the trees. And hard winters have softened, which allows the beetles to flourish and expand their range. Hoping to keep their forests from completely dying, to earn money by selling dead and infected trees and to mitigate fire risks, landowners are scrambling to cut the pines. If enough are cut — up to 75 percent — it might leave some behind that, with less competition for water, can survive.

Still, for many landowners, cutting most of the forest where they have they built their homes is painful. “I’ve literally had people in my office crying,” said Gary Ellingson, a forestry consultant for Northwest Management. The black, hard-shelled beetle, the size of a fingertip, drills through pine bark and digs a gallery in the wood where it lays its eggs. When the larvae hatch under the bark, they eat the sweet, rich cambium layer that provides nutrients to the tree. They also inject a fungus to stop the tree from moving sap, which could drown the larvae. That fungus stains the wood blue. “The Latin name is Dendroctunus, which means tree killer,” said Gregg DeNitto, a Forest Service entomologist in Missoula, Mont. “They are very effective.” To fend off the bugs, trees emit white resin, which looks like candle wax, into the beetle’s drill hole. Sometimes the tree wins and entombs the beetle. Often, though, the attacker puts out a pheromone-based call for reinforcements and more of the beetles swarm the tree. In a drought the tree has trouble producing enough resin, and is overwhelmed.

There are some defenses. Owners nail to a tree an “aggregator pheromone” in a small packet, which mimics the chemical scent given off by beetles when a tree is full of insects. It can work when beetles are not too numerous, but at some point the beetles are not deterred. Large, old, high-value trees, ones that shade campgrounds or yards, can be sprayed with an insecticide. But the trees need to be sprayed from the base to the height at which it is less than 4 inches around. Each tree costs about $10 to $15 if hundreds are sprayed. Lodgepole pines are largely confined to high altitudes. But the beetles have moved into ponderosa pine forests on Colorado’s front range, Mr. Kyhl said, which means it could kill forests around homes in the densely populated region. The beetles will only be truly checked, experts say, if temperatures that used to reach 30 and 40 below for weeks return to the Rockies, temperatures that have not been seen in decades.

The death of the forests worries the tourism industry. Many ski areas have cut down their forests because of the hazard of falling trees and have revegetated the land. At Vail Ski Resort, for example, which has been particularly hard hit, workers have removed thousands of dead trees and planted new ones. The dead trees that blanket the mountains are shifting ecosystems as well. In Yellowstone, for example, the beetles are killing the white-barked pine trees, which grow nuts rich in fat that are critical to grizzly bears in the fall. Biologists in Canada say streams will flash-flood because live trees will no longer catch snow and allow it to slowly melt, and it could injure salmon and destroy habitat. On the other hand, woodpeckers and other insect eaters will thrive.

Wildfire is the biggest threat. Some towns like Steamboat Springs and Vail, Colo., are surrounded by dead forests, and the Forest Service and logging companies are clear-cutting “defensible space” so firefighters have a place to fight fires. After the trees die, the risk of crown fires that move through the canopy is the threat. After four or five years, as the dead trees fall to the ground, the threat of catastrophic fire is most severe. Fires in the piles of logs severely damage soils, prevent regrowth and cause mudslides. Rainfall on damaged ground could also lead to widespread mudslides and silt buildup in rivers and reservoirs, which many mountain communities depend on for water. Strontia Springs Reservoir, a main water source for Denver, required a $20 million cleanup after a large fire resulted in severe erosion.

The other major problem is large numbers of falling trees. In Colorado and Wyoming, officials have closed 38 campgrounds for fear trees could fall on campers. They have reopened all but 14. But there is a lot more to do. “We know they are going to fall,” Mr. Kyhl said. “And they are going to fall in the next 10 to 15 years. There’s campgrounds, thousands of miles of road, picnic areas, power lines and trails. How do we keep the facilities open for people to use?” The agency is faced with clearing a strip of 75 to 100 feet of dead trees along highways so they are not closed by blow downs. Then there is a question of what do with the wood. Sawmills have diminished in the West in recent years, and there are not enough mills to take all of the timber.

In Colorado, entrepreneurs have been scrambling to find ways to use it. Two pellet plants have been built, which turn the trees into sawdust and then pack them into a clean-burning pellet used in wood stoves. Some trees are being shredded for use in biomass boilers, and carpenters are using the pine stained blue from the fungus for furniture. In Alberta, a newsprint mill is testing a system to use the millions of dead acres of pines. Because of the fungal stain the trees aren’t bright enough for paper, but a computerized process adjusts the amount of bleach.

Still, the volume of timber used is small compared with the vast acreage of dead trees. The West that depends on tourism, meanwhile, wonders what their customers will think about the dramatic change in scenery. Four million visitors a year come for sightseeing and recreation to Grand County in Colorado, where much of the forest is now dead. “What happens,” said Ray Jennings, director of emergency management for Grand County, “if this becomes an ugly place to be?”


Anonymous said...

GREAT stuff as usual I&S. Many thanks!

RE: The Paulson and The Congress:

Were I in Congress, here's what I'd ask....for starters:

1. "Mr. Paulson, Mr. Bernanke Thank you for caring so much about the American homeowner. Would you be willing, in that spirit of caring, to give all but one of your homes to several families in need?"

2. "Would you be willing, gentlemen, to testify before this body while attached to a lie detector?"

3. "Mr Paulson, Yes or no please. did you or did you not, at a meeting at Camp David over TWO YEARS AGO tell the President the following, and I quote: "over-the-counter derivatives as an example of financial innovation could, under certain circumstances, blow up in Wall Street's face and affect the whole economy."? If so, sir, to what circumstances specifically were you referring?

4. "Mr Paulson and Mr. Bernanke, please defend, to this committee, your support for the SEC's suspension of mark-to-market accounting of assets by objective and credible auditing agencies."

