Thursday, October 29, 2009

October 29 2009: A Halloween beyond your nightmares

Unknown Fodder April 1865
Petersburg, Virginia. Federal soldiers removing artillery from Confederate fortifications

Ilargi: Why does Goldman Sachs make a last minute less-than-rosy prediction about Thursday's GDP numbers? Could it be that they are acting as the voice of the government they own? A voice to counter the 3.2% growth prediction doing the rounds among "experts" [duh!] with a lower 2.7%, so at least the people that count can't say they weren't warned?

Also warned are all the banks missing from Tim Geithner's Christmas card list, who will soon, under proposed new regulation, be at Timmy and Larry Summers' every beck and call. Watch out guys and dolls, they have their eyes on your valuables. They came prepared.

It's not entirely clear to me why the Brits are suddenly so determined to break their too-big-to-fail banks into pieces - the little man inside says it's the EU that makes them do it, and the EU only- but it's certainly a wise move, even if it's too late to stave off all out economic disaster. If you go down anyway, why do it telling blatant lies till the bitter end and cheating every grandma you can put your sweaty palms on, including your own, out of every penny they own? Have these folks no pride?

In Washington, they certainly don't. The Financial Services Oversight Council, which in the future is set to prevent financial firms from becoming too big to fail, will be made up of the same regulators who in the past decade have made sure that those financials DID become too big to fail. Why not put Goldman directly in charge and do away with the tiresome pretense? The direction is obvious: more and more centralized rule. Eat your heart out, Benito.

So tell me, how ridiculous does it have to get? The mortgage and building lobby manages to get its homebuyer tax credit extension through, despite fierce resistance, by having a bunch off their Capitol Hill lackeys bundle it with that other extension, the one for unemployment benefits for people who’ve been out of a job for over year, and are by now deeply miserable. They're really a group of fellow citizens over whose backs you want to get your pet projects financed, ain't they? That's the sort of deal that makes one sleep well at night.

Tell me, did you guys actually vote for these talking lobotomies? They’re selling you out every chance they get when you're not looking. They've voted to burden you with $23.7 trillion in debt, and yes, you will have to pay that back, and that's just in the past year and a half. Before that, they established the too big to fail banks, a bunch of "wars" that kill scores of your kids, and land, water and air that will do in many of those the wars do not.

They’ve made sure tens of millions among you live in homes you're either already not able to afford or won’t be in the near future. They’ve watched over the demise of the manufacturing base your own parents and grandparents fought hard to establish, they’ve made health care unaffordable for a fast growing number among you, and did the same with the education system your children's futures should have been built on.

And you voted for these tricksters? Look at yourself, and then look at them, look at what they’re doing to you. Don't listen to them, look at them.

When are you thinking of starting to think straight? When you’re too sick and cold and hungry to think straight anymore? To even care? Do you still care at all right now? If not for yourselves, maybe for your children? If you ask me, you deserve a Halloween way beyond your wildest nightmares.

Ilargi: The Automatic Earth’s Fall Fund Drive (see the left hand column) is going well, and we owe heartfelt thanks to all of you who have donated. That said, in order to execute what we think would be the appropriate and logical next steps for us, more is needed, and quite a bit of it actually.

There are many thousands of people who read us every single day, and if everyone of them would donate just a dime for every time they read us we'd be doing just fine. But obviously, most never will.

We would love to be able to expand on what we do, to involve more people, more opinions, a more diverse view from more places in the world. And that is unfortunately not possible right now. Along the same lines, we would like for Stoneleigh to be much more involved at TAE. Not happening. On a happy note, our brand-new Twitter and Facebook presences are directed by our good friend VK, all the way from Nairobi, Kenya, the first time we’ve been able -and willing- to expand and relinquish control at least a little.

The Automatic Earth will be busier than ever as the real economy deteriorates in the months to come and things come to a head. Inevitably that will take more from us, and we hope you will do more as well.

Again for those among you who have donated to us -and many have in the past 3 weeks-, and those who will do so in the days and weeks and months to come, please know we are deeply grateful for, and humbled by, the confidence you have shown in us.

Ahead Of Thursday's Report, Goldman Sachs Cuts GDP Estimate
Ahead of Thursday's U.S. gross domestic product numbers, Goldman Sachs cut its third-quarter GDP estimate to 2.7%, following lower-than-expected durable-goods shipments Wednesday morning. The estimate, calculated on an annual basis, is down from the 3% Goldman previously expected.

Despite the reduced estimate for GDP growth, Goldman noted that orders for long-lasting goods were less dependent on volatile components than some, including Goldman, had expected. The firm called the durable-good numbers "actually quite encouraging," because the gains were "not heavily concentrated in the volatile defense and transportation categories." However, shipments were "somewhat weaker, especially for nondefense capital goods," Goldman said in the Wednesday report.

Stocks slammed
Stocks tumbled Wednesday, led by the tech-fueled Nasdaq, as a weaker-than-expected new home sales report added to questions about the strength of the economic recovery. The Dow Jones industrial average lost 119 points, or 1.9%, to close at 9,762.69, according to early tallies. The S&P 500 index dropped 21 points, or 2% to close at 1,042.63. The Nasdaq composite tumbled 56 points, or 2.7% to close at 2,059.61.

The Dow and S&P have fallen for three of the last four sessions, and the Nasdaq for all three, as investors have turned cautious following a 7 1/2-month stock rally. Since bottoming at a 12-year low in March, the S&P 500 gained 62% through its peak last week. But since then, it's lost 3.5%, as of Tuesday's close. Enthusiasm about the largely better-than-expected quarterly earnings reports has been tempered recently by concerns about the still-burgeoning economic recovery.

"There's been some nervousness over the last week, and today the worry is that the weaker new home sales report means the consumer is still flat on its back," said Alan Gayle, senior investment strategist at RidgeWorth Investments. Gayle said Wednesday's action shows investors are feeling less willing to take on risk at the moment, a factor made clear by the sector movement. In particular, the weakness in areas such as retail, financial and technology - and strength in defensive sectors like consumer staples and healthcare.

Housing: New home sales fell to a 402,000 unit annualized rate in September from a revised 417,000 unit annualized rate in August, the Commerce Department reported. Sales were expected to rise to a 440,000 unit annualized rate, according to a consensus of analysts surveyed by

Durable goods: Orders for manufactured goods meant to last three years or more rose 1% in September, after falling 2.6% in the previous month. The rise was in line with estimates. Goods excluding transportation rose 0.9% after falling 0.4% in August. Economists thought they would rise 0.7%. Another report showed that fewer metro areas reported jobless rates above 10% in September than in the previous month.

GDP: Thursday's reading on gross domestic product (GDP) growth is the key economic event of the week. GDP is expected to have grown at a 3.2% annualized rate in the third quarter after shrinking at an 0.7% annualized rate in the second quarter. GDP has declined steadily for four straight quarters, as Americans have contended with the worst recession since the Great Depression.

But the end of the recession doesn't necessarily mean a return to a period of robust growth, particularly amid rising joblessness and still-sluggish consumer spending. Government stimulus programs have played a big role in the recovery, and there are concerns about the strength of the system once that support winds down.

$8,000 Home Tax Break Update
Looks like Congress held off on extending UE benefits so they could bundle it with the tax credit and that ensures there is ZERO chance Obama will veto them packaged together.
In an effort to make the new credit more confusing and less economically beneficial, the credit amount will be reduced to $7,290 (no idea who came up with that number), but it will allow for "move-up" buyers to qualify for the credit so long as they either live in their existing house for 5 years or are willing to "state" that they have (This constitutes a fairly large number of recent home purchasers who procured the loan via "stated" income).
This newly extended / modestly reduced credit will only extend to April 30th, 2010 (plus 60 days for closing), though I would expect if the USA has not completely run out of ink in the printers that the credit will be extended one more time (perhaps to $6,480), as I doubt any politicians will want to stop giving away "free money" before the 2010 elections. The next non-sense housing agenda that I have not heard any movement on is extending the limits on FHA conforming loans. That is currently set to expire at year-end and will keep FHA out of loans over $417,000.
I’m not holding out hope, but I will still wish for a Friday miracle that gets rid of this wasteful, ineffective credit. As far as the impact to the housing market, by the way, I expect this has little to no impact. This credit getting extended was more or less fully priced in. I maintain my central belief that despite the past few months of rises, national housing prices median will not bottom until at least one year from now.

Outrage Of The Day: Tim Geithner's Latest Bailout
When the historians finally finish sorting through the appalling decisions that have been made in the past two years, some of Tim Geithner's will be at the top of the heap. It is probably safe to say that no man in history has given more to Wall Street at the expense of the taxpayer. Tim Geithner's latest outrage, yet another bailout of GMAC, makes him the Outrage of the Day.

The Debt Crisis Is Not a Conspiracy
by Kevin Depew 

1. The Debt Crisis is Simple

Awash as we are in a sea of Federal Reserve- and Treasury Department-sponsored financial acronyms, it would be easy to assume the complexity of the debt crisis is beyond the comprehension of the average person. After all, who, apart from a wonkish cadre of financial engineering geeks, can be bothered with trying to sift through the details of things like the Primary Dealer Credit Facility or an array of seemingly sketchy repurchase agreements? Yes, it would be easy to assume the complexity is beyond comprehension; easy, but wrong.

Recently, I ran across a long-winded, chart-filled screed haranguing the Federal Reserve for single-handedly taking over the entire capital market. The claim actually made a certain kind of hysterical sense, perhaps because it appeared in bold typeface, even if it missed the point; outrage over the Fed intervening in equity markets is akin to expressing outrage over what color sack the robbers are using to haul away their loot. At what point did we all become armchair central bankers?

The reality is that the Federal Reserve is simply following the Irving Fisher debt-deflation game plan and doing exactly what the vast majority of US central bankers have always insisted they would be doing if trying to prevent a full collapse into a deflationary depression; that is, try and reflate.

2. When Did We All Become Armchair Central Bankers?

The various mechanics of this reflation attempt are only worth arguing about among armchair central bankers and the various banking system participants concerned with how big of a slice they're getting of the great reflation pie. For everyone else, things are far less complicated and, sorry to spoil a good conspiracy theory, far more bureaucratic and mundane. In order to understand it, let's go to the source.

Toward the end of the Great Depression, economist Irving Fisher outlined a nine-step sequence of events that followed a debt bubble, which became known as his Debt-Deflation Theory of Great Depressions. Believe it or not, the St. Louis Federal Reserve actually has available for download a very easy-to-read 21-page paper by Fisher outlining this theory. The paper consists of what Fisher called his "creed," consisting of 49 "articles." Among the most important for our purposes is number 20, covering "over-indebtedness":
Over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money. That is, over-indebtedness may lend importance to over-investment or to over-speculation. The same is true as to over-confidence. I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.

3. The Debt Bubble Sequence

In that brief article, Fisher handily summarizes why this is no ordinary recession. This debt bubble, over-indebtedness, was fueled by borrowed money, which was made too cheap for too long, and which resulted in massive over-investment, over-speculation, and over-confidence.

But everyone knows that. After all, it's how Alan Greenspan became a household name, appeared on the cover of Time magazine, and became known as The Maestro in the first place, and it's why all those accolades will ultimately be for nought as we continue to try and transfer the excessive corporate and public debt incurred during Greenspan's tenure, and which accelerated under Ben Bernanke, to government debt. More on that in a moment.

The debt bubble sequence Fisher described is very intuitive, which is why you don't need to know much about structured finance or the precise mechanics of Federal Reserve operations to see it play out. According to Fisher, assuming over-indebtedness exists, the following chain of consequences will result in nine steps that are easy to understand, if a bit more complicated in their inter-relations:
Step One: Debt liquidation leading to distress selling.

Step Two: A contraction of deposit currency as bank loans are paid off, and a slowing down of the velocity of circulation.

Step Three: A fall in the level of prices, or a swelling of the dollar (assuming this fall in prices is not interfered with).

Step Four: A still greater fall in the net worth of businesses, leading to bankruptcies.

Step Five: A decline in profits, which leads to...

Step Six: A reduction in output, trade, and employment, which lead to...

Step Seven: Pessimism and loss of confidence.

Step Eight: Hoarding of money, slowing down still more the velocity of circulation, which conspires to cause...

Step Nine: Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in real, or commodity, rates of interest.

4. So, What to Do?

It's obvious, isn't it? Let's go back to Step Three in the sequence for a moment, "A fall in the level of prices, or a swelling of the dollar (assuming this fall in prices is not interfered with)." Fisher writes, "assuming this fall in prices is not interfered with," an important observation. Later, he explains, "when over-indebtedness stands alone, that is, does not lead to a fall of prices, in other words, when its tendency to do so is counteracted by inflationary forces (whether by accident or design), the resulting 'cycle' will be far milder and far more regular."

And so there you have all you need to know about the Federal Reserve's game plan for ending the unwinding of the debt bubble. The answer is simple: reflate, reflate, reflate, by all means necessary reflate.

5. Will it Work?

Federal Reserve Chairman Ben Bernanke has been even more explicit than Fisher, who was writing more than 70 years ago, in the types of policies he believes the Federal Reserve should pursue in attempting to reflate and, it is hoped, avoid a deflationary depression.

Unless we're intent on debating specific monetary transmission mechanisms and the intricacies of trying to force feed more credit into the system, we can leave the actual mechanics to the armchair central bankers. What's important from our standpoint is one thing: Will it work?

Looking at the market through the lens of complex systems theory, the problem is actually one of time. On short-term time scales, the Fed and Treasury think they are rock stars, "The Committee to Save the World"... indeed. But on longer-term time scales we know they have simply made the problem worse. The question, then, becomes: How much longer?