Anonymous said...


Anonymous said...

On a lighter note, I enjoyed a movie last night I'd like to recommend:

Holiday - with Cary Grant and Katherine Hepburn. It seems a good parable for our times. Perhaps when our hosts take a break it would be a good diversion from reality.

Johnny (Cary Grant) falls in love with Julia, a rich young woman. This is depression era, and man are they rich. Her father is a stereotypical capitalist. Johnny however, having achieved modest success, wants to enjoy life, see the world, smell the roses. Dad is flabbergasted and Julia is hurt.

Linda however (Hepburn), while originally supporting her sister's relationship, comes to see the light.

I enjoyed the movie thoroughly, but was a bit sad in that it seemed so apt and such a lesson-not-learned from an earlier time.

(Sorry about the above mis-post, in masking my identity, I hit enter and there it went...)

el gallinazo said...

Email to a friend and fellow reader of TAE:

Stoneleigh highly recommended a physical fitness DVD today and I ordered it immediately from Amazon. I would probably buy the Brooklyn Bridge if she recommended it :-)

Anonymous said...

Hi Ilargi,

There is one thing I still cannot understand:

They want to to take the taxpayers' money and throw them to the mouth of dying beast, am I right?

But why is the beast - car making industry - dying? It is because taxpayers pockets are empty, they (most of them) have no money to buy a car. Not because carmaking company managers are stupid and/or they misused their money.

If Bush will take the taxpayers' money to save the carmakers, they will continue to make the cars but what will happen? Will they make the cars others cannot buy? The cars will remain somewhere in the stores and nothing will happens.

And after the money given by Bush will be spent, they will be in the same or deeper poo-poo than they're today. Because people will be much poor than they're today, 'cause Bush used thrir money to cover all the poo-poos his administration made for a long years.

This is not the solution of today's problem.

The only way how to save the beast is to make people more solvent to buy a car for example.

Greetings from Czechia

Anonymous said...

On the demise of imminent demise of GM et al., I enjoyed this video of

Ford's Brazilian Plant

linked from MISH's site.

All those busy robots contrast with my own feeble attempts to restore the upholstery of my '51 MG saloon armed with a hand Singer sewing machine and two whole hides of leather.


Anonymous said...

The bail out will destroy the "big 3"

If the bail out money is the first to get paid back then there will be nothing for, bank loans, suppliers, bonds, prefered share,pension funds, common shares, etc.
There are not enough assets to guarrantee the bail out package.

If the bail out money is the last to get paid back. It will never get paid back and the money is going to go to the most persistent bank loan, pension fund, and supplier.

Please explain the "food chain" with or without a bail out.

Branden said...

always an interesting read. perhaps its of little matter...but...just for the record (since i've been corrected so many time)...it's not "the ukraine", it's "ukraine". just as it isn't "the canada".

Ilargi said...


'round here we say The Ukraine as in The Lebanon and The Netherlands. A sentimental thingy of mine.


Exactly, why make things that nobody can buy?

Anonymous said...

I've been busy making money lately (hey, the presses are running, the streams are flowing, just reach the dipper in and grab some gold!), so no time to read/post here, but saw today's issue and have to comment....

Two major errors in today's intro:
1) the discussion of credit and 'moneyness' (!) and bank trust, etc is completely incorrect. Money and credit are inseperable; inflation is inflation and is readily created both naturally and artificially. The whole printing money thing works to create inflation, and there can be no serious argument about this. But to discuss and anlayze this stuff, one needs to be very careful to seperate treasury vs Fed credit/lending: note that many/most of the recent operations have been fully immunized! (Sorry, technical terms, but it's a technical subject: look them up!) I suggest you read James Grant for an easy to follow discussion of this stuff. On the notion of bank trust: the industry talks about bank trust, but what is really meant is not that banks don't have trust, but rather that the loans are not profitable to execute at levels that represent the risk. Or, a better way at looking at all of this: inflows are being directed into loss reserves. Very technical subject, but trust in the casual sense is the wrong way to look at it: important to note that it's all about P&L and having money to lend vs reserves.

2) Credit Swaps: this whole discussion of CDS causing financial collapse as a result of unwinding events is sickening and demonstrates a total lack of understanding for how Wall St operates. Yes, the media gets this wrong all the time too, so at least you're not alone. Key point: Wall St is divided into Buy side (asset managers, investors, pension funds, etc) and Sell side (all those big Wall St institutions that are now banks). The Buy side only transacts with the Sell side (NEVER another Buy side fund), but the Sell side can transact with anyone -- and this is all true even in the OTC markets like CDS. Anyway, the only way an unwinding event could cause total financial collapse would be if one or more of these firms took enormously huge unhedged exposure to one or more names/risks in these markets; fortunately, that is virtually impossible, and that was well demonstrated in the unwinding of LEH. When credit events happen -- and there have now been many over the existence of these products -- the various Buy side investors loose/make money, but the Sell side sees very, very small shifts in value, as their net exposure was very small. Even though a given Sell side firm may have billions in notional on a given name, that notional is some long, some short, so that net exposure to an event is very small: it's almost entirely offsetting. (The offset amount is managed as proprietary risk taking, the firm's own money at risk.) The unwinding of LEH should have demonstrated this for real (trillions unwound over a weekend, with Street losses in the low millions), but somehow the media prefers the fantasy of the Sword of Damocles....

Anyway, my driver is waiting for me downstairs: I have a benefit to go to (spread the wealth, do a deal or two, and make more than I donate!)....

Ilargi said...


You're hilarious, an absolute riot, and yes, you're right, no serious argument is possible, and yes Wall Street has a buy side and a sell side, and never the twain shall meet. Have a drink or three.

Greenpa said...

Nice to have our clown back!

On a different note- Stoneleigh, and Ilargi- (I was going to write this long before reading Uncider's humor) - I'm just seriously impressed with the team you two make. Your talents mesh beautifully.

You have my very best wishes that your community living project works out as well. And, in view of the short supply of sentience down here on Earth, can we hope for the imminent arrival of some little Ilargleighs and Stoneglis? Please?


Anonymous said...

Insider yes indeedy! read any paper today- in the current climate piracy is at an all time high! Rake it in; you do know how it works.

Ilargi said...

El Pollo:

Stoneleigh does a daily hour of P90X. I have worked out all my life, and it is the best program i know. Not easy, mind you, but it'll get you fitter overall than anything else I have done. If you persist, that is.

I would recommend Thai boxing as well, but that you can't do at home. P90X includes yoga, strength, flexibility and much more, it trains all of your body.

The X stands for Xtreme, but back in January when I moved in with S. and her family I got her started on it despite the fact that she could or should perhaps have initially done a lower level program. She's lost more pounds than I care to mention, and wouldn't give up P90X for the world.

Very important, guys, get fit. The combination of weight training and running cleans your body of all sorts of stuff that doesn't belong with you.

Tony Horton also launched a 10-minute training program, which might be a good intro for the really "needy". But do step up from there.

P90X sells for, what, two hundred dollars? The best investment you can ever make, easily. If you follow it, that is. You can get fit, everyone of you, if you understand why.

We come from ancestors, and I don't mean 100 years, but 100.000 years ago, who got tons of exercise just to survive. That's in our genes. Exercise is the ultimate clean-up mechanism, and in the face of deteriorating medical care, processed food and environmental pollution, very necessary.

An hour a day, all of you!

PS And no, we are not a couple.

Bigelow said...

If this is old, sorry for the repost; I thought it was good for a few laughs.

In The Know: Should The Government Stop Dumping Money Into A Giant Hole? Onion News

el gallinazo said...


I must have bought the P90X for vegetables because it only cost USD22 from Amazon. Full title is:

P90X+ TOTAL BODY PLUS with Tony Horton by Beachbody

As a 62 year old rutabaga, this should get me started.

el gallinazo said...

Today's final hour 4% rally looked too suspicious to be normal lemming behavior, but rather something artificial. PPT protecting the year's low on the S&P500? Bloomberg says it was due to Budweiser being pulled off the S&P due to its Belgian takeover, and index funds filling in to cover. Strange.

Also, I'm glad the Insider clown is back and hope he prospers. After all, keeping your closet full of size 18 shoes is expensive.

Starcade said...

Legitimacy in the system??

That died with JFK -- certainly with 9/11...

The Congress is operating with a gun to their heads. Now, it appears, Paulson is holding the gun -- not PNAC.

We no longer have a legitimate government. Soon -- very soon! -- we will have no government at all. Whatever rule will be left will be by the gun (military or vigilante -- take your choice of your death).

Once one automaker falls, add 1-2% to the admitted national unemployment figure.

Once they all do, add 8-15%...

What legit government, do you think, is going to stand up to all this?

Ilargi: Paulson should be jailed -- perhaps as participant to treason against the American populace, as we find out how deeply this was all planned. The problem, here, is: He holds everything by the balls. He could "force" martial law tomorrow. All he has to do is allow the markets to finally do what they've been wanting to do since the nationalization of Fannie and Freddie: nose-dive to zero.

Millions will die -- it's just a matter, now, of how many...

Starcade said...

dan w: Your second proposed question should be an indication that the only action should be that the Sergeant at Arms of the Congress take Paulson into custody. Whether his crimes will simply imprison him for life or call for his execution (the latter, for treason) will come up in the investigation.

anonymous from Czechia: The whole doggone thing is dead. Car industry, banks, entertainment industry, currency, economy, society, government. It's ALL dead. And if you need evidence to that effect: Value of the GDP of the world: $55,000,000,000,000. Last estimate I heard of the derivatives market: $1,460,000,000,000,000.

Q E D.

el pollo: And the PPT (for the third time now -- Used to think it was the second) protecting the last support level which prevents a 10-20% immediate shear off of the Dow 30. The first was when it was first hit on 10/10, the second was that day we had the 300+ point drop, and then it finished up 500 or so... This is the third. This market wants to go to zero.

Anonymous said...

Sorry ilargi you don't get off that easy:)

I don't understand the ins and outs of CDS's well enough to know if insider is accurate in what he says or not. On that Lehmans business maybe he has something there, or maybe not, but the something I can find in the news is dated 0ct 21 and while interesting is not closure.

Too bad the both of you are having more fun throwing insults back and forth than in lightening the darkness - No ilargi, I am not intrested that he started it first.

Anonymous said...

ilargi, at least Insider posted things that can be essentially discussed as wrong or right, so you have to give him at least some credit for slowly but surely bringing his comments into an area where they can at least be discussed.

Here's a small test I'd propose. Since I'm not at all interested in what someone claims they have done, what money they claim to be making (this is virtual worlds, with virtual words, we can all say what we want), what I would be interested in is a prediction, concrete, that demonstrates an ability to grasp the situation and extrapolate into the future. Correctly.

IE, basically, what you do, fairly successfully.

I'm not at all interested in seeing someone show off knowing some technical term, and I'm likewise not at all interested in unverifiable claims about income generation.

But predictions, ie, re the credit default swaps, outcomes, companies, specifics.

I don't, by the way, expect to see, this from Insider, because I think then he might have to expose himself a bit too much in terms of having essentially nothing to actually say. But it's possible, his recent posts aren't as childish as his first attempts.

Anonymous said...

For those unwilling to part with so much dough for fitness DVDs, try




(remove spaces)

Any similar programme will work, as long as (the catch--there's always a catch) you actually DO IT.