Going back to Fisher's Debt-Deflation Theory, the dollar is the real canary in the coalmine because during aggressive debt deflation the value of the dollar "swells," to use Fisher's term. And I suppose that's what keeps me up at night. When I look at the dollar with  long-term DeMark indicator studies applied, they're pointing to a high probability of multi-scale alignment by the first quarter of 2010 and a major bottom for the US dollar. Currently, there's a weekly TD Buy Setup that has been perfected, so the next four weeks for the US dollar look higher, after which we need one more move lower, preferably below 72.509, for a major bottom.

If the dollar does bottom, then it will become quite clear that reflation attempts have failed, and then we face the heart of the debt deflation where the swelling of the dollar competes simultaneously with debt destruction and where debt levels increase in dollar terms faster than they can be paid down.

Make no mistake, debt-deflation will conclude with an inevitable sharp rise in inflation as monetary policies designed to battle deflation remain in place even as excessive debt is eventually destroyed, but the outlook for the dollar says that isn't today's business. Be careful which scenario you're preparing for because those who anticipate inflation before the debt-deflation has fully run its course will find themselves digging out of a deep and painful hole.

Deflation fears as Eurozone and US credit contracts
Bank lending to firms and households in the eurozone has fallen for the first time, raising fears of an economic relapse and a slide into deflation next year. Data from the European Central Bank shows that the M3 broad money supply has contracted over the last six months, confounding expectations that ultra-low interest rates would soon boost monetary growth. Loans to the private sector fell 0.3pc from a year earlier, the first such decline since the data started in 1983. The M3 figures include a wide range of bank accounts. They are watched closely by experts for early warnings about the economy a year or so ahead.

The picture is even starker in America where M3 has shrunk at an annual rate of 6.5pc over the last three months, a pace of contraction not seen since the 1930s. US bank loans have plummeted since May. Michael Taylor from Lombard Street Research said the eurozone was "blundering towards deflation". Inflation was minus 0.3pc in September, but unevenly distributed. Prices fell 3pc in Ireland, 1.8pc in Portugal, and 1pc in Spain. "All the ingredients are there for deflation next year. At some stage this may start alarm bells ringing at the ECB," he said. The credit data on both sides of the Atlantic are hard to square with market expectations of a "V-shaped" recovery. Experts at the ECB and the Federal Reserve view the loan contraction as a short-term anomaly caused by the distortions of the crisis, and some have begun to hint that emergency stimuli will be withdrawn soon.

However, an ominous pattern is emerging where excess liquidity from low rates and quantitative easing is flooding into the equity (QE) and bond markets without gaining full traction on the underlying economy. This threatens to become a central banker's nightmare. Otmar Issing, the ECB's former chief economist, told an Open Europe forum in London that policymakers are entering treacherous waters. "Nobody can be sure that we have a self-sustaining recovery. The challenges facing the ECB are tremendous," he said. "Money multipliers have collapsed everywhere. What M3 is telling us is that confidence is missing. I don't see any way to stabilise M3 in such circumstances," he said. Professor Tim Congdon from International Monetary Research called on the ECB to buy state bonds in a blitz of QE to insure against a double-dip recession. He said: "2010 is going to be very difficult."

However, any move to purchase EMU state debt would erode ECB independence and be viewed in Berlin as a monetary bail-out of Club Med countries. "They would enter a political minefield," said Dr Issing. So far the ECB has confined itself to purchasing €60bn (£54bn) of covered bonds, a pittance compared to the Fed's actions. The assumption is that aggressive QE is not needed because the credit bubble in core Europe was less extreme. However, there is a heated debate over credit conditions in Germany. Mittelstand family firms complain that the window for fresh loans has slammed shut. Savings banks are tightening credit to meet capital rules agreed at the G20 summit.

A report by Germany's five institutes said it was a error to push banks into raising capital ratios before the recovery is secure. "Financial conditions are likely to worsen further. Banks are facing large write-offs on toxic debt and a rising toll of company insolvencies. There is a major danger that already tight financing conditions could lead to a credit crunch next year," they said. JP Morgan says European banks may have to raise $78bn (£48bn) in fresh equity over the next six months.

BNP Paribas, Unicredit and others have already tapped the market, but some have dragged their feet – even clinging on to Icelandic bank debt at face value. Jürgen Fitschen of Deutsche Bank said lenders would face "major challenges" in the first half of 2010. "We are going to see some pain," he said. Germany is competitive and will recover. The bigger danger lies in the South. Italy's public debt will reach 125pc of GDP next year. The country risks a compound interest trap. Nations can endure high debt, or deflation: both together are toxic.

UK government to break up the banks
Lloyds, RBS and Northern Rock will be split up in state sell-off

Lloyds, Royal Bank of Scotland and Northern Rock will be broken up and parts of their businesses sold off to create three new banks, it emerged last night. Government sources said ministers were "determined" to see more competition in the market, following the £1.2 trillion bailout of the sector which resulted in the loss of three independent banks and several building societies.

The European Union will today approve the split of Northern Rock into two sections, a "good", profitable, bank with no bad debt, and a "bad" bank. Ministers will begin exploring sale options at the start of next year when the split happens and a deal could be finalised before the general election. The remaining "bad" bank will remain in state hands for the time being although sales of "tranches" of the more risky mortgages it holds will be explored in the longer term.

The Lloyds and RBS sell-offs will follow over the next three to five years and will be supervised by UK Financial Investments, the government body set up to oversee taxpayers' investment in the banks. The Government is understood to have made clear that existing larger operators will be banned from participating in the sales. Ministers want to drive competition in a sector they believe is too concentrated in the hands of the "Big Four" of Barclays, HSBC, Lloyds and RBS. Virgin Money is known to be watching the situation closely and is in talks to add former Northern Rock chairman Bryan Sanderson to its board ahead of a possible bid for Northern Rock.

Tesco is another company that could be enticed into an auction as it seeks to grow its financial services business. Spain's Banco Santander, which owns Abbey, Alliance & Leicester and part of Bradford & Bingley, may be allowed to get involved because it is significantly smaller than the big banking groups in Britain. But it could still be frustrated by the Government's determination to attract new entrants. "We are keen to see greater competition in the banking sector as soon as possible," said a government source.

A deal to buy "good" Northern Rock would bring a new entrant around £20bn of deposits together with a portfolio of low-risk mortgages and a platform to expand operations that remain concentrated in the North-east nationwide. Lloyds is expected to face a forced reduction in its share of the retail banking market from 30 per cent to 25 per cent, with the disposal of more than a seventh of its 3,000 branches expected.

It has been desperately seeking support in the City for a share issue of up to £15bn to keep it out of the Government's asset protection scheme that will cover it against losses from up to £260bn of risky loans. But even if Lloyds can achieve this, it will be forced to sell parts of itself as a consequence of the Government's injection of nearly £15bn to recapitalise the bank at the height of the financial crisis. That will be seen as a blow to Eric Daniels, chief executive, who indicated at the bank's recent results that he did not expect to make significant disposals. A spokesman said: "We continue to work with European regulators."

Royal Bank of Scotland, meanwhile, is working on plans to sell off a "couple of hundred" branches, including RBS branded outlets in the UK and NatWest's Scottish branches. It is certain to join the government scheme although how much will be protected is not yet certain. Final details on the Lloyds and RBS disposals are set to be announced alongside details of the asset protection scheme.

But an indication of the EU's "get tough" approach came on Monday when ING, which owns the ING Direct savings bank in Britain, said it would split itself in two to satisfy watchdogs unhappy at its bailout by the Dutch government. Britain's banking sector was further consolidated on Monday with the announcement by Barclays of a deal to buy Standard Life Bank.

Government sources said that while the new banks would be relatively small compared with the big four, they hoped they would prove fast moving and innovative. The effect Standard Life Bank had on the market when it was launched has been noted, although its activities were constrained by the credit crunch. The Government currently has a stake of 70.34 per cent in Royal Bank of Scotland and 43.44 per cent in Lloyds. That gives ministers the whip hand over both banks. They are expected to take up the taxpayers' "rights" when Lloyds launches its share issue to maintain the size of its investment.

Familiar Flavor To US Financial Reform Bill
Proposed system to regulate firms too big to fail features council that looks remarkably similar to existing advisory group.

More than a year after the U.S. government began bailing out the nation's biggest financial firms, a key congressional committee has unveiled a bill to prevent companies from becoming too big to fail.
The draft of the bill, released by the House Financial Services Committee on Tuesday, is designed to minimize the threats from firms that are so big or interconnected that they pose a "systemic risk" to the overall economy. It also sets forth a plan to wind down troubled non-financial firms, blunting the impact that the failure of those companies can have on the economy.

In many ways, the bill's aims mirror proposals put forth by the Obama administration earlier this year. As proposed, at the pinnacle of the new system would be a panel of top regulators dubbed the Financial Services Oversight Council.

The membership would be a who's who of Washington's regulators (take a deep breath before reading the list out loud): The Treasury secretary, the chairman of the Federal Reserve and the head of the Securities and Exchange Commission, as well as the heads of the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency and the National Credit Union Administration. Only one regulator, the Office of Thrift Supervision, is getting the ax in this proposal. The Treasury Secretary would chair the council. One state insurance regulator and one state bank regulator will also get non-voting seats.

The council's task will be "to monitor the financial services marketplace to identify potential threats to the stability of the United States financial system"--in other words, to watch out for financial crises and stop them before they begin. A key part of this task is identifying firms that "could pose a threat to financial stability," firms that are considered "too big to fail." The council will identify these firms and ask their respective regulators to tighten oversight. This tighter oversight would mostly mean requiring banks to keep more liquid capital on hand. It could also take the form of limiting how much exposure a bank has to another institution, or requiring an institution to change its risk management practices.

In an apparent attempt to avoid moral hazard, no public list will be kept of these too big to fail companies. The authority is somewhat toothless as regulators are allowed to ignore the council as long as they provide a written justification for doing so. The council will also have binding authority to resolve turf battles between different regulators. The council of regulators is remarkably similar to an advisory council that already exists: the President's Working Group on Financial Markets, which includes the Treasury secretary, Fed chair, and the heads of the SEC and CFTC.

Putting all these regulators in a room didn't provide much early warning about the crisis in 2008. In the 1990s, Brooksley Born, then the chair of the CFTC, sounded an alarm about the unregulated derivatives market, but the other regulators in the working group disagreed with her and so her efforts went nowhere--the sort of mistake a new council could easily repeat. One of the key dilemmas the bill aims to solve is how to unwind troubled non-financial firms that pose a threat to the economy. Traditional bankruptcy procedures can be drawn out, which could endanger the overall financial system. In addition, banking regulators don't have the legal authority to "resolve" a non-financial firm.

Under the proposal put forth by House Democrats, the FDIC would take over a failing firm so that taxpayers won't have to foot the bill for a bailout, as has happened with insurance giant American International Group during the past year. A troubled firm's shareholders and creditors would be responsible for bearing the costs of its resolution, but the government would also establish a Systemic Resolution Fund within the Treasury Department to help cover any additional costs. Financial firms with assets of $10 billion or more would be required to kick in money to help cover the cost of a firm's unwinding.

One concern is that the bill does little to streamline the nation's fractured system of financial regulation. And it's not clear how a council of regulators will prevent a few firms from posing a threat to the system. These questions will be addressed in depth by the committee in the days ahead. Many questions will likely be answered Thursday, when Treasury Secretary Timothy Geithner is scheduled to testify before the panel. But the key hurdle for Democrats won't be in getting the bill to the House floor in the coming weeks. (The party has an overwhelming majority in the House.) It'll be minimizing the influence of lobbyists and getting the Senate to produce similar legislation.

The Worst September For Home Sales Since 1981
Even uber-bearish housing analyst Mark Hanson was taken aback by the shortfall in home sales this morning. Even he thought that the remaining homebuyer tax credit, plus all the other stimulus out there, would produce a rise in new home sales.

But no. September was the worst month since 1981.


Builders, of course, will use the number as evidence that the subsidy MUST remain in place, but at this point there's probably no helping them. See, new homes compete for low-end homebuyers with foreclosures, and though we're still limiting the number of foreclosures out there (through moratoria and whatnot) the wave is just enormous.


New-Home Sales Drop as End of Tax Credit Looms
Sales of new U.S. homes unexpectedly fell in September as the end of a tax credit for first-time homebuyers approached, highlighting the importance of government aid to the emerging economic recovery. Purchases dropped 3.6 percent to a 402,000 annual pace that was lower than the most pessimistic economist’s forecast, according to Commerce Department figures issued today in Washington. Other data showed orders for durable goods climbed 1 percent in September, the fourth gain in the last six months.

Stocks fell as the home-sales report reinforced concerns a recovery from the worst recession since the 1930s may cool after programs such as the $8,000 tax credit and Federal Reserve purchases of mortgage-backed securities expire. Economists say a recovery in housing is a key to rebuilding the confidence and finances of American consumers, whose spending makes up 70 percent of the world’s largest economy.

The drop in sales "does raise some questions about where the housing market is going to be in six months, arguably without any more support," said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. "Whatever you think about the economy, it’s not going to be a straight line" toward recovery. The Standard & Poor’s 500 Index declined 1.1 percent to 1,051.86 at 11:57 a.m. in New York, extending a global slump. The S&P Homebuilder Supercomposite Index, which includes companies such as Lennar Corp. and KB Home, dropped 4.2 percent to 243.63.

New-home sales were forecast to rise to a 440,000 annual rate, according to the median forecast of 75 economists in the Bloomberg survey. Estimates ranged from 412,000 to 460,000 after an initially reported 429,000 rate the prior month. Sales of new homes, which make up less than 10 percent of the market, are tabulated when a contract is signed. Purchases of existing homes, which account for the remainder, are counted when transactions close and thus reflect contracts signed a month or two earlier.

Contracts signed last month to buy a new house may not be able to close before the tax credit expires at the end of November. A proposal to extend the credit as part of an unemployment-benefits measure has significant support, Senate Majority Leader Harry Reid said today. Previously owned homes in September sold at a 5.57 million pace, up a record 9.4 percent from the prior month, the National Association of Realtors reported last week. The level of sales was the highest in more than two years.