Start slow, build confidence, and you'll find it addictive. Health truly is wealth. Combine the exercise with a sensible diet (I like westonaprice.org for good advice), and you'll be able to enjoy life as never before, even as the world collapses around you.

Anonymous said...


what do you think of the following:


Tyr said...

From my experience in IT I've learned that when someone throws out a lot of jargon and describes things as "complicated", "really technical" and reserved exclusively for experts it usually means :

- you are being bullshitted
- the person doing the explaining is incompetent
- the system is about to implode under the weight of its own complexity and is currently being held together by chewing-gum and prayers

or some combination thereof.

Anonymous said...


Here is something full of hope and simplicity, all in one:

I am watching a so so period piece called "All Passions Spent" and have got to the spot where the aged lead, a widow dressed like Whistlers mother and sitting like w
Whistlers mother, is found by her maid dead as a doornail looking like Whistlers mother.

I figured one had to thrash about a bit, or at least go "aaarg!". when one kicked it. I think I will invest in a Windsor chair:)

Stoneleigh said...


I stand by what I said. We'll let time tell who is right. Watch this space.

Anonymous said...

"inflows are being directed into loss reserves" is very technical, ya.

I wundur if thar is a fancy math formala that mite captur what that inzidur fello is talkin about.

It seams so hard for a simpul guy like me to fullo.

Anonymous said...

@stone: of course you have to stand by what you said; to admit I'm right would mean you are wrong, and well that would really complicate matters for you. Alas, there's no two ways about these issues; I am right -- the re-flationary efforts have barely gotten underway, and the CDS notional really is quite irrelevant -- so you need to adjust your worldview....

Anonymous said...

@tyr: fortunately in this situation, all the jargon is readily decipherable in resources on the web, and it's really not all that complicated, though it is too much to explain in these comments. And after all, I have no intention of feeding you from my silver spoons!

I highly recommend tracking down James Grant's Interest Rate Observer; Grant is a Street insider, a journalist who really knows his stuff and is really well respected, and you all will be pleased to know that he's definitely not of the rosy outlook persuasion. (Not total doom and gloom either, but rather balanced.) Most importantly, he is easy and fun to read.

But to give you a brief intro, and perhaps explain why Stone gets the Fed situation wrong: the Fed and Treas have acted in concert recently to try to fix some underlying systemic issues; their moves have been largely offsetting with respect to inflationary impact as they are trying to manipulate the systemic issues before tackling reflation full on. The rationale is that this approach is a lot faster and cheaper in the long run, though it is a race against time and the political situation makes it all very risky. Think of it as if you have a gas tank with a hole in it: better to patch the hole first, then refil it -- but if you can't patch the hole before the tank runs dry, better to put some more gas in along the way....

Anonymous said...

@Ill: thanks for your support of my comments; your inability to find anything to counter them speaks volumes!

And, BTW, your intro has a serious error, too, in that you say that Congress is responsible for interpreting the law: in fact, Congress, the Legislative branch, makes any law they damn well want, the Executive branch executes on the law, and the Judicial branch interprets what the law actually says. Rodger Moore demonstrated that all Canadians know this; I assume you're ex-pat American?

Anonymous said...

@crystalradio: exactly correct. Once you recognize that notional amounts overstate exposure -- it's like adding absolute values of positive and negative numbers -- then lots of things become clear. Realize that often times the equity option markets have notional equity position implications that are vastly larger than the amount of equities available (many times over, even); while this ratio can indicate some interesting things, it is of little practical consequence or concern -- equally true in the CDS world.

Lots and lots of CDS have settled out over the past years and there have been few problems. And with LEH, we had the sudden unwinding of a major market maker (counterparty) with over a trillion dollars in net notional with very, very small resulting losses to the central firms. (Yes, some investment funds made money, and some lost money -- but no systemic risk!) This should be a settled issue, but the media is now so invested in it (punny, I know) it just can't let go. But surely here we can discuss and expect clear truths, no?

Anonymous said...

Just wanted to say thanks for keeping at it and I'm still here reading everyday.

I won't bore you with the details of the university judicial board hearing I just spent the last 6 hours in...I'll just say that these students committed an IT crime for their own gain (at the expense of their fellow students). Their lack of remorse was right in sync with the ethics of those currently running our financial system. It was very depressing for me to hear these students defend their actions.

I sent another letter to my senators and representative today urging them again to avoid further bailouts (for what its worth).

Bluemarble (can't get the google blogger login to work)

Farmerod said...


I thought the Lehman unwind was going to take at least 10 years. According to Insider, it's all done already. I guess no one wants to advertise good news.

I wonder how many of the counterparties will be around in 2018 to pay the winners.

Anonymous said...

@uncertain: Hmm, a prediction, my tea leaves vs the world. Interesting challenge! Well....

The world is running unscripted at this point; the US is facing an enormous fork in the road. One side leads to deep socialism, USSR-style, perhaps even an extreme totalitarian regime. The other side leads through a long and painful recession back to global growth. We, or you all, or whomever selects these things, could choose either path and neither choice would shock me.

But my best guess:
- dismal holiday season is a given
- the paradox of low retail prices but simultaneously low inventory (Best Buy offering to order you the TV on sale)
- Internet retailers (i.e.: Amazon) hugely outperforming B&M retailers
- 15+% unemployment in the US by mid January
- some big quasi-forced consolidation in the banking world (can't name names!)
- housing stabilizing in current problem areas in Jul09, but very dependent on exactly what the government does (bottom marked by stabilizing FC and REO inventory)
- Metro NY MSA/CBSA housing taking a major hit in Feb09 (down 15%)
- DOW bottoming in the realm of 5000-6000 in early Jan

I also think that rural areas will likely be faced with goods shortages, particularly fuel, and possibly food/grocery products that are from distant production sites: meat, paper products, fresh OJ, milk (depending on location), etc. Medium sized cities with diverse population bases (including large numbers of high income people) will be safest and experience the least disruption over the next few years.

But like I said, this is all unscripted, and with the change of administration, anything could happen. I will be very interested to see if the US really does try a demand-driven cure (can't possibly work, and, as a card carrying NJ member, I'm headed to Switzerland at the first sign of this), or if the rhetoric is moderated (Volcker presence is a good sign). It is somewhat entertaining to notice that the Fed min wage is set to rise again in Jul09 IIRC...!

EBrown said...

I have a litmus test question for you. Do you know of and understand the societal implications of peak oil?

This site deals first with finance so I understand if you don't much about the topic, but I do wonder if you have bigger picture perspective about the world than just money.

I can see a bit of a difference between banks "not trusting each other" and "...it's all about P&L and having money to lend vs reserves." I don't think the writings of I and S have ever discounted the banking industry's need for extra money to offset losses on the books is part of the equation. My understanding is that it is a BIG part of the problem, and all the loosening of reserve requirements over teh last few months is specifically directed at that "problem" the industry faces.

In the end though, is there a material difference in the amount of credit in the system if the banks refuse to make a loan because they don't "trust" their counterparty or if they refuse to make loans on the basis of needing the cash to offset losses on their books? If yes, please explain, I'm all ears.

And finally, the gas tank. Yes, will the patch hold? I am with Stoneleigh and Ilargi that it will not.

Farmerod said...


I guess you didn't spend enough time with Garth.

Suburbs will fall out of favour, areas without light rail transit or reliable bus transit will suffer more price depreciation, as will homes that are not energy efficient. Price deflation may be our future, but it will be combined with energy inflation.

Once you unlearn what you thought inflation and deflation really were, this whole problem becomes a lot easier to understand. Garth could do even more good with his site by not confusing affordability with "price inflation/deflation".

EBrown said...

you're more pessimistic than I thought you would be in your predicitons. Would those numbers in your predictions qualify as a depression? If not, what would depression unemployment numbers and Dow levels be?

Anonymous said...

Peak Oil: I don't make up my mind on such matters lightly, and thus have yet to be convinced one way or the other. There is definitely a lot of odd accounting going on by the various oil producers, but there are many potential explanations for that. Conveniently, though, peak oil is, I believe, suddenly irrelevant: the recession or whatever you want to call it pushes us so far down the demand curve that it's as if we get a global do-over. Not only is demand forced down, but we also now have an economic stimulus argument for wholesale investment into developing non-hydrocarbon energy streams....

Bank trust: well, there's not a lot of difference in terms of consequence regardless of why lending is not happening. (Which is how the industry conveniently started explaining this as trust.) But there's a big difference in terms of determining when and what will reverse the situation. One thing that the media doesn't seem to get: a lot of these loss reserve demands are being driven by volatility right now; if volatility, particularly i-rate volatility, would trend back to earth, the banking system would free up. The reintroduction of lots of obsolete Treas issue tennors this past week was no coincidence!

Depression: for qualifying depression, I suggest refering to the DSM III. Or is it DSM IV these days? I can never remember. Anyway, lots of people I know are depressed, and I often feel tinges of depression, though definitely still sub-clinical. Thus, not having any real in-depth experience with depression, I can't really say what it is, though like someone famous once said, I'll know it when I see it....

Anonymous said...

Anonymous Anonymous said...


"what do you think of the following:" ...

If true that might explain Lehmans 'possible' unwind but as OC so rightly said, that if there was news on that, where is it?
Insider, How can I be correct about something I have not formed an opinion on as yet let alone stated one.
It's past my bedtime and so it must be because my eyes droop and head nods that your words seem to devolve into such utter and meaningles gibberish. I'll look for lucidity in your comments in the morning.

Anonymous said...

For Stoneleigh:

With no means to connect buyers and sellers, people can starve amid plenty, as they did then.

In your opinion, are Craigslist and LETS feasible solutions for connecting buyers and sellers? If you have never heard of LETS, see the brief intro at http://en.wikipedia.org/wiki/Local_Exchange_Trading_Systems

Unknown said...

If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency," Kenneth Bruce, the Merrill analyst, wrote in the report urging investors to dump their shares.
consumer generated media

Stoneleigh said...


In your opinion, are Craigslist and LETS feasible solutions for connecting buyers and sellers?

When there is money (or credit) available then buyers and sellers connect easily enough. As I've said before, money is the lubricant in the economic engine. The problem comes when an insufficiency of money causes the engine to seize up like a car driven with the oil light on.

The scenario we are facing is a liquidity crunch - the loss of credit and an extreme shortage of cash. Without money, connecting buyers and sellers is very difficult. They would need to be in close proximity and transaction costs would be high. Barter is possible, but not efficient or convenient. As a means of running anything remotely resembling our current society it would be woefully inadequate.

Stoneleigh said...


Garth was called away to another engagement unfortunately, so we agreed to postpone our chat.

Anonymous said...

@ insider:

RE: the CDS unwind.

It seems to me that when you talk about the BUY side and SELL side, you are alluding on some level to the "zero sum" characteristics of the CDS market.

However, I will posit here that a major reason that Paulson et al. seem to be supporting bank and financial institution consolidation is that, once consolidated, these institutions can seemingly merge and effectively net out their balance sheets.

But this in fact does nothing to eliminate the risk of all counter parties: in fact, virtually all of the country party risk will be uncovered: all of the IOUs that have netted-out on the conglomerates balance sheet will nonetheless still exist as unfulfilled debt obligations to everyone else who has a stek in that particular instrument or CDO.

Stoneleigh said...


Do you understand Ponzi dynamics, whereby there is an underlying dependency on buy-in by new entrants? Credit bubbles are a prime example of such inherently self-limiting systems.