The median price of a new house fell to $204,800, compared with $225,200 at the same time last year. The value was up 2.5 percent from the prior month, reflecting a plunge in the share of houses selling for less than $150,000, a category that often includes first-time buyers. Sales fell 11 percent in the West and 10 percent in the South. Purchases in the Midwest jumped 34 percent and were unchanged in the Northeast. Builders had 251,000 houses on the market last month, the fewest since November 1982. It would take 7.5 months to sell all homes at the current sales pace, the same as in August.

A report from the Commerce Department tomorrow may show the economy grew at a 3.2 percent annual pace last quarter, according to the median estimate of economists surveyed. It would be the first positive reading in more than a year and the strongest performance since the third quarter of 2007. Growth is forecast to slow to a 2.4 percent pace in the fourth quarter.

"Much of the strength in the economy is due to temporary factors such as fiscal stimulus initiatives like the home- buyers credit," said Dana Saporta, an economist at Stone & McCarthy Research in Skillman, New Jersey. Fed policy makers meeting next week are likely to repeat their commitment to keeping interest rates low for an "extended period." The Fed last month decided to slow purchases of $1.25 trillion in mortgage-backed securities while extending the end-date of the program by three months, to March 31.

The gain in durable goods orders illustrates how manufacturers such as Caterpillar Inc. are benefiting from $2 trillion in global stimulus spending. The 1 percent increase in bookings for goods meant to last several years matched the median estimate of economists surveyed by Bloomberg News and followed a 2.6 percent drop the prior month. Caterpillar, the world’s largest maker of bulldozers and excavators, issued a full-year profit forecast exceeding the highest prediction from analysts. Peoria, Illinois-based Caterpillar is considered a bellwether for its ties to construction and mining and its overseas presence.

"We are seeing encouraging signs that indicate a recovery may be under way," Chief Executive Officer Jim Owens said in a statement on Oct. 20. "We’ve already started planning for an upturn." Shipments for non-defense capital goods excluding aircraft, used in calculating gross domestic product, fell 0.2 percent in September. For the quarter, such shipments dropped at a 1.9 percent annual pace compared with a 14 percent plunge in the prior three months, indicating business investment stabilized after plunging over the past four quarters.

Fears of a New Chill in Home Sales
Even as new figures show house prices have risen for three consecutive months, concerns are growing that the real estate market will be severely tested this winter.

Artificially low interest rates and a government tax credit are luring buyers, but both those inducements are scheduled to end. Defaults and distress sales are rising in the middle and upper price ranges. And millions of people have lost so much equity that they are locked into their homes for years, a modern variation of the Victorian debtor’s prison that is freezing a large swath of the market.

"Plenty of pain yet to come," said Joshua Shapiro, chief United States economist for MFR. He is forecasting an imminent resumption of price declines. This summer, housing seemed at last to be stabilizing. A flood of last-minute buyers trying to conclude a deal before the tax credit expires Nov. 30 helped push up the Standard & Poor’s/Case-Shiller home price index a seasonally adjusted 1 percent in August, it was announced on Tuesday.

That was the first time since early 2006 that the widely watched measure of 20 metropolitan areas put together three consecutive increases. While underlining the importance of that long-awaited rise, Maureen Maitland, the S.& P. vice president for index services, warned, "Everything is up for grabs this winter." Consumers seem acutely aware of the strains ahead. The Conference Board’s consumer confidence index fell unexpectedly in October, after reaching its high for the year in September, the board announced on Tuesday.

The only hot sector of the real estate market has been foreclosures. Investors and first-time buyers have been competing for these, often creating bidding wars. But with the economy still weak, many analysts expect more foreclosures. Another factor likely to weigh on home sales in the coming months is a rise in interest rates. As the Federal Reserve ceases its buying of mortgage-backed securities, rates may well drift up to 6 percent, from 5 percent.

Worries about the fragility of the housing market, fanned by the real estate industry, may prompt an extension of the tax credit. The controversial program has spurred as many as 400,000 buyers, including Brenda Colon, a nurse in Las Vegas. "If you had told me in January that I would be buying a house, I would have laughed," said Ms. Colon, 48, who lives with her two daughters and granddaughter. "But the tax credit was just the kicker to throw me over."

Yet despite the tax credit and other local and federal incentives for homebuyers in Las Vegas, prices there are continuing to fall, shedding 0.8 percent in August. The city’s home prices have declined on average more than 55 percent from their peak, more than in any other metropolis. Whenever the tax credit finally expires, Las Vegas and every other city will have to confront the inevitable question after all such stimulus packages: what will motivate the buyers of tomorrow?

"In my office, people were buying homes left and right because of that tax credit," said Kitty Berberick, who works for an insurance company in Las Vegas. "That credit was a godsend." Ms. Berberick, 62, could not strike a deal in time, and now has signed another lease for her apartment. If the credit is not extended, she said, she is likely to give up the search entirely until the market really crashes.

This, of course, is the sort of fatalistic attitude that relentlessly drove down prices last fall. "Everyone keeps telling me, it’s going to go down before it goes up," Ms. Berberick said. "I hope it does, because then I can buy." The recovery is both modest and tentative when measured against the preceding plunge. Prices have fallen nearly a third from their peak, and are down 11.4 percent over the last year.

In most major cities, it is as if the housing boom never happened. Prices over all are back to where they were in the fall of 2003. Some cities have been pushed down even more: In Cleveland, prices are at 2001 levels; in Detroit they’re at 1995. It is the magnitude of this decline that makes Karl E. Case, the Wellesley professor for whom the Case-Shiller index is partly named, an optimist.

While acknowledging "there are a lot of dangers out there," Mr. Case said "housing is as affordable as it’s been in 20 years. I don’t see a very rapid recovery, but I think we’ve seen the bottom." Sixteen of the 20 cities in the index rose in August, including San Francisco, up 2.6 percent, and Minneapolis, which rose 2.3 percent. Besides Las Vegas, three cities fell: Charlotte, Cleveland and Seattle. New York was up 0.3 percent.

The Case-Shiller numbers on prices lag behind the National Association of Realtors’ report on existing-home sales, which has been issued for September. Sales were up 9.4 percent from August, with the tax credit again getting much of the credit. Critics of the credit argue that the number of those who merely qualify for it — and gladly take it — greatly outnumber those it is precisely intended to assist: people who would not have bought a house otherwise. That means, they argue, that the government is essentially paying more than $40,000 for each purchase that would not have occurred without the credit.

That is an expensive proposition, said Roberton Williams, a senior fellow at the Tax Policy Center who has closely followed the issue. "The bigger threat to the housing market is not the reduction in demand from the end of the credit, but the continuing wave of foreclosures we’re likely to see over the next 18 months," he said. In California, there is strong evidence that foreclosures are beginning to migrate from the subprime inland areas to the more exclusive coastal region.

According to MDA DataQuick, third-quarter notices of default in Santa Barbara were up 25 percent from 2008; in San Luis Obispo, they rose 46 percent; in Marin County, they were up 66 percent. Defaults in hard-hit Sacramento, by contrast, were up only 10 percent. In Merced County in the Central Valley, an epicenter of the bust, they actually fell.

While defaults are only the first stage in foreclosure, Mr. Shapiro, the MFR economist, expects many formerly creditworthy homeowners to go under. He says he thinks the recent improvement in Case-Shiller numbers is an aberration rather than the beginning of a long-term improvement, with consequences for the larger economy. "Another leg down in home prices, even if much more limited than the initial move, would nonetheless weigh on consumer spending," Mr. Shapiro said, adding that he did not expect a second recession.

Capmark's bankruptcy provides a template for the future
Capmark Financial Group Inc.'s weekend bankruptcy filing surprised no one, but it was still a harsh reminder of the hard times ahead in the commercial real estate industry. "It's not a turning point. The problems are only starting," Dennis Yeskey, a senior adviser at AlixPartners L.L.P., a business-advisory firm in New York, said yesterday. Yeskey and other experts warned that as long as the economy keeps shedding jobs, the commercial real estate market will be plagued by declining demand and falling property prices.

In its Chapter 11 bankruptcy filing Sunday, the commercial-property lender listed assets of $20.1 billion and debts of $21 billion. Capmark, which has 585 of its 1,000 employees in Horsham, relied heavily on selling loans it had made into the secondary market. When that froze and property values fell, the company got stuck owing more to its own lenders than its loans were worth. "It's a template that you will see multiply itself many times over over the next three years," said Matthew McManus, chairman of NAI BlueStone Real Estate Capital, a real estate investment bank in Philadelphia.

The problem for the industry is that between now and 2013, more than $2 trillion in commercial mortgages, which typically have a five- to 10-year term, will need to be refinanced, according to a July report by Richard Parkus, head of commercial mortgage-backed securities at Deutsche Bank AG. It is not turmoil in the capital markets that is causing the bottleneck, but rather the fact that properties are not worth enough to retire the old debt in a refinancing, Parkus said.

The value of commercial properties has fallen 40 percent from their peak in October 2007 through August, according the Moodys/REAL Commercial Property Price Index. The sharp decline in property values has contributed to a rapid deterioration of the $7.8 billion loan book at the Capmark Bank unit. Most loans were made at the peak of the lending frenzy in 2006-07.

During the five quarters ended June 30, the percentage of loans on the bank's "watch list" for problems soared to 39 percent from 2 percent, according to a presentation posted on the firm's Web site.
Capmark had $340.3 million in loans outstanding in the Philadelphia market, or 4.3 percent of its total, as of Sept. 30. Of those, $35.6 million, or 10.5 percent, were behind on payments, according to the presentation.

Paul Halpern, a partner at Versa Capital Management Inc., of Philadelphia, said a lack of ready financing for commercial real estate had prevented properties from trading at depressed values. That could help some lenders otherwise facing big write-offs. "By the time financing is available, asset prices will have recovered substantially, though not enough to save everybody," Halpern said.

GMAC Asks for Fresh Lifeline
In a stark reminder of how some battered financial firms remain dependent on government lifelines, GMAC Financial Services Inc. and the Treasury Department are in advanced talks to prop up the lender with its third helping of taxpayer money, people familiar with the matter said. The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government's 35.4% stake in the company could increase if existing shares eventually are converted into common equity.

The willingness by Treasury officials to deepen taxpayer exposure to GMAC reflects the troubled company's importance to the revival of the auto industry. Founded in 1919, GMAC has $181 billion in assets and is a major financier for 15 million borrowers and thousands of General Motors and Chrysler car dealerships in the U.S. The new capital would help firm up GMAC's balance sheet and solidify its auto-loan business. GMAC provides the vast majority of wholesale financing for GM dealerships across the country, meaning scores of local distributors would be unable to bring new vehicles onto their lots if GMAC were to collapse.

Federal officials also are moving to shore up GMAC's ability to fund its daily operations, with the Federal Deposit Insurance Corp. telling the company Tuesday the agency will guarantee an additional $2.9 billion in debt, according to people familiar with the discussions. The FDIC guarantee will make it easier for the company to sell debt to investors. The FDIC backed $4.5 billion in GMAC-issued debt earlier this year. The FDIC approval came just four days before the expiration of the regulator's program that guarantees debt issued by certain banks. It ended months of tense negotiations between GMAC and regulators. Without a deal, the company would have been forced to further reduce its lending volume. New-car loans by the company tumbled 55% to $5.6 billion in the second quarter from a year earlier.

While GMAC would be the only U.S. company to get three capital injections from the government since the financial crisis erupted two years ago, thousands of banks and other financial firms remain weakened by exposure to fallen real-estate values and clobbered financial markets.

Paying Back TARP
Among U.S. banks that got a total of $204.64 billion in aid through the Troubled Asset Relief Program, just one-third of the capital has been repaid so far. Government officials are skeptical that some banks now wanting to escape the government's grip are strong enough to do so, with Bank of America Corp.'s attempt to repay bailout funds snagged by a disagreement over how much additional capital the bank must raise to satisfy regulators, people familiar with the situation said.

At GMAC, the likelihood of a third infusion increased when the government's stress-test results were released in May. The tests were conducted to determine whether banks would need more capital to continue lending if the economy deteriorated in 2009 and 2010. The test concluded GMAC needed $11.5 billion in common equity to continue lending in a stressed economy.

GMAC raised some of the money directly from the government, but a significant hole remains. The company hasn't been able to attract much capital from private investors because it isn't listed as a public company, forcing GMAC to begin negotiating with the government to find the remaining funds. GMAC and Treasury officials are now negotiating about exactly how much capital the company needs. "GMAC is the only one of the banks that went through the stress test to need additional government capital," Treasury spokesman Andrew Williams said. "All other institutions were able to raise any necessary capital from investors and several paid back the taxpayer."

Capital Hole
People close to GMAC said the company's outlook is better than it was in May, and that unlike other banks that went through the stress-test process, GMAC won't be forced to fill the entire capital hole even with a third infusion. Bank of America has raised about $40 billion in new equity, higher than the $34 billion required, and regulators are asking it to raise even more if it wants to return $45 billion in U.S. aid. The U.S. government's current 35.4% stake in GMAC is the result of a 2009 restructuring of GM.

People close to GMAC said they don't expect the government to call for changes in management as a result of the likely infusion. The company posted a second-quarter loss of $3.9 billion amid rising loan delinquencies and the continued U.S. auto slump. It expects to release third-quarter earnings next week. For decades, GMAC served as GM's finance arm. In 2006, GM sold a majority stake to private-equity firm Cerberus Capital Management, which eventually installed former Bank of America Chief Financial Officer Alvaro de Molina as CEO. The collapse of the U.S. housing market and declining U.S. auto sales nearly crushed GMAC, forcing Mr. de Molina to curtail lending and seek help to finance its operations.