Over-confidence amongst insiders as to their ability to control the global financial system is one of the primary reasons we're in the mess we're in. If one assumes that problems are necessarily soluble due to one's own omnipotence, as Paulson and Bernanke seem to do, then one will take risks, especially when playing the 'game' with other people's money.

The scale of the credit bubble is far greater than anyone, however powerful, could hope to control. The analogy I've used before is that Paulson and Bernanke might as well be standing on the Gulf coast ordering a Cat 5 hurricane not to come ashore. Deleveraging will eventually proceed to its natural conclusion, despite temporary respites (postponements, not prevention). The derivatives market is a giant Enron waiting to happen, and there's absolutely nothing the powers-that-be can do to prevent it.

As for peak oil, I suggest you read up on it, starting perhaps with The Oil Drum (where Ilargi and I used to write before we set up on our own at TAE). Energy subsidies enable socioeconomic complexity (see Joseph Tainter's seminal work on the subject). I agree that we are much further down the demand curve than we were, but as I have argued before, first we see a demand collapse, then we see a supply collapse, as the projects that might have cushioned the downslope of Hubbert's curve are rendered uneconomic by current low prices. Demand and supply could well be falling together, with demand initially falling faster, but not necessarily for long. The collapse of energy supply will place a hard ceiling on any potential recovery.

As for you market prediction, a spike low to 5000-6000 by January is certainly possible, but I'd stake my life on it not being a lasting bottom. I do think it would lead to a rally, and as I've said before, when we see the next rally off a spike low, I would expect it to last for at least a couple of months. Talk of a lasting bottom is a pipe-dream though IMO. I wouldn't expect a bottom for years, and when it does happen, I would expect it to be at DJIA much less than 1000.

Stoneleigh said...


TAE may be for entertainment purposes only, but it isn't a soap opera ;)

I do think we make a good team though (someone once said here that we were fire and ice). We aren't a couple, but we are a big part of each others' lives, as is inevitable when people live communally.

Anonymous said...

RE: living communally

I know this is somewhat off-topic, but now you have really piqued my interest.

I am married, though my wife and I both recognize, or at least believe, that communal living arrangements are going to be very important in the coming years.

I'd love to hear more about your community if and when you have a sec.


Anonymous said...

Do you think that gold has any chance of a rally... or do you think it is trending downhill from now on?

Stoneleigh said...

Dan W,

Our communal arrangement is a work in progress, as not many people see the need yet. There are currently 6 of us, but eventually I expect there to be quite a few more. I'd rather they came before everything hits the fan, as it's easier to set up communal structures when people are making a positive choice, not fleeing a desperate situation. Human interactions can be challenging, and more so when the population, and therefore the number of interactions, goes up.

I expect mutual interdependence on that scale to be challenging, but rewarding, as there's really nothing more rewarding than community. Like everything to do with being self-sufficient (or selves-sufficient in this case), there's learning curve that's best climbed before you have to depend on it.

Anonymous said...

A question:

What are the ABX and CMBX?

how do the charts found at the link I'm providing get interpreted?



Stoneleigh said...


I would expect to gold fall and rise with the ebb and flow of liquidity generally. I certainly expect rallies, as no market moves in only one direction.

My guess is that both gold and oil (and other essentials) could bottom relatively early in our deflationary deleveraging, and would probably fall considerably less far than most other things in any case. A much larger percentage of a much smaller money supply will be chasing them, which should offer price support relative to non-essentials.

This is the dynamic people mean when they say we should see deflation in some things and inflation in others, although in saying so they misunderstand what inflation is (always and everywhere a monetary phenomenon). In practice, whatever the nominal price may do, most things will become less affordable as purchasing power collapses faster than price, and essentials will become less affordable more quickly than everything else. It will be as if prices were rising, even if the sticker price would be lower.

Gold will hold its value over the long term, as it has for thousands of years, but you may have to sit on it for a very long time. I suggest you deal with any debt you may have, secure some liquidity under your own control and try to implement some self-sufficiency measures before you worry about buying gold. Most people won't be able to get that far down the to-do list unfortunately, although communal living can help a group of people prepare better than any one person or family could do alone.

Anonymous said...

So...hmmmmm....this is going to be really unscientific, but....

Since Denninger, ml-implode AND CalcRisk blogs are all buzzing about the CMBX and ABX stats that just came out, and since the Big 3 bailout is not going over so big...

I am going to predict our 1st 1000+ point drop in the DOW today.

Anonymous said...

Would this deserve a "wow!"

Gold Charts







Oh, and I think I get ABX and CMBX now. :)

Anonymous said...

Hey dan w- do you think they will let it drop or still try to prop it up?
I was watching cnbc yesterday and some guy was on there talking about the "president's plunge protection team" - the cnbc commentator looked bemused and angry.

Anonymous said...

@ newbie

That's a good point. Also, I have written on my blog a few times recently that the DOW seems so disconnected from reality. Like playing fantasy football and thinking it's real.

By the way, Barbara Mikulski is a moron!

el gallinazo said...

Dan W

I notice you said predict - not bet.

I'll give you ten to one odds you're wrong. Maybe I should structure the bet as a CDS in basis points.


Re the PPT

the 11% 3 hour rally last Thursday, and to a somewhat lesser extent yesterday's 4% one hour rally, look very suspicious. Either its the PPT or some sort of lemming programmed trading. It certainly does not represent a natural market flux. I don't buy the Budweiser bs that Bloomberg used as an explanation for yesterday.

Greenpa said...

Stoneleigh - ah, I know many who would say that all life is a soap opera...

Ah, well; disappointed as I am, I will struggle on. :-)

As for the "conversation" with Incider- I am forcefully reminded of a conversation between professors in my nearby college.