Bank-Holding Status
Mr. de Molina's search for capital brought him to the government's door. The Fed awarded GMAC status as a bank-holding company and Treasury injected $5 billion in December 2008. It came back with an additional $7.5 billion on May 21. The Fed also waived rules to allow the bank to pass assets down into its bank division, and the FDIC reluctantly agreed to issue "up to" $7.4 billion in government-backed debt. The FDIC approval issued Tuesday brings GMAC to the full amount authorized in May.

In another defining moment, GMAC entered into an agreement with Chrysler in April 2009 to provide auto financing and services to Chrysler dealers and customers. This allowed GMAC to leverage its core strength of auto financing and become part of a solution with the U.S. government to restructure the auto industry.

In May, GMAC also launched a new brand for its online bank, called Ally Bank. Its pursuit of deposits at high rates became a key leg of its strategy, since deposits provide a cheap form of funding, but the taxpayer-assisted approach rankled competitors and the FDIC. The dispute nearly cost GMAC its chance at the final $2.9 billion in FDIC debt guarantees. The two sides were able to hammer out an agreement that requires GMAC to keep its rates at certain amounts in exchange for the support, according to people familiar with the situation.

Jeremy Grantham: Little Has Changed in the Last 18 Months
The latest Grantham quarterly is a real gem. It sounds to me like he has been reading too much TPC (more likely, I have been reading too much Grantham!). He calls out just about everyone involved in the economy in the letter. He claims Bernanke is clueless and is repeating the mistakes of Greenspan. He calls Geithner and Summers the captains of the USS Disaster.

He says the homebuilders are reckless and that the mortgage borrowers and consumers are idiotic. He hammers the big banks and CEO pay. In essence, he argues that very little has changed in the last 18 months and that the market is now well overbought and at risk of a substantial downturn that is based on the weak real economy and realization that stimulus can’t get us out of this mess. The main takeaways:
  • The market is 25% overvalued
  • He hopes for "some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again."
  • "The U.S. market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1098 on October 19)."
  • "All in all we are likely to have learned little, or rather to act, through lack of character, as if we have learned nothing. In doing so we are probably condemning ourselves to another serious financial crisis in the not too-distant future."

I hope investors will take particular note of point two above. This Federal Reserve is destroying the dollars in our pockets as they implement the exact same boom/bust policies that helped create this mess in the first place. We absolutely must do something to help change the system and limit the power of these reckless and destructive bankers. Grantham has some suggestions in his letter, but it’s the investors who need to take power back from the Fed and the bankers.

U.S. foreclosures spike in new regions in 3rd quarter
U.S. mortgage defaults ebbed in some hard-hit cities in the third quarter, but unemployment created new trouble spots as foreclosures set a record in the quarter, real estate data company RealtyTrac said on Wednesday. Foreclosure activity declined in five of the top 10 metro areas from a year earlier, at least temporarily aided by government programs to modify terms of home loans.

Job loss as well and mortgage rate resets, however, are severely curbing the ability of homeowners to make timely payments. Many metro areas with the 50 highest foreclosure rates had sharp increases in filings during the past three months. "Rising unemployment and a new variety of mortgage resets continue to gradually shift the nation's foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave," James J. Saccacio, RealtyTrac's chief executive, said in the company's quarterly Metropolitan Foreclosure Market Report.

U.S. unemployment reached a 26-year high of 9.8 percent in September. Foreclosure filings -- which include notice of default, auctions and bank repossessions -- rose 5 percent in the third quarter from the prior quarter and 23 percent from a year ago, RealtyTrac reported earlier this month. One in every 136 households with a loan got a filing in the quarter, a record since the firm started tracking them in the first quarter of 2005. Filings were reported on more than 937,000 properties in July through September.

All of the cities with the 10 highest foreclosure rates were in California, Florida and Nevada, led by Las Vegas, Nevada; Merced, California; and Cape Coral-Fort Myers, Florida.
Las Vegas had a third-quarter foreclosure activity rate of 5.13 percent, affecting one in 20 households with loans. Five of the top 10 metro areas, including Merced and Cape Coral-Fort Myers, reported a decrease in foreclosure activity in the quarter from a year ago. The other big metro areas that saw a decline in foreclosure activity were all in California: Stockton, Modesto, and Vallejo-Fairfield.

Despite a 13 percent drop in foreclosure activity from the second quarter and 11 percent drop from a year ago, Merced had the second highest rate. The Cape Coral-Fort Myers metro area ranked third in foreclosure activity, RealtyTrac reported. And some cities that haven't been a focal point of the foreclosure crisis showed steep increases in activity in the third quarter. Boise City-Nampa, Idaho, and Provo-Orem and Salt Lake City in Utah had the biggest year-over-year increases in foreclosure rates among the top 50 areas.

In California, the Chico area posted the biggest year-over-year increase in foreclosure activity, up 98 percent from the third quarter of 2008. Chico, located about 100 miles north of Sacramento, had a 12.8 percent unemployment rate in August, above the state and national averages, RealtyTrac noted. "As unemployment is likely to stay high and maybe even go a little higher for a while, it means we will continue to see people defaulting and their homes ending up in foreclosure," Jed Kolko, associate director of research at Public Policy Institute of California in San Francisco, said on Tuesday.

The two other looming uncertainties are the fallout from the next wave of adjustable-rate mortgage resets and the degree of success of U.S. loan modification programs, he said, noting the possibility that the government program may have only delayed defaults and foreclosures.

U.S. stock market analysts disagree on impact of Fed moves
As U.S. stock investors start factoring in the idea of the Federal Reserve tightening moves, analysts held starkly divergent views on how the market will greet central bank steps to pull its massive stimulus out of the economy. The Fed, which has cut interest rates to near zero in an effort to pull the economy out of its worst recession since the 1930s, will begin to hike rates in mid-2010, said Jeffrey Kleintop, chief market strategist at LPL Financial.

The central bank will also likely abandon use of the phrase "extended period" in statements related to how long it intends to keep rates low, he said. "I think the market weakens as the Fed begins to hike interest rates, and leading up, as the market fears what the Fed may do," said Kleintop. But the Fed would only start hiking interest rates on signs of increased economic activity, sending a bullish signal to the equities market as central bankers try to preserve economic growth coupled with low inflation, said Art Hogan, chief market strategist at Jefferies & Co.

"The Fed has a pretty good picture of the economy, and can usually see around the corner," said Hogan. Bob Baur, chief global economist at Principal Global Investors, also believes a Fed rate hike would be viewed favorably by the equities market. "By the time the Fed does something, enough people will be saying it's about time. Plus, it'll be a pre-emptive strike against future inflation. And, others will like it as an indication the economy is strong enough to handle a rate hike," said Baur.

Kleintop concurs that Fed tightening moves would be a "nice confirmation that the recovery is here." But, he said, "investors would be more concerned that we're finally going to have to pay for all the resources brought to bear to end the recession. It would weigh on stocks and the economic outlook too." Defensive sectors such as utilities, consumer staples and health care would hold up best as the Fed begins to raise rates, he said.

"Everybody likes low interest rates rather than rising rates, so it is going to put some of the U.S. in a little bit of a bind - anyone who has to borrow money - and the dollar would strengthen some," said Baur of the downsides of Fed tightening moves.

One might assume higher interest rates would cast a negative spin on equities, but if one looks at the market's behavior in the 1980s during the three- and six-month spans after tightening cycles begin, "stocks actually work in the other direction," offered Hogan. Calling the risk of inflation "clear and present," Hogan said investors would be wise to consider investments that do well in an inflationary environment.

Hogan points to industries with exposure to commodities, such as basic materials, energy, natural resources and industrials, what he called "hard assets as a storer of value in an inflationary economy." Sectors to be avoided, in Hogan's view, include large financial institutions now able to borrow at near-zero and lend at healthy rates. "When the spreads tighten they will be less profitable." Another reason not to be long traditional financials that have drawn government assistance is they'll soon have to stand on their own and repay TARP funds, which "will be redeployed to the smaller and regional banks that need help," said Hogan.

Hogan advises investors to look at regional banks that haven't been exposed to government assistance. Beyond the interest-rate trade, the technology sector tends to outperform as economic conditions improve, with companies turning to tech to help productivity. The tech sector is also likely to see more activity on the M&A front, since top-tier companies still have "lots of cash," said Hogan.

On Wall Street, financials fronted the losses as the major indexes finished sharply lower. Hit with its third triple-digit fall in four sessions, the Dow Jones Industrial Average finished at 9,762.69, off 119.48 points, or 1.2%. The S&P 500 Index dropped 20.78 points, or 2%, to 1,042.63, with the broad market indicator erasing its gains for October. The Nasdaq Composite Index declined 56.48 points, or 2.8%, to 2,059.61.

Roubini Says Carry Trades Fueling 'Huge' Asset Bubble
Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling "huge" bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini. "We have the mother of all carry trades," Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. "Everybody’s playing the same game and this game is becoming dangerous."

The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually "bottom out" as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and "rush to the exit," he said.

"The risk is that we are planting the seeds of the next financial crisis," said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. "This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals."

The MSCI World Index of advanced-nation equities has surged 65 percent from this year’s low on March 9, while the MSCI Emerging Markets Index has jumped 96 percent. The Reuters/Jefferies CRB Index of 19 commodities has added 33 percent. Roubini said he sees a bubble in emerging-market equities and that gains in some developing-nation currencies are becoming "excessive." The rally in oil "is not justified by the fundamentals," he said.

An asset "bust" may not occur for another year or two as a "wall of liquidity" pushes prices higher, Roubini said. In a carry trade, investors borrow in countries with low interest rates to invest in higher-yielding assets. Roubini said the U.S. recession seems to be over, though the economic recovery in advanced nations will be "anemic." He’s "more optimistic" on the outlook for emerging-nation growth. The U.S. economy probably expanded at a 3.2 percent pace from July through September after shrinking the previous four quarters, according to the median estimate of 65 economists surveyed by Bloomberg News before the Commerce Department’s report on gross domestic product due Oct. 29.

The economy shrank 3.8 percent in the 12 months to June, the worst performance in seven decades. Roubini’s July 2006 warning about the financial crisis protected investors from losses in the Standard & Poor’s 500 Index’s worst annual tumble in seven decades. The U.S. equity benchmark has surged 58 percent from a 12-year low in March even as Roubini said that month the advance was a "dead-cat bounce," that it may "fizzle" in May and warned in July that the economy is "not out of the woods."

The S&P 500 gained was little changed at 1,067.30 as of 12:44 p.m. in New York, while the MSCI emerging markets index lost 1.8 percent. South Africa’s rand dropped 0.9 percent against the dollar as developing-nation currencies weakened. Crude oil for December delivery added 1.2 percent to $79.60 a barrel.

How mistaken ideas helped to bring the economy down
How did the world economy fall into such a deep hole? It is recovering, but painfully, and after a deep recession, despite unprecedented monetary and fiscal easing. Moreover, how likely is it that a balanced world economy will emerge from this force-feeding? The very fact that such drastic action has been necessary is terrifying. The fact that there is little room for a policy encore is yet more terrifying. Most terrifying of all is that this is not the first time in recent decades the world economy has had to be guided through a post-bubble collapse.

In his latest book – a successor to Valuing Wall Street, which appeared in time to help alert readers avoid the 2000 meltdown – Andrew Smithers of London-based Smithers & Co, provides an invaluable guide to past errors of analysis and policy.* He is a rare guide – a man with a deep understanding of economics and a lifetime’s experience of financial markets. His work helps to explain the stock-market bubble of the 1990s, the fiscal errors of Gordon Brown and the recent credit excess.

The big points of the book are four: first, asset markets are only “imperfectly efficient”; second, it is possible to value markets; third, huge positive deviations from fair value – bubbles – are economically devastating, particularly if associated with credit surges and underpricing of liquidity; and, finally, central banks should try to prick such bubbles. “We must be prepared to consider the possibility that periodic mild recessions are a necessary price for avoiding major ones.” I have been unwilling to accept this view. That is no longer true.

The efficient market hypothesis, which has had a dominant role in financial economics, proposes that all relevant information is in the price. Prices will then move only in response to news. The movement of the market will be a “random walk”. Mr Smithers shows that this conclusion is empirically false: stock markets exhibit “negative serial correlation”. More simply, real returns from stock markets are likely to be lower, if they have recently been high, and vice versa. The right time to buy is not when markets have done well, but when they have done badly. “Markets rotate around fair value.” There is, Mr Smithers also shows, reason to believe this is true of other markets in real assets – including housing.

A standard objection is that if markets deviate from fair value, they must present chances for arbitrage. Mr Smithers demonstrates that the length of time over which markets deviate is so long (decades) and their movement so unpredictable that this opportunity cannot be exploited. A short seller will go broke long before the value ship comes in. Similarly, someone who borrows to buy shares when they are cheap has an excellent chance of losing everything before the gamble pays off. The difficulty of exploiting such opportunities is large for professional managers, who will lose clients. The graveyard of finance contains those who were right too soon.

Mr Smithers proposes two fundamental measures of value – “Q” or the valuation ratio, which relates the market value of stocks to the net worth of companies and the cyclically adjusted price-earnings ratio, which relates current market value to a 10-year moving average of past real earnings. The two measures give similar results (see chart). Professional managers use many other valuation methods, all of them false. As Mr Smithers remarks sardonically: “Invalid approaches to value typically belong to the world of stockbrokers and investment bankers whose aim is the pursuit of commission rather than the pursuit of truth.”

Imperfectly efficient markets rotate around fair value. Bandwagon effects may push them a long way away from fair value. But, in the end, powerful forces will bring them back. Trees do not grow to the sky and markets do not attain infinite value. When stocks reach absurd valuations, investors will stop buying and start to sell. In the end, the value of stocks will move back into line with (or below) the value – and underlying earnings – of companies. House prices will, in the long term, also relate to incomes. Anybody interested in investing would gain from reading this book. They would then understand, for example, why the “buy and hold” strategy advocated by many pension advisers, even at the peak of the stock market bubble, was such a catastrophe. Value matters, as Warren Buffett has said so often.

Yet, for those interested in economic policy, Mr Smithers’ arguments have wider significance. If markets can be valued, it is possible to tell whether they are entering bubble territory. Moreover, we also know that the bursting of a huge bubble can be economically devastating. This is particularly true if there was an associated surge in credit. This is also the conclusion of a significant chapter in the latest World Economic Outlook. In extreme circumstances, monetary policy loses its impact, as the financial system is decapitalised and borrowers become bankrupt. What we see then is what Keynes called “pushing on a string”.

So what are the policy lessons? The International Monetary Fund concludes, ponderously: “Simulations suggest that using a macroprudential instrument designed specifically to dampen credit market cycles would help to counter accelerator mechanisms that inflate credit growth and asset prices. In addition, a stronger monetary reaction to signs of overheating or of a credit or asset price bubble could also be useful.” Mr Smithers suggests that policymakers should monitor the price of stocks, houses and liquidity. If one of these, and especially if all three, are flashing red central bankers should respond. He recommends measures that raise capital requirements of banks in the boom. I would also support measures that directly limit the leverage among borrowers, as asset prices soar, particularly house prices.

The era when central banks could target inflation and assume that what was happening in asset and credit markets was no concern of theirs is over. Not only can asset prices be valued; they have to be. “Leaning against the wind” requires judgment and will always prove controversial. Monetary and credit policies will also lose their simplicity. But it is better to be roughly right than precisely wrong. Pure inflation targeting and a belief in efficient markets proved wrong. These beliefs must be abandoned.

More than you probably ever wanted to know about the Hamp
by Tracy Calloway

The Federal Reserve Board had just released a working paper on the Home Affordable Modification Plan — the Hamp.

The paper is fantastic for details on just how the programme — which is aimed at making mortgages more affordable by reducing interest payments — came about and feeds into the wider financial system. When it comes to the programme’s potential success, authors Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang and Eileen Mauskopf think the Hamp will help a lot of homeowners — but they do see limitations.

Of particular note is the idea that the Hamp might not be helping those who need it most:
Nonetheless, millions of foreclosures are likely to occur over the next couple of years. House price declines have led to a sharp deterioration in the financial situation of many homeowners, leaving them less willing or able to afford even reduced mortgage payments. Further, HAMP modifications are not well-suited to address many cases where homeowners have suffered a large temporary decline in income, as might be the result of job loss. In particular, because the modification calls for a reduction in the ratio of payments to income based on the current level of income, a reduction that would not be reversed if income were to return to its previous level, the required modification in such cases will often be too costly to qualify the program.

Which means that because the size of the reduction in payments permanently depends on current income (virtually none in the case of the unemployed) — the loan modification could turn out to be overly generous. Once the jobless homeowner resumes work he will still be making Hamp payments based on his unemployed income — and those bearing the cost of the Hamp exercise will be left to pick up the tab. Furthermore:
In addition, the program may not be very effective when the value of the mortgage greatly exceeds the value of the home. Some borrowers who believe that there is little prospect for house prices to recover enough to put the mortgage “above water” within some reasonable period of time will not participate in the program and instead walk away from their mortgages. Worse yet, other borrowers may shift beliefs only after entering the program; these borrowers are likely to default after many of the costs associated with the modification have already been borne.

Which is a problem that’s been mentioned before. If you are say, a homeowner offered a Hamp trial modification plan where your monthly payments are reduced, you could easily walk away after making a few cheap payments. We’ve noted one instance where a Hamp modification plan entailed monthly payment of $1170 a month, when comparable houses were renting for close to $1,500 a month. That’s a bargain for the (underwater) homeowner.

But it’s not so great for the people and institutions assuming the cost of the modifications:
The HAMP protocol requires servicers to lower monthly mortgage payments, which include principal, interest, taxes and insurance (PITI), to 38 percent of the borrower’s gross income, through any method they choose, with investors bearing the losses implied by the reduced payments. Servicers are then required to reduce the DTI [payment to current income ratio] from 38 percent to 31 percent by using the waterfall provided by the plan; the losses associated with the additional reductions in the DTI are shared equally by the government and the investors

Now a typical mortgage investor is someone like Greenwich Financial Services. But they also include Fannie and Freddie — the government-sponsored enterprises. Banks tend to be on the mortgage lending and servicing side of things — which presumably is why you sometimes see them lobbying for more aggressive Hamp action. Servicers and lenders get payments for Hamp participation — the trade-off is they have to commit a lot of time and resources to the actual modification process.
Anyway, back to the GSEs:
For loans owned or guaranteed by the government-sponsored entities, the modification may proceed even if the present value of the modified revenue stream is less than that expected to be obtained under foreclosure. In all cases, the GSE buys the loan out of the pool, the investor is made whole with respect to the remaining balance on the loan. Under the Treasury’s commitment to maintain a positive net worth for the GSEs, the cost of the modification may ultimately be borne by the taxpayer. (23)

23 These modification costs are over and above the Treasury incentive payments under HAMP. Given the Treasury’s commitment to the GSEs, a modification that lowers the borrower’s payments means that the taxpayer receives a lower return than he would under the terms of the original loan when the loan is owned or guaranteed by the GSEs.

Got it? Mortgage investors get lower payments. Mortgage lenders and servicers get Hamp bonus incentives and Fannie and Freddie get Treasurized.

The argument of course, is that a loan modification will ultimately be cheaper than foreclosure — though some of that loses weight if you consider that a Hamp homeowner dragging out proceedings in an environment of declining houseprices, will mean losses from delaying foreclosure could be larger than losses if foreclosure had been initiated immediately. The authors say incentive payments — linked to the rate of recent home price decline — should mitigate this.

But the historic evidence presented from the paper is not encouraging.

The authors, for instance, looked at 5.5m active loans in the First American CoreLogic Loan Performance ABS database as at March 2009. Of note:
. . . the performance of loans modified as of March 2009 was poor, as only 40 percent of modified loans were current at 6 months after modification, and 29 percent were seriously delinquent. Given that loans are marked as seriously delinquent if they have missed three or more payments or are in foreclosure, such borrowers likely made only one or two payments on their modified loan.

BMW Links Executive Pay to That of its Line Workers
BMW has become the first major company in Germany to change its compensation practices amid growing concern over excessive banker bonuses. The company cited a fairer work environment as its reason. Other firms are sure to take notice, given BMW's size and weight in the global business market. BMW became the first major blue chip German company to link the bonuses of its top managers to those of its assembly line workers, amid growing global criticism of executive compensation. The move sends a strong message to other firms also examining their compensation practices, as the world's largest banks in particular have come under fire from politicians, shareholders and the public over excessive bonuses during one of the worst economic crises the world has seen.

BMW plans to tie executive bonuses to those of its blue-collar workers, in a bid to create a fairer and sustainable compensation environment within the company. Starting in 2010, the company will use a common formula to ascertain and award bonuses to its upper and lower level employees, based on the company's performance as measured by profit, sales and other factors. That means that upper level management could potentially lose more money than their lower level counterparts for bad performance, BMW said.

A spokesman for BMW said the company's goal was to create fair and transparent compensation practices and to prevent a gap between management and the workers, as the under class, from developing. "We don't just want to build sustainable cars. We also want to have sustainable personnel politics. We think this is good for the company culture," the spokesman told SPIEGEL ONLINE. He declined to be more specific on how the formula will work.

Other companies may follow BMW's example as pressure grows on firms to curb excessive bonuses in the wake of the financial crisis. German Chancellor Angela Merkel has been outspoken about her dislike for excessive bonuses, calling them "inappropriate." In September, she penned a letter with French President Nicolas Sarkozy and Prime Minister Gordon Brown of the United Kingdom ahead of the G20 summit in Pittsburgh that proposed a cap on the the total amount of bonus money a bank could pay out. They didn't stipulate how much banks could reward a single individual. "Our citizens are deeply shocked at the revival of reprehensible practices, despite taxpayers' money having been mobilized to support the financial sector at the height of the crisis," the letter stated.

US President Barack Obama has also been outspoken about excessive compensation. In June, he appointed attorney Kenneth Feinberg to oversee compensation practices at seven companies that received bail-out funds from the government. To that end, Feinberg has devised a plan to cut the total compensation for these companies in half. This month, Feinberg pushed Kenneth D. Lewis, outgoing chief executive of Bank of America Corp., to give back $1 million in compensation and forgo any additional salary this year, arguing his retirement benefits and stock, worth millions, was enough.

Joseph Sorrentino, managing director with Steven Hall & Partners, a US-based executive compensation consulting firm, said a combination of factors including political pressure, government bailouts, public pressure and the declining stock market has led to many companies re-examining their compensation practices to make sure they are effectively paying for performance and not encouraging excessive risk-taking. "Companies are trying to make sure they balance the public outcry with what they need to make sure they are able to attract and retain their employees," Sorrentino told SPIEGEL ONLINE. He added that often when big companies such as BMW change their compensation practices, other companies take notice.

To be sure, the BMW spokesman said the company has been discussing its compensation practices for months, and that its announcement has nothing to do with the larger debate over executive compensation circulating through governments currently. However, Harald Krüger, BMW's human resources director, was critical of the bonus structure of banks and other businesses. "If employees need the money or bonuses for motivation, it encourages harmful developments inside a company," the executive told Frankfurter Allgemeine Sonntagszeitung newspaper on Sunday.

Norway raises interest rate
Norway’s central bank increased its key interest rate by a quarter point to 1.5 per cent on Wednesday – Europe’s first monetary policy tightening since the global economic crisis bit hard last year. Norges Bank said it would gradually continue with more rises, holding its main rate at between 1.25 and 2.25 per cent until the next monetary policy report in late March. Analysts think the central bank is seeking to keep rates around the mid-point of the range, signalling another 25 basis point rise.

The krone initially rose, pushing the euro down to about NKr8.3680 from NKr 8.4071 before the announcement. It then pulled back to NKr8.40. Norges Bank said inflation had been slightly higher than expected, while unemployment was "considerably lower than previously projected". "Activity in the Norwegian economy has picked up more rapidly than expected ... developments indicate that it is appropriate to raise the key policy rate now," said Svein Gjedrem, the central bank governor, in a statement. He added that projections indicated that the key policy rate should be "raised gradually".

Erik Bruce, chief analyst at Nordea Markets, said the rate rise was expected, and he was expecting further rises early next year. "There will be no rate rise at the next meeting [in December], which was priced in. Norges Bank is signalling that they will wait until February with the next rate rise," he said. "It looks like the crown strengthened on the rate rise, but this could be short-lived." All 10 economists polled by Reuters last week expected a 25bp increase to help the already recovering Norwegian economy neutralise a hefty fiscal stimulus unleashed by the government during the worst of the crisis. Norges Bank had cut borrowing costs seven times during the past 12 months to a record low of 1.25 per cent.


Erasmus said...

Stoneleigh what do you think is going to happen to the European Union? Do you see dissolution? Do you see a return to various national currencies (Lira, Mark, Peseta, etc.)?

Repeat from yesterday

Farmerod said...

Coy Ote: What do you market watchers make of this?

Not that I pay much attention to the German markets but maybe I can make something up. But first: what do you make of it? To me, it's just 3 different indices, somewhat similar to the Dow, S&P500 and the NASDAQ, all comprised of stocks, some of the same stocks in the US, smaller ones for the MDAX as compared to the DAX. Some days they all move together, some days they don't.

What am I missing?


Jim R said...

The Nikkei, after an unfortunate run-in with its Yakuza boss, has lost a digit.

Tyr said...

Given that they're doing the same to ING I think you're right about the EU being behind the breakup of the UK banks. You know things are fucked when the EU is applying pressure behind the scenes and even the UK is cooperating.

Stoneleigh said...


Stoneleigh what do you think is going to happen to the European Union? Do you see dissolution? Do you see a return to various national currencies (Lira, Mark, Peseta, etc.)?

I don't see the EU surviving in its present form, as I think the regional disparities will be far too large for the tensions they generate to be contained. Countries with significant housing bubbles (eg the UK, Ireland, Spain etc) will be in terrible shape once the bubbles deflate, while those that did not (notably Germany) will do much better. The winners will not want to bail out the losers.

I think we may well see a core group of countries remain together and keep the euro, but I can see many countries going their own way with their own currencies.

During expansionist times political units grow, helped by growing trust and a sense of common humanity. During contractionary times the opposite happens - trust evaporates and differences are emphasized over similarities. Unfortunately I think the future of Europe is balkanization.

Bukko Boomeranger said...

What was that rocket footage on the screen behind Blodgett in the "Outrage of the Day" video? The Challenger and Columbia shuttle disasters? Was that looping as an illustration of proud U.S. symbols exploding and burning? Or was it just some current news event, and I'm reading too much into things, looking for a subliminal subtext?

Bukko Boomeranger said...

Stoneleigh said: During expansionist times political units grow, helped by growing trust and a sense of common humanity. During contractionary times the opposite happens - trust evaporates and differences are emphasized over similarities. Unfortunately I think the future of Europe is balkanization.

How right you are, in a Roman Empire sense of the world.

One of my side reading projects is slowly going through "Decline and Fall of the Roman Empire." I recently got through Diocletian, with an eye to what you wrote about him, and I'm now into Constantine. In that century, beset by barbarians, Persians and greedy factional infighting, Rome was contractionary.

So Diocletian divided the Empire into four chunks, to make it manageable and play rivals off against each other. Constantine was skilled and vigorous and expansionary, so he re-knitted it. But the underlying problems were still pulling at the Empire. After him came the permanent divide into Eastern and Western empires. A precedent for the trend you point to.