I was teaching there, at the time; the conversation was related to me by one of the participants, the Head of the Religion Department; it's a Lutheran school. We talked in the locker room of the gymnasium; naked: the best venue for the transmission of difficult truths.

He, the Head, was in the process of becoming apostate- a not unusual situation. Most of those in the department were, of course, pietists.

Basically, in discussing the basic question of "does god exist" - well out of the hearing of the students; the Head had used the metaphor of "religious belief" having an existence that could be visualized as the World Tree, Yggdsrasil.

And- with the advent of scholarly examination of beliefs; it was repeatedly found that this branch; and that- could not be justified; they were demonstrably due to a falsehood, somewhere. Scholarly studies have been lopping limbs off Yggdrasil for hundreds of years now.

At which point, the Head stated: "All we have left, after all our work, is a stump."

The pietist's fervent response was: "Yes! But it's a REAL stump!!"

The Head could only shake his head; in astonished bemusement. The pietist would never- under any circumstances - be able to see that the Tree- was GONE. But the Head could.

He left the school the next year; the school continues, of course, to turn out believers.

There's only a stump left of your "economic science", Insider. It does not exist. "Growth" is a false god.

We understand that you cannot see that. St. Augustine would have loved your arguments.

Anonymous said...

"Kohler: A tsunami of hope or terror?

As the world slips into recession, it is also on the brink of a synthetic CDO cataclysm that could actually save the global banking system."

This was posted anonymously above. The author, Alan Kohler seems to have some journalistic credentials and is promoting a theory that would result in Banks walking.


Greenpa said...

Stoneleigh- "fire and ice" - is not it. I don't perceive you as icy in any way.

How about "volcano and ocean." :-) A little better.

Anonymous said...

@ el_pollo

I think you're right. Putting together all of the negatives and thinking it would logically translate to the DOW is absurd of me. Seriously. The DOW is probably one of the easiest institutions to "tweak", and probably the one institution whose massive drop would precipitate panic.

Even the supposedly honest Paul Volker said, “To meet the challenge [sic]the Federal Reserve judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending certain long-embedded central banking principles and practices.”

el gallinazo said...

Dan W

"supposedly honest Paul Volker"

He, like Kissenger, Brezshinski, and many others, is a Rockerfeller apparatchik. William Engdahl gives the nasty particulars in The Seeds of Destruction. A wolf in a sheep's pelt.

Anonymous said...

Why do you think that the deflationary deleveraging will take many years? Would other countries be able to still lend vast amounts to the US even if they are struggling with their own economies? Will the US not be forced to monetize their debts sooner rather than later?

el gallinazo said...

I wonder if there is some sort of internet clearinghouse for communal communities. That would really be useful.

Anonymous said...

general theory of
Gravitational Paulsonism

"to make his great works
for the Paulson"
The Paulsons power is not a means,
it is an end.

The global economy is currently undergoing an energy-ratio inversion cascade,
an event also known as "the great paulsonism", "peak paulson"
or the "paulson purge"

The various sciences and ideology of Paulsonism
(sometimes referred to as paulsitronics paulsonics, or paulsonry) have many facets, its followers, paulsonists, wonderously divergent.

The process of Corporatism is benign, gradual and insidious,
displacing and modulating the fabric of corporate-political culture, and the dominant carrier-wave of cultural induction,
and patiently utilizing the law to allow for exponentially self-reinforcing, and thus unreasonably irreversible, private concentration of public capital,
and so justly hyperbolic concentrations of private capital.

Perhaps certainly, the teachings of the Paulson have shown us
that politicians, bankers and financiers in general have a higher utility for, and probability of, being advantageously "sociopathic" in conduct.

Sociopaths would function significantly better than
more caring varieties of people
in such positions,being very efficient liars and most manipulative cheats,
and such secure positions being secretly self-selective
for the productive expression of traits society considers anti-social outside of
corporate functions, but which yield delicious profits when aligned through the practice of Paulsonism.

Working in such a profession within
proactive corporatist culture,
while being fruitfully employed
to make his great works
for the Paulson, this would also make one more likely to witness the incineration of compound emotions,
and become increasingly impervious and insensitive to
unproductive empathic sensation.

And so, precisely because capital is subject to a gravitational field that attracts all other capital,
in five-space, it willfully bends with compounding interests the proportioned future continuum of markets, generated by both biophysical energy and utility functions and the gradually irreversible dissemination
of property-rights by law.

This gravito-corporate memetic potential,
the generating force of the paulsonist-paulsonic field,
increases exponentially beyond a certain threshold.

During economic contraction, resource depletion, oil peaks,
or biosphere-destabilizations, the dominant sociopathy would
naturally align in any
critical mass of capital,
resulting in singular or multilateral Paulsonism.

Tis the theory of the dominant sociopathy.

Through the astounding combination
of the applied theories of Gravitational Paulsonism
with the well known cognitive discounting mechanisms,
the operations of any
paulsonist needs are
projected delicately as
viral memeplexes throughout and within the dominant carrier-wave of cultural induction,
and are adequately represented by means of paulitical debate.
By this, we generate the
collective dissociative psychosis
that defines the profitabilities
of the western world.

and so that is the mind
of the Paulson,
which is collective, and immortal.

Anonymous said...

special theory of Gravitational Paulsonism

The fundamental interactions in a typical five-dimensional paulsonic field with negative vacuum energy
are governed by swap-wave particles moving between darkmatter swaps.

These swap-wave particles are known as paulsitrons, charm paulsons, bottom paulsons and strange anti-paulsons.

They have no mass, no velocity, no position or vector,
and do not interact with any object or force in the universe,
other than the event horizon of the Paulson himself, which gives them quickly decaying spin.