If I delved into the history books, I'm sure I could find a dozen other civilisations to which that rule applied. You posit it will happen to the E.U. And maybe the U.S. too? Seems sadly logical...

Glennjeff said...

Been out and about getting small sample on Australian economy. It is giving the impression that it want's to get up and run at full speed but there are rumblings that the RBA may have moved too quickly on interest rates, already housing starts are down after a couple of months of growth.

We are so dependent on resources that any glitch in global situation could kill of recovery in an instant but at the moment we appear to be crawling out of the hole rather well.

Been thinking we may see the big correction in January once dismal festive season results come in, although this week has been a good start at correction already, and as my first ever effort at investment, I'm buying silver as it slowly erodes against the $Aussie. I've got more money than at any stage in my life, perhaps I should apologize and share a little.

Hmmm, I'll just share a little.

Anonymous said...

Obama gives away free houses, now free cell phones.

OK, I am not an expert on the net but this looks like a legit site to me.

Starcade said...

I do have to wonder when the shooting starts sometimes.

This will end with rivers of blood -- just whose?

trichter said...


I'm guessing Coy Ote just meant the sea of red stock selloff in general. All but one of the DAX stock closed down with Commerzbank leading the way (9.1% down). It has had a strong recovery and is now giving back all those gains.

The ASX had closed for today and here is the summary:

"The Australian share market closed sharply lower on Thursday in the fourth straight day of sell-offs, following negative offshore leads amid concerns that the global economic recovery has stagnated."


Syn said...


This is a bit off topic, but since you work in the Energy field and have extensive knowledge in this area, would you consider giving your thoughts about the Cap and Trade Bill.

That is, do you think that the proposal has any merit?

There is so much conflicting information, it’s difficult to sort through it and get the truth.

Hombre said...

Ilargi - "Tell me, did you guys actually vote for these talking lobotomies?"

No, many or most of us did not. True democracy has not working and hasn't for some time here.

Most of them are "selected", appointees, elite members of the ruling class, moving through positions of power within the patterns of advancement which exist in the east coast high-rise, high finance, political environment. They are bought and paid for and they and their connivings are hidden by the evolved propaganda machines which function via television.

Democracy, direct or representative, only exists at the local level these days.

Frank - Interesting about the coyote/red wolf! Survival by diversity perhaps.

Hombre said...

Farmerod - Perhaps my overreaction to the significant red numbers, but all I have been hearing is how well Germany was riding things out.

Starcade - They are even getting the "pine" boxes ready!
Wal-Mart... "save money, live better". Right!

el gallinazo said...

The EU indices broke the momentum of the global stock market downturn. It is pretty much holding steady. Probably no feast for the vultures this week.

Hombre said...

Oh, I forgot the link to the Wal-Mart story.

Anonymous said...

Free cell phones

I've long wondered how even middle class could afford 200 or more a month for everyone in the family to talk and text.

The last thing the government wants is people to lose the distractors. Their word is falling apart all around them but no one sees since the cable tv screen and the phone screen are all they look at.

Ilargi said...

El G.,

Europe was off 2.5% across the board yesterday (Vienna lost over 5.5%) and are now waiting for the 8.30 EDT GDP numbers from the Commerce Department. They could sink fast after that.

Ilargi said...

From US Commerce Department

”Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 5). The "second" estimate for the third quarter, based on more complete data, will be released on November 24, 2009.

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The upturn in real GDP in the third quarter primarily reflected upturns in PCE, in private inventory investment, in exports, and in residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by an upturn in imports, a downturn in state and local government spending, and a deceleration in federal government spending.

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change. Final sales of computers subtracted 0.11 percentage point from the third-quarter change in real GDP after subtracting 0.04 percentage point from the second-quarter change.”

Note: a full 1% comes through less gressive inventory dumping. and 1.66% though motor vehicles.

Unknown said...

TAE Summary, I love your work. You made me laugh out loud this last time. You're a real treasure.

VK, nice work with the one year retrospective! Very interesting indeed...

Greenpa said...

Stoneleigh and Erasmus: "I don't see the EU surviving in its present form, as I think the regional disparities will be far too large ..."

And this has immediate ramifications here. My patent lawyer has just lost an income stream, since I've decided to abandon the application for an EU patent on the the thingy I've already got a US and Chinese patent on. Still working on the Canadian patent.

Because- my best judgment is- any EU patent is going to be unenforceable, very quickly.

Which actions are all- deflationary.

Bigelow said...


“Don't listen to them, look at them.”

Perhaps you mean for people to bear witness, in an evangelical sense, doubtful.

The government is not a personal failing –corrected by voting for a different group or volunteering.

If people try to replace, as opposed to 'reform' authority, and bans on public gatherings for flu or terrorist threats don’t suffice, then there are plenty of police SWAT teams and military and death squads becoming available for crowd control duties. Just what is the indirect imperative you are wielding?

Ilargi said...


I'm sorry, but I simply don't have a clue what you're saying.

Taizui said...

Recent Peak/cliff/swan-dive/crash/decline discussions followed by this morning's GDP announcement and market rally took me back to long-ago Cocoa Beach Wet T-shirt contests. Whenever cheers began to subside before a dancer's song ended, the DJ would yell "More Water," and a fresh pitcher always revived the crowd.

Similar today, except the Cocoa Beach bar closed at 2am, so everyone had the Goldman Opportunity of knowing when to get their naked shorts in.

Ilargi said...


I don't know what timeframe you're looking at, but I do know that the relevant core of the EU will remain intact at least as long as US patents make any economic sense to you. There may of course be other issues at play, for instance with regards to difficulties acquiring a patent for a certain region, but on the face of it, your logic makes little sense.

Greenpa said...

Starcade -

"This will end with rivers of blood -- just whose?"

I don't see how the answer can be anything but "everybody's".

Greenpa said...

Ilargi: "There may of course be other issues at play,"

How could there not be?

"for instance with regards to difficulties acquiring a patent for a certain region, "

That is in fact one of them- the complexities of enforcing patents inside the EU is already staggering-

"but on the face of it, your logic makes little sense."

Oh, tsk, tsk. :-)

Do I have time to write the complete scenario out here, with public, private, and secret components? And who here would want to read the result? And would you be happy if I put some 50,000 words here?

Take my word for it. It makes sense. :-)

Ilargi said...

Tsk tsk yourself Greenpa

All I said is that the reason you gave not to get an EU patent, namely that it would very quickly become unenforceable, makes no sense if you're going after the US one anyway.

Greenpa said...

I have a new and I think useful description of the current economy. It's nicely graphic and evocative, and should communicate on a visceral level with anyone, including those not deeply conversant with the ins and outs of it all.

The MSM is propagating the idea that the recession is over, and we're moving back to growth as usual. Proof lies in the great surge in the stock markets.

We KNOW here, in the fullest and hardest sense of that word, that this is not so. It's all imaginary- the big banks are using all their tools to leverage themselves out further and further, mostly with each other. There is no substance to it; no end result beyond the quick euphoria and quick descent to reality when it is clear- there are no fundamentals; nothing is being accomplished beyond the good feelings.

What we have here is the Circle Jerks Economy.

That describes the entire phenomenon precisely, in a nutsack.

I think we should work on disseminating the phrase widely- though it may initally prove soporific, over time it could lead to greater awareness.

Bigelow said...


"And you voted for these tricksters? Look at yourself, and then look at them, look at what they’re doing to you. Don't listen to them, look at them.

When are you thinking of starting to think straight? When you’re too sick and cold and hungry to think straight anymore? To even care? Do you still care at all right now?"

Voting is a rubber stamp; if not these bastards, it would be some other bastards. Straight thinking what exactly?

"If you ask me, you deserve a Halloween way beyond your wildest nightmares." Why? What is the implied thing, the indirect imperative of your several paragraphs that we must do to avoid deserving horrible nightmares? It is not thinking.

Hombre said...

Voting means nothing at the national level. For example: Indiana voted for the "centrist, people's" democrat, Evan Bayh.

From todays paper...

According to a Washington Post ABC poll and a poll from the Henry J. Kaiser Family Foundation, 57 percent of Americans are for a public option. Bayh's own Democratic Party is for the public option, but Bayh obstinately holds out. Why does Bayh withhold his support? Mrs. Bayh and her career as a professional corporate board member may have the answer.
Mrs. Bayh serves on five corporate boards of directors. Of those five boards, four are in the health-care sector. One of the boards she serves on is for the corporate giant Wellpoint, which is the largest member of the Blue Cross and Blue Shield Association.
According to Forbes, for the past four years she has served as a director for Wellpoint, Mrs. Bayh has received more than a million dollars in cash, stocks and options for her services to the health-care conglomerate. This is in addition to the smaller, but not insignificant salaries she receives from her other positions.
Wellpoint spent more than $2 million lobbying this year. Do you think they were lobbing for the public option?

Did Indiana folks vote him in? Some did. The only sensible decision was TO NOT VOTE AT ALL! There is no choice!

Hombre said...

Bigelow - "Voting is a rubber stamp; if not these bastards, it would be some other bastards."

Anything beyond the state's borders, I pretty much agree. Of course there are always exceptions (?not very evident) but generally the oligharchy rules.

Farmerod said...

Why does Goldman Sachs make a last minute less-than-rosy prediction about Thursday's GDP numbers? Could it be that they are acting as the voice of the government they own?

So much for that law.


Top Hat Cat said...

The 1918 flu actually spread through the U.S. via WWI era army bases scattered about the country linked by rail lines, not cars or planes or donkey carts. Pretty ironic, the War Department facilitated the spread a deadly virus by pointlessly shuffling it's personnel around the country in the fashion that all nameless faceless lumbering bureaucratic monoliths do.

Geithner stated there was no plan "B" for his scheme, didn't need one, the first plan was guaranteed to work.. haha

As the Big Lie that Gold in Sacks has spin unwinds, once again the War Department and the Flu, will step onstage to entertain the U.S public, most of whom fit to a tee Ilargi's colorful coined term: talking lobotomies.

Judged purely by their performance on the common sense/intellectual curiousity scale (CSIC) thus far, the vast majority of 'citizens' in the U.S. could certainly never seriously ever be considered 'adults' by any stretch of the imagination, so 'talking lobotomies' as a collective common tragic moniker works AOK for me to tar the proles with. I do look at them, I never have listened to them.

Using 'health' emergencies to quarantine or encourage bans on public gatherings (even school systems) dovetails nicely into a Lock Down Scenario Mode that, coincidentally (what a shock), then in turn 'preps the plebs' (PTP) for, Extended Bank Vacations (EBV) and 'being attacked' with WMD fiendishly wielded by the crazy mullahs of Iran (Candy Apple Code Red With A Slight Pink Blush Terra Alert!!) and the Certain Oil Disruptions (COD) to follow which then in turn (like a Tim Burton impersonation of Rube Goldberg) drops The Cone of Silence over any and all honest, even faintly plausible, explanations of the Semi Controlled Final Solution Implosion (SCFSI) of what's left of the U.S. economy.

Not that any honest, even faintly plausible, explanations have occurred in the MSM to date, it will just be officially Verboden Vrucht after the Flu War Song & Dance (FWSD) has commenced to reap it's rewards. War footings and all that jolly good rubbish and such.

Mission Accomplished Déjà Voodo.

Remember, it's not an historic conspiratorial repeat, it's just a clever lobotomized serendipitous rhyme.

Hombre said...

Over at Jesse's Cafe a posted thought from the past. I used to think this stuff was paranoia--not so anymore!

"If you think this explosion of Federal debt will facilitate a stronger US dollar you might be suffering from ideological myopia or some other delusion.

Some years ago we forecast that the financiers and their elites would take the world down this road of leveraged debt and malinvestment, and then make you an offer that they think you cannot refuse. They will seek to frighten you with a collapse of the existing financial order, because that is what they fear the most themselves, for their own unique positions of power.
The offer will be a one world currency, which is a giant step towards a one world government, managed by them of course. Once you control the money, local fiscal and social preferences start to matter less and less.
This theory seems more plausible today than it did then."

Cassandra said...

Moral dilemma #1

We've got a small property that I used to live in, and until today (when the tenant gave notice) we used to let it out. I was reluctant to kick the tenant out prior to them leaving - they had a young baby - but they've split anyway.

The mortgage is hovering around break even point *assuming* we could sell it.

We are going to try to sell it immediately, but if it doesn't sell, we could probably let it again, having lost a couple of £k from having it left fallow.

We are planning on leaving the UK next March with enough money to last us a couple of years [not including paying off this mortgage though]

In a couple of years time however, (when the 4.5% fixed interest only mortgage comes to an end) it will come back to haunt us I fear.

What do you think would be our most sensible course of action?

To sell now at fire sale prices, may be even below the mortgage, reducing the capital we have to live on by 10-20k (i.e. a year or so's money!)

Or to rent it out incurring minimal loses then perhaps have to fall on our swords, i.e. one of us declare bankruptcy/hide in a couple of years time if prices are through the floor with no prospect of repaying them?

Chances are, in a couple of years, no one of my/our stature will be allowed credit anyway - gawd only knows what state the UK will be in by then. We won't need credit as the house we're moving to is free from debt.

Any advice much appreciated - should we play ball or play the system, maxing out our credit cards as we go?


We've just got back from visiting our doomstead in Italy. Some fruit trees have died, some have taken. The grapes have been harvested, now we just have to tease it from the locals who've been 'helping' us by helping themselves in absentia. Politically tricky, but we'll get there.
The top soil we had delivered looks better than the pallid clay in situ. It gives me hope.

As we were driving back to the airport yesterday, we stopped to take some photos - the sunshine was glorious, 22°C.

I heard the sound of metal being sharpened and looked round to see an old lady in a field sharpening a sickle with a carborundum stone.

A few years ago, I would, I think have regarded her as a relic from a by-gone age, antedeluvian.

Now? Antedeluvian suits me just fine. She's our future not our past. She's not looking at our novice attempts at building a small holding as an easy lunch. We're not competition either.
That made me smile.

thethirdcoast said...

@ Top:

Pretty ironic, the War Department facilitated the spread a deadly virus by pointlessly shuffling it's personnel around the country in the fashion that all nameless faceless lumbering bureaucratic monoliths do.

These troop movements are not pointless from the DoD's perspective. DoD carries out these shifts (rotations) on a regular basis to prevent service people from developing local and regional attachments that might supersede their loyalty to the national state.

The implications of this system should be obvious.

anon916 said...

"Tell me, did you guys actually vote for these talking lobotomies?"

Voting is much overrated these days. It occured to me the other week that not a single candidate I voted for over the last 15 years has won an election, not even the local city mayor, not even close. My candidates usually garner 2 to 4% of the vote. I think I'm done with voting...why bother?

Stoneleigh said...

Coy Ote,

The offer will be a one world currency, which is a giant step towards a one world government, managed by them of course. Once you control the money, local fiscal and social preferences start to matter less and less. This theory seems more plausible today than it did then."

I don't doubt that this kind of arrangement would suit the global financial elite very nicely, and if one extrapolated current trends forward that is indeed more or less where we would probably end up. However, extrapolating the trend of expansionary (and capital concentrating/consolidating) times forward amounts to putting one's foot on the gas while looking only in the rearview mirror.

Expansionary times result in political accretion towards larger and larger structures. A One World Government would be the epitome of such a trend. But, that trend is reversing, and about to pick up significant momentum in the other direction. Contractionary times lead to the break up of existing large political structures (like the EU and a number of other federal entities).

While we are likely to see additional wealth concentration in the early stages of a depression (as the middle classes are dispossessed), that is unlikely to last. Large scale bear markets are nature's wealth redistribution mechanism, albeit with relative equalization at a very low level indeed, due partly to the the amount of wealth which ends up being destroyed in fighting over it.

The global elite will find that they cannot maintain their standard of living in the absence of the system which allowed them to concentrate the wealth of the world in their hands. They'll try coercion/repression to wring wealth from the much expanded peasantry, but it won't work for that long. Eventually they would find themselves living in an increasingly run down guilded prison, and even further on there would be nowhere to hide.

By way of analogy, if one is trying to drive a concentration gradient in the direction of greater disparity (ie a lower entropy situation), one must actively force that to happen, which requires energy (so that over the whole system the amount of entropy still increases). A gradient left to its own devices because the necessary energy is not available, will equalize over time. Wealth works like that too. Adding to, or even maintaining, a significant disparity takes active effort and access to the wherewithal to implement that effort. Past a certain point the wherewithal will not be available, and we will see political structures fragment into many much more local wealth concentration mechanisms (regional, provincial, municipal etc).

Another analogy would be a food chain. Where energy is plentiful at the primary producer level, an elaborate food web with many levels of predators is possible. If the energy level available at the bottom is reduced, top level predators will not be able to survive there. There will still be predation, but by lower level predators.

Of course being human, we complicate matters by having a distinction between energy/resources and the rights of ownership/control of energy/resources, and it is these rights that we call wealth. Using the derivative concept of wealth allows a top level predator to control vast quantities of primary production, and to borrow against it in order to acquire more (at least on paper and temporarily) through leverage (and therefore ponzi dynamics). That simply brings consumption forward at the expense of tomorrow.

Lions, tigers, tuna fish and other non-human top predators don't have the option to hollow out a food chain for short term gain like that, which is just as well, since the outcome would be for that food chain to collapse, which would leave the lions and tigers starving along with everything else.

snuffy said...

Some good food for thought there,Stoneleigh...

Posted a couple of stray thoughts over at LATOC today,as I spotted a thread that gave a excellent cross-view of the current economic pic across the USA.It was called"I knew it was bad.."in the Financial Doom file.


At this count,13 pages of stories of grief from posters ...stories that will break your heart...As well as clear your head of any foolish thought of "recovery" the tiny bit of money that l.summers and two lips timmy let slip out of their hands and get spent for infrastructure,instead of lining the pockets of those who made some real bad[fraudulent] business decisions,and should,in a just society,be hanging from a back ally lamp post.

We are going down folks.Next year,if their is no changes in the airplane,we hit HARD

Folks will stop talking about "recovery"and start talking about who is responsible for this disaster...

And looking for a rope.

I expect to see a bunch of scapegoats lined up for the public's amusement soon.Bloodsport will be the only thing that keeps the mob from looking too hard at those responsible...maybe...Or they will crank a war up SOON,'cause Christmas will be a barren,snow covered hell for many this year....


Gravity said...

"I saw Him, I thought He was coming for me, it was He who walks behind the Markets, He passed right by me. If we don't find growth before nighttime, will we stay in the markets?"
"We'll find growth."
"But if we don't?"
"You know we never stay out in
the markets after dark, its not safe then."
"Because of Him?"
"Yes, because of Him."
"He's very old, isn't He?"
"Yes, very old, and the night is his time."

Hombre said...

Cassandra - "I heard the sound of metal being sharpened and looked round to see an old lady in a field sharpening a sickle with a carborundum stone."

Actually that is a very charming visual, and as to the future it gives me the idea to stock up on more elementary tools--if not for me, then for my next-gens.

Stonelady - I am sure you have a much more studied perspective than I, and I hope you are right! I am all for any and all localization trends.

I think the words I referred to, from Jesse's, likely concerned the short term as far as a possible attempt of the PTB to push a global currency. In any case, many of the things I used to consider impossible are now looking possible.

And thanks, your feedback was very astute and, like all I read here, much appreciated.

message_in_a_bottle said...

"Fair value" in markets is something like "Truth" in axiomatic systems:

This Truth is

undefinable and
algorithmically undecidable

basically unknowable.

Absence of arbitrage is a completely different notion analogous to freedom from contradiction.

A market can be arbitrage free but the prices can be completely absurd.

A deviation from "fair value" (however defined) does not imply an arbitrage opportunity.

"Fair Value" is a completely illusory concept.

Hombre said...

Stonelady - You just described PEAK WORLD! We're starting down the other side.

"Expansionary times result in political accretion towards larger and larger structures. A One World Government would be the epitome of such a trend. But, that trend is reversing, and about to pick up significant momentum in the other direction. Contractionary times lead to the break up of existing large political structures...

Erin Winthrope said...


You've got to start putting your ideas down in book/manuscript form. Your grand synthesis is really taking shape.

The only concept that you haven't touched on (as far as I can tell) is the fundamental role that deception/lying plays in all of human behavior. Jay Hanson has discussed this concept extensively. Ilargi mentions it from time to time as well.

I never cease to be amazed by the extent to which most people are repelled by pessimism. Friends, family, pop culture, academic culture, and especially corporate/government culture spend a great deal of effort avoiding "defeatist" thinking. IMO, humanity's ability to dwell in the dark side - to imagine and ponder the future negative outcomes caused by current behavior - is one of our greatest gifts. Why do we work so hard to stifle our only hope for survival? This seems to be a fatal flaw that's been recognized and written about for thousands of years. The ancient Greeks famously gave the notion form in the tragedy Agamemnon.

I guess it all gets back to Ilargi's observation : As a species, we don't do "the future." It's about today, and not much else. Perhaps we all need our dopamine fix to stave off suicidal inclinations, and for whatever reason, planning for a dark future doesn't offer the dopamine burst we crave.

message_in_a_bottle said...


What you are proposing (planned default, "maxing out the credit cards" while retiring in Italy)
is a crime plain and simple.

Insofar as these plans involcve others they are a conspiracy to defraud.

If you carry out these plans you should be locked up.

Stoneleigh said...

Coy Ote,

I am all for any and all localization trends.

What I think we're moving towards is probably better described as neo-fuedalism, which unfortunately doesn't have the nice associations that the word relocalization has. Relocalization implies a degree of voluntary participation, or choice, that I think will be notably absent from the future I see. In other words, the future will be largely local, but we aren't going to like it as much as we currently imagine we might.

Losing freedom is one of the hardest things to come to terms with, but so much of our freedom is a function of cheap energy and cheap credit. As those will be sharply curtailed, so will our freedom of action (and speech etc etc).

Hombre said...

"Large scale bear markets are nature's wealth redistribution mechanism, albeit with relative equalization at a very low level indeed, due partly to the the amount of wealth which ends up being destroyed in fighting over it."

My country has wasted enough wealth/resources on unnecessary wars during the last few decades that I am sure would have been equal to building... say... large scale mass transit, rebuilt the grid, susbsidized small scale farming such as permaculture and natural methods, and etc. the list goes on.

Back to work...

Hombre said...

"What I think we're moving towards is probably better described as neo-fuedalism,.."

In that particular case I take back my "I hope you're right" :-)

Although I realize you probably are.

Unknown said...

So the market's come roaring back today, which might be a blip, or it might mark the end and start of another 2-3 week hill on an overall upward trend since July, like we had in September and in late august. Perhaps onwards and upwards yet for another spurt.

Should have a better sense of where this is going by Tuesday.

M said...

The cartoon from the current post has me thinking about the Dada artist John Heartfield's photomontage: " The Meaning of the Hitler Salute: Little Man Asks For Big Gifts"

That’s some pretty gutsy social and political commentary to have been leveled back in 1932.

In terms of the ‘lobotomized,’ the masses assumed the role of mannequins representing “reality” quite a long time ago. Our emotions imitate those seen on television and the silver screen; our desires are structured for us in mass advertising campaigns. The sports aficionado’s spirit pulsates in frenzied unison with other like minded types on the weekend while assuming a Monday thru Friday role of “white-collar Republican Automaton, that peculiar hybrid between a tailor’s dummy and the office robot” (Krauss).

We’re in a real Walter Benjamin moment if you ask me:

“Those puppets heavy with sadness that will walk over corpses if necessary. With their rigid body armor, their slowly advancing movements, and the blindness of their actions, they embody the human fusion of insect and tank.”

Phlogiston Água de Beber said...

@ Stoneleigh

It is sobering,and strangely gratifying, to see that your vision of the future is so similar to mine. Loosing freedom is indeed a tragedy. Hearing that you are going to loose it seems to be beyond unbearable for most people. I try not to bring it up too often. Just telling people the hard times are stretching out toward infinity is difficult enough.

Back in the 80's I pondered a bit on the subject of feudalism and posited that it hadn't really ended. IMHO it had morphed into a looser form of serfdom to suit an altered legal and cultural milieu.

Just because you can quit your job does not mean that you have no resemblance to a serf while you hold it. Vassals, after all, did enter into serfdom voluntarily. The contract was just a lot harder to break. Back then we used to see bumper stickers in Silicon Valley that read "I can't be fired, slaves must be sold". I think many of us felt that it told a grim sort of truth.

I'm guessing that once the lordly pyramid has collapsed back to only a few layers, the local Lords will feel a need to revert to the old customs.

Anonymous said...


Thanx. Boy this way beyond interesting. Among all you bring today from the absurd, on the side, the Hate bill is piggybacked on the war funding extension.
Glad I didn't just start paying attention. Doesn't mean I know what to do, but at least I can do something reasonable considering all the plausibilities, none of which seem to have 'help' in the title let alone the purpose.
No one knows. But it is clear at least our reaction time will be tested.
Creativity is sadly not part of anything I can see, unless we have space for that garden we'll need very soon.

Bob (Your Uncle) said...

gpp said "What you are proposing (planned default, "maxing out the credit cards" while retiring in Italy)
is a crime plain and simple."

Problem is when one "side" is able to commit these types of crimes with abandon, it becomes difficult to take a moral high ground to discourage the other "side" from similar crimes.

While I may not (at this time) take the actions Cassandra is contemplating, I can certainly understand where her thinking is coming from....

Gravity said...

A compelling piece of rumored circumstantial evidence on the agenda for a world currency is Aaron Russo's statement concerning a plan supposedly revealed to him, which he possibly made up himself, or was typical deliberate seeding of misinformation.

This predictable plot would involve the unlikely introduction of mandatory electronic tags by motivation of terror or disease, combining biometric identification, carbon credits, health information and monetary functions in order to achieve the final destruction of individual physical currency, and so implement monetary totality by direct control over the spatial distributions of the indivisible hand.

Having all moneys permanently digitised and coupled to biometric identifiction would theoretically eliminate bank runs, frustrate black markets and financing of terrorisms, make tax evasion difficult, make negative interest on deposits feasible, and could also remove thermal drag inherent in physical currency.

Enforcing such a system would require an incredible feat of removing all notes from circulation and installing billions of radio-frequency or microwave tuned scannable markers in tradeable products and people simultaneously in many countries, while automatically displacing and limiting the concepts of trade and ownership to conform with oppressive and vindictive standards of authority.

Its a big idea,
He who hawks behind the Markets.

NZSanctuary said...

It is Halloween dress up Friday at work today. I have come as an investment banker. Most people get it.

Cassandra said...

gpp said...


What you are proposing (planned default, "maxing out the credit cards" while retiring in Italy)
is a crime plain and simple.

Insofar as these plans involcve others they are a conspiracy to defraud.

If you carry out these plans you should be locked up."

I think you may have misunderstood me. I'm not advocating/exploring this path immediately, nor if I have other viable options - it's more of a Custer's last stand. if I hadn't found TAE and other sites, but otherwise the same scenario, i.e. had decided to rent the house out, then, in a couple of years, interest rates rocket, struggle to find tenants, can't sell, have to borrow on credit cards to keep up the repayments, *then* finally capitulate, what's the difference?

Intent? Prior knowledge [is Ilargi really *that good*]? If you read 'How to build a lifeboat' and ignore any of the advice, then lose your job whilst still having debt when you could have sold earlier, are you culpable? Ignorance is then a defence? A bizarre twist indeed. What would happen then?

Welfare from the same government that owns the bank that kicked me out on the streets? How much would that cost them?