A rare form of decay observed in the charm paulson seems to result in time-displacement of equity
and the creation of two paulsitrons and a virtual bottom paulson.
These suddenly develop enormous residual charge
when their ghost-swap pairs fail to annihilate each other,
one end being trapped behind the curtain of Paulsons event horizon.
Thus, the Paulsons body must emit paulsonising radiation.

The resulting paulsonising radiation could initiate a
chain reaction in sufficient density and swiftly propagate throughout all neutral swaps in five-space,
paulsonising the residual memetic market matter into higher entropy,
increasing the universal constant of elctrostatic repaulsion
and causing violent paulsonic cascades of paulsitrons and overcharged bottom paulsons.

The swaps themselves are of course in quantum superpaulsition,
while partially paulsonized they are subject to the housingbubble uncertainty-principle
and the paulsometric stress-tensors of "peak paulson",
which negates their value at a certain distance
from the paulsonist singularity.

and so the body of the Paulson consists of these things.

el gallinazo said...

Anon 11.52

If his "intelligence" advisers, all war criminals, are any indication, Obama will probably appoint an even bigger asshole than the Paulson as SecTreas, and then you will have to revise your entire structure of reality. Hardly worth the effort.

Anonymous said...

Give praise!

we are now blessed with
the magnificent spendor of the Paulson, may his infinite benevolence shine upon you.

We must all be grateful to the Paulson, for allowing us to exist for a little while longer,
and for sending his puppet Obama
to tranquilize the herd,
so that we may drink from his nectar of swaps and make some sweet profits ourselves, while we can.

May the fair justice of his Paulsonism last for millenia!

Anonymous said...

ell pollo,

the Paulson himself is not at all required for the practice of Paulsonism or paulsonry, and thus the structure of the general theory remains fundamentally strong.

concerning the nature of "reality"

How many swaps am I holding up, Winston?

and if the Paulson says there
are not four swaps, but five,
then how many?

...Reality exists in the human mind.

Not in the individual mind...
which makes mistakes, and soon perishes,

but in the mind of the Paulson...
which is collective, and immortal.

Humanity is the Party

...power is inflicting insolvency and humiliation,
otherwise you cannot be sure,
power is tearing human minds
and markets apart
and putting them back together again in new shapes
of the Paulsons own choosing...

If you want a vision of the future,
imagine a boot- paulsons boot- stamping on a human face, forever.

You are thinking that while I talk of the Paulsons power,
I am unable to prevent the decay of my own equity...

But the individual taxpayer is only a cell, Winston,
and the weariness of the cell is the vigor of the organism.

scandia said...

The media coverage of the Somali pirates is loaded with dark humour. The navies of the world are being sent out to stop piracy all the while the Paulson band of pirates steal billions, hold the entire nation hostage and not one copper in sight.

Anonymous said...

Goodnews, everyone!

When you stare into the Paulson,
the abyss stares into you.

When you stare into the Paulson
to look for evil,
the Paulson does not reflect evil, it creates it.
Therefore, one must never stare into the Paulson,
but merely glance at it.

"why did you do that?
now we're both going to drown!"

...to which the Paulson replied:
"I couldnt help myself,
its my nature..."

Ilargi said...

"I am going to predict our 1st 1000+ point drop in the DOW today."

Not today. Today is when the sheep get fleeced.

Anonymous said...

RE: anonymous's Paulson obsession:

I'm worried about you dude... ;)

Anonymous said...

thanks all,

i think peak paulson has now passed, im out of material
and am considering a more profitable expression of my insightful talents in paulsonry.

but i would appreciate any revisions on the paulsonic field theory,
or ways to accurately identify the paulsonists and concentrations of applied Paulsonism embedded in government. see general theory

el gallinazo said...


Who are these sheep anyway? I suspect they are the fund investors trying to buy "good value" for their clients. Of course the sheep are j6p who still are letting these assholes manage their money in their ever shrinking undeferred portfolios, 401-K's and pension funds.

The late, great Douglas Adams, in a sequel to Hitchhiker's Guide to the Galaxy, wrote of a planet whose world government feigned that their star would go nova, and then shipped all the telephone sanitizers off in a spaceship. (Of course they landed on Earth, and we are their progeny).

I think it time to ship the financial advisors off to another star system. Recent advances have even allowed us to detect planetary systems.

Anonymous said...

Tyr, you actually took the words right out of my mouth, I was going to post the same last night.

I've seen exactly the same thing, when someone acts kind of snotty, and tries to show their superiority by throwing out some technical terms as if that has any real meaning, it almost always means they are not very good at what they do.

You can see this in IT, but you see it in many other technical fields, I've done it myself. It was only looking back on it that I realized what I was doing.

The mark of true competence generally comes with a bit of maturity, and calmness, and an ability to see the forest for the trees, which is the result of experience. Not everyone reaches this level, but it's always obvious when you're dealing with them, because they tend to be very reasonable, and most definitely do not jump on single technical terms to show off, as Insider is doing.

So I have some real doubts about this guy, he's acting like every mediocre professional type I've ever seen.

el gallinazo said...

The S&P500 today is like the Starship Enterprise - going where no index has gone before. Wonder if we are going to see one of those manipulated last hour mega-rallies again.

Anonymous said...

He's Dead, Jim!

Farmerod said...

el pollo

Why has the PPT "allowed" the market to fall 40% from its highs?

Anonymous said...

Greek Chorus of Anonymousi:

"...and so that is the mind
of the Paulson, which is collective, and immortal..."

"...overcharged bottom paulsons..."

"...How many swaps am I holding up, Winston?..."

"...If you want a vision of the future, imagine a boot- paulsons boot- stamping on a human face, forever..."

"...Therefore, one must never stare into the Paulson, but merely glance at it..."

All heh. Very heh. Heheheh.

Reluctant Poseidon Hamster

Anonymous said...

I just want to say that it is just not right and apt to use the taxpayer’s money to save the car makers and help them while wasting the money totally.