If you're a regular here you'll know we're being played, with malice afore thought, on a vast scale.

Just because they're not wearing masks and carrying swag bags, doesn't mean you've not been held up at gunpoint.

Conspiracy to defraud? How apt.

LynnHarding said...

The FASB is such a joke! I knew they would suspend mark to market when it suited them. They also regulate appraisal standards. Imagine if they suspended appraisal standards and told real estate appraisers that it would be OK to ignore current market conditions. You might not put your property on the market in very adverse conditions. This one of the reasons that real estate is considered illiquid. But eventually, enough sellers, both commercial and residential will have to sell and a market will be established. There is a limit to how long anyone can claim that there is a "panic market" right?
Are any of the toxic assets trading in such a way that values could be estimated for any of them? Won't there come a time when banks will have to recognize losses because they will stare them in the face? Are these things so abstract that they need never trade? I don't understand how Sheila Bair can possibly keep accounting standards suspended for much longer.

Stoneleigh said...

Ed Gorey,

Thanks - I'll turn that comment into a proper into when I get a chance. Parallels with predatory structures in the natural world are something I want to pursue, along with comparisons between ecological cycles and socioeconomic cycles (which have the same fractal structure IMO - see CS Holling on the former and Bob Prechter on the latter).

You're right about the critical role of deception. As someone once said, "Sincerity is the key. Once you can fake that, you've got it made." People who actually believe their own propaganda (like Obama IMO) can be very useful to existing power structures, as they're very good at getting the public to vote against their own interests.

I'm hoping to write a book. I just have to convince a publisher to advance me enough to live on while I write it ;)

I do worry though that the warning aspect would be too late to be useful by the time a book could be published. That's why I've wanted to do my writing here so far, where the warning is out there immediately and in time to (hopefully) do some good. I'd still write here of course, and a book might serve a different purpose, assuming anyone was still interested in grand synthesis by the time I could finish it.

Unknown said...

Another week, another good Dave Cohen piece to complement the work of our keen and stalwart hosts.

Gravity said...

In view of predator-prey cycles,
the elites would be discouraged to know that even their numbers will eventually be thinned in equal measures, maintaining a set ratio of autotrophic carrying capacity when it comes to industrial collapse and depopulation.

It is possible to combine impoverished neo-feudalism with novel systems of monetary totalitarianism, maintaining some of the available space for monetary predation, but it is more likely that re-emergence of local scrip necessitated by diverging economic imperatives will result in the disintegration of existing currency unions, with the demise of trustworthy deposit banking greatly fortifying the role of physical currencies.

For once you have tasted bubbles you will walk the earth with your eyes turned growthwards, for there you have been and there you will long to return.

Erin Winthrope said...

@ Stoneleigh,

The deception is everywhere and all the time: NPR, New York Times, Washington Post, BBC, UK Telegraph, Le Monde, Der Speigel, Asia Times, Bloomberg etc. etc. etc.

It's a warm wet suffocating blanket of incoherent nonsense.

Who really and honestly believes that Martin Wolf, Ambrose Evan-Pritchard, Willem Buiter, and even Paul Krugman aren't aware of what's happening and where we are headed?

The truth is so rarely spoken in the mainstream, it feels like an invigorating splash of cold water whenever it slips past the filter.

The unfiltered truth about our situation is what makes TAE so special. It's what gives Ilargi and James Howard Kunstler's writing that Cher/Moonstruck "snap out of it" quality. It's what made Matt Tiabbi's "vampire squid" so widely quoted.

Other prominent yet sadly rare examples of the truth slipping through the cracks:

Hugh Hendry stating on American CNBC that "we're in a depression." He later said the makeup girl whispered to his wife that, "We're not allowed to say that on American television."

Hugh Hendry stating on European CNBC that, "I look around me and I can see dead people."

Marc Faber stating that a shotgun would be a wise investment for the future, accompanied by his creepy giggling.

Because the truth is so rarely spoken, I don't think the public knows whether or not to take these statements seriously. I imagine they chalk it up to bizarre humor and move on with their largely pointless daily jobs.

memphis said...


Do you have any familiarity with a soon to be published book by Joshua Kosman, The Buyout of America? Its premise is that one of the next big credit debacles will be the inability of venture capitalists/hedge funds being unable to refinance debt within a few years. Thanks.


el gallinazo said...

gpp said...


"What you are proposing (planned default, maxing out the credit cards" while retiring in Italy)is a crime plain and simple."

gpp, you ever consider writing comedy as a profession?

The Waffen SS made it a crime for Ukrainian civilians to own guns.

"Insofar as these plans involcve (sic) others they are a conspiracy to defraud."

I don't believe in conspiracy theories.

thethirdcoast said...

I believe that I've managed to dig up the link to the LATOC Forum thread snuffy mentioned earlier.

Here it is in case anyone is interested:

I knew the economy was bad, but not this bad...

Judging by the posted anecdotes, Christmas 2009/New Year 2010 is going to look somewhat Dickensian...

Joseph j7uy5 said...


I suspect that a potential publisher would be impressed by the readership you have here, as well as the vibrancy of the comment threads, and the extension into Facebook and Twitter.

I'd be interested to see you integrate ethnology (e.g. Karen Ho) and sociobiology (e.g. E.O. Wilson) into your treatment of modern finance; perhaps with a bit of evolutionary psychology thrown in. This is tricky, though, because in these fields, it is tempting to spin all kinds of appealing but untestable hypotheses.

Those in the field refer to these -- appropriately -- as "just-so stories." Good headlines; lousy science. You might need some good peer review to stay on track, unless you have formal training in anthropology or a related field. (Sorry, I forget what degrees you have.) This, of course, adds considerable time to the overall effort.

Stoneleigh said...

Ed Gorey,

The unfiltered truth about our situation is what makes TAE so special.

We promise always to give you exactly that. We are not selling anything. We have no vested interest in what you believe. We will never sugar-coat our opinions. We have a commitment to the truth as we perceive it, however inconvenient a truth it may be. We seek only to disseminate that truth to as many people as possible, so that they may preserve what they have worked so hard for all their lives.

Erasmus said...

Stoneleigh how much of a repreive will the GDP print give to the stock market and general social/economic optimism/euphoria?

Stoneleigh said...


Do you have any familiarity with a soon to be published book by Joshua Kosman, The Buyout of America? Its premise is that one of the next big credit debacles will be the inability of venture capitalists/hedge funds being unable to refinance debt within a few years. Thanks.

I am not familiar with Mr Kosman or his work, but I agree with your statement about his premise, with the exception of the time scale. I think it will be within a few months, not a few years.

Gravity said...

During the events last october,
a regular CNN guy reporting live-ish from outside wallstreet on the bailout proposal said something strange, possibly spontaneous and unscripted.
Paraphrasing; "its hard to get a clear picture of the future, as my agenda's drenched with blood." This could have been literal, as his ear seemed to be bleeding at the time.

Last week on CNBC, a person being interviewed, his name has slipped my mind for a moment, hesitantly mentioned something about the difficulties of trading in light of 'the end of the world', with the true momentum naturally being in 2012.(D'oh) This could have been figurative, as many rates would have been reset by then. The segment ended immediately after, seemingly cut short, must have run out of airtime and useful insights.

Truth slippling past the censors,
or manipulative hysterics perhaps.

And why is it that an official recession requires at least two consecutive quarters of statistically relevant contraction, while even one quarter of noise will happily qualify as salvation?

scandia said...

@ Ed Gorey, re the truth rarely spoken on MSM, it is by their actions that we shall know them. I would really like to know what actions the elite have taken to protect themselves and families. How many have a rescue contract with a mercenary group?If these matters have been attended to then that speaks volumes of truth as to how they see the situation, this predicament. To get the facts on elite security arrangements would be a major investigative task.
It could be that they feel so confident that the nation's law enforcement is in their service that they don't feel under threat at all. And it is looking that way.

memphis said...

Stoneleigh, yes, I also doubt that VCs and hedgies can postpone the inevitable by years either. But, like others here, I'd like a little more time to make additional preparations.

I've a friend who's about to embark on establishing his own business in animal medicine. I won't try to dissuade him, for it'll do no good, and some form of care will surely be required. I don't foresee the kind of lucrative practice the profession has seen over the past 10 years, but can you offer any thoughts or advice I can use to uh, influence him in some of the decisions he makes?

Ilargi said...


The euphoria will be shortlived. Maybe tomorrow?

Stoneleigh said...


I'd be interested to see you integrate ethnology (e.g. Karen Ho) and sociobiology (e.g. E.O. Wilson) into your treatment of modern finance; perhaps with a bit of evolutionary psychology thrown in....You might need some good peer review to stay on track, unless you have formal training in anthropology or a related field. (Sorry, I forget what degrees you have.)

I did spend some time studying anthropology, as an elective in a biology/psychology (and some geology) degree. It was fascinating. I'm always on the lookout for a bigger big picture. It's weaving disparate threads together into a coherent and comprehensible whole that I find so interesting and worthwhile.

Personally I don't think degrees matter much though. The best big picture people I know are self-taught, probably because they didn't have to unlearn received wisdom before they could learn useful things.

Ilargi said...

Cassandra, Memphis, and basically everyone else,

Assuming that you have years left to prepare for pretty much anything that involves a major change from where and what you are now, is really not a smart proposition. You don't. And when you presume you do, you will not do what does need doing.

Shamba said...

Peace to All,

memphis said...

Ilargi wrote:

Cassandra, Memphis, and basically everyone else,

Assuming that you have years left to prepare for pretty much anything that involves a major change from where and what you are now, is really not a smart proposition. You don't. And when you presume you do, you will not do what does need doing.

I know, Ilargi, I do know. I remember my parent's stories of living through 1929, but I just never figured I'd have to repeat that history. Scares me to death because I know I'll never be ready enough. The only consolation I have is that I keep reading TAE, realizing that you and Stoneleigh have been right so far. And that is a scary realization in itself.


Erin Winthrope said...

@ Scandia,

Scandia said: "I would really like to know what actions the elite have taken to protect themselves and families. How many have a rescue contract with a mercenary group?If these matters have been attended to then that speaks volumes of truth as to how they see the situation, this predicament."

My reply: You need look no further than Mr. Barton Biggs.

From wikipedia: "Barton M. Biggs runs Traxis Partners, a multi-billion dollar hedge fund based in New York City. He formerly held the title of "chief global strategist" for Morgan Stanley and was with that firm for 30 years......Biggs has a gloomy outlook for the economic future....Biggs recommends that his readers should “assume the possibility of a breakdown of the civilized infrastructure.” He goes so far as to recommend planning adaptation strategies now and setting up survival retreats: “Your safe haven must be self-sufficient and capable of growing some kind of food,” Mr. Biggs writes. “It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson. Even in America and Europe there could be moments of riot and rebellion when law and order temporarily completely breaks down.”

It's funny, whenever he appears on CNBC or Charlie Rose, nobody ever asks him to chat about these topics. Conversations are limited to what Biggs sees the market doing over the next 6 months. He's reliably bullish.

Anonymous said...

KD took apart the GDP numbers. And on the inside it looks horrible.

GDP Is..... Better Than Expected?

This looks like more Ministry of Truth operation. Sadly, that's par for the course, whether Barrack Obama or Sarah Palin sits in the White House.

Remember, folks, both parties are owned, lock, stock, and barrel by Wall Street.

Shamba said...

Well, Phooey!

I meant to post a reply and it didn't come through, sorry! Now, i can't replicate the whole thread since I have meeting to go to.


Ventriloquist said...

But what happens if things don't work out the way that has been prognosticated here for the next 90 days?

What happens if we get to January 1 and there hasn't been a Great Stock Market Collapse, a great Commodity Market Collapse, a great Dollar Collapse, a Great Collapse of the US Government, a total breakdown of US society?

And/or any combination of the above?

How do we rationalize the great fact that what was predicted did not happen?

Where do we go from there?

What hope do we have then to get from point B to point C?

Who do we trust then?


Phlogiston Água de Beber said...

Stoneleigh Said...

Personally I don't think degrees matter much though. The best big picture people I know are self-taught, probably because they didn't have to unlearn received wisdom before they could learn useful things.

Lady, is there no limit to your good sense? In my eyes, er eye, you grow a little taller every day. I sure wish there was some way we could get you crowned Empress of North America.

Top Hat Cat said...

In response to this article

"Geithner rejects any limits on new executive bailout authority"

Stacy over at Mad Max's castle said:

"Codifying neo-feudalism. Have you selected for which Lord you will toil? Or do you have other plans?"

hahaha, you mean we have a choice in Peasantdumb?

Grab your waterboard kids, Serfs up!

Starcade said...

Coy Ote: Saw that. Makes me wonder what else they have planned... It really is as if they know what is coming (probably in their stores four weeks from tomorrow!), and are preparing for mountains of dead bodies.

Ilargi: It's becoming clear most elections are little more than shams, these days. Consider that we are supposedly "electing" a mayor where I live, and, even if we come out and vote against this corporatist jerk, he's going to win with probably 70-80% of the vote.

bluebird said...

memphis said "I just never figured I'd have to repeat that history. Scares me to death because I know I'll never be ready enough. The only consolation I have is that I keep reading TAE, realizing that you and Stoneleigh have been right so far. And that is a scary realization in itself. Thanks."


Ilargi said...

New post up.

An interview with Stoneleigh.

Phlogiston Água de Beber said...


You remind me of Carrie Fisher's famous quote, “Instant gratification takes too long”.

I for one will be pleased as punch if armageddon gets deferred a little longer and you should be too. Because, getting there will be way more than half the fun, if you get my drift.

Greenpa said...

Scandia: "I would really like to know what actions the elite have taken to protect themselves and families."

Some months ago a company made the front page in Minnesota- because they were hiring workers.

They make very high end, super-safe, super-fast, small airplanes. And they had more orders than they could handle.