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Generational Dynamics Web Log for 28-Feb-2011
28-Feb-11 News -- Peripheral stock markets continue to plunge, pressuring the center

Web Log - February, 2011

28-Feb-11 News -- Peripheral stock markets continue to plunge, pressuring the center

Turkish businessmen experience xenophobia in Morocco

Peripheral stock markets continue to plunge, pressuring the center

In the wake of the turmoil in the Mideast, stock prices in peripheral stock markets have continued to plunge, often by several percentage points in a day.

Recent stock market plunges

Recent stock market plunges

The Cairo stock exchange, which has been shut down for over a month, is going to reopen on Tuesday, according to Bloomberg.

There's one paragraph in this news story that I found amusing:

"The regulator announced a list of rules on Feb. 19 aimed at managing a possible selloff when trading resumes, including putting in place a 10 percent circuit breaker on the daily price movement of shares, reducing trading hours by one to three, and banning margin trading."

The reason that this is amusing is because officials at the Dhaka (Bangladesh) stock exchange did all the same steps when that market started crashing. The circuit breaker did no good, because the index crashed through the circuit breaker within five minutes of opening. Dhaka had banned margin trading (buying stocks on credit), but then decided to permit and even expand margin trading, in the hopes that investors would borrow a lot of money and pour it into stock purchases. It didn't work though, and the Dhaka stock exchange kept crashing, 6% on Sunday alone.

Saudi Arabia is a relatively recent member of the stock crash club, triggered by the protests in Libya, Yemen and Bahrain. The market fell 5.2% on Sunday, according to Bloomberg. The article points out that protests are also growing in next-door neighbor Oman, where stock market index has fallen to its lowest level in months.

"Higgenbotham," a contributor to the Generational Dynamics forum, described the situation as follows:

"It's because of all the various things we are seeing that indicate the periphery is once again beginning to collapse. This would be the same type of thing I wrote about in this forum on April 26, 2010 but instead of involving just Greece it involves many more areas on the periphery and it is spreading very quickly and unpredictably (small countries, states, local governments, and individuals). In order to keep the center of the system afloat, resources are being sucked from the periphery of the world into the center. As the periphery collapses, the center can't hold either because it runs out of resources to suck in. However, with the heavy government involvement in the markets, it's a lot harder to read the situation. It's like trying to monitor a backyard pond that had fish in it and now there is a whale in it."

This is a very profound description of what's going on. As I've been describing for years, each day there's less money in the world than there was the day before.

In 2007, the Bank of International Settlements was reporting that there were over one quadrillion dollars nominal value (that's quadrillion with a "Q") of synthetic credit derivatives in portfolios around the world. That figure included about $60 trillion in credit default swaps, and about $500 trillion in interest rate swaps.

These synthetic securities are not often thought of as "money," but they were at the heart of the credit bubble, since they were used as collateral or in trade for purchases of stock and other assets. During the credit bubble, these were the reason that there was more money in the world each day than there was the day before.

That's when the credit crunch began, and the "deleveraging" process began in financial institutions around the world. Today, the above figures have been approximately cut in half, meaning that there's about $500 trillion less in the world today.

And that's only part of it. The latest S&P/Case-Shiller release indicates that home prices fell 1% from November to December of last year, and Shiller is predicting another 15-20% fall in home prices, according to the Wall Street Journal (Access). So, the collapse of the housing bubble has already removed some $10 trillion in value in the U.S. alone, and there may be another $5-10 trillion or so lost.

When you hear someone on CNBC whine because so many investment firms are "keeping money on the sidelines," it's because the people in those firms are viscerally aware that they'd better hold on to what they have, while they still have it.

So, when all that money poured out of Washington in the form of quantitative easing, that money wasn't spent on factories, as politicians fantasized; it was redirected into the Wall Street Ponzi scheme, and into bubbles in various peripheral countries. And now, as Higgenbotham points out, that money is being sucked back out of the periphery into the center -- to London, Frankfurt and Wall Street.

In the diagram above, I included a graph of Portugal's 10-year bond yield (interest rate), which has now reached 7.54% and continues to grow steadily. It continues to follow the same path as Greece and Ireland, and the same is happening in other euroland countries as well, indicating that the Europeans are unable to suck money back in fast enough to keep yields down. This is at a time when Euro Intelligence reports that Germany's "academic establishment and business community are in open revolt against Angela Merkel's policy to bolster the European rescue [bailout] mechanism." The Germans, you'll recall, were absolutely furious at having to give their hard-saved euros to the profligate Greeks, and they're not going to be supportive of bailouts for Portugal or any other Club Med countries.

Meanwhile, back here in America, state budgets are crashing, as anyone who turns on a TV these days can see. Thanks to the Republican victory last November, Washington is as much in open revolt against bailouts as the Germans are.

It's just as well. Bailouts wouldn't do any good for long. Just as setting circuit breakers in Dhaka was a total failure, just as quantitative easing was a total failure, bailouts of states would also be a total failure. There's less and less money in the world every day, so there's less and less money to go around for bailouts. There's a massive deflationary spiral in progess that nothing can stop.

Here are some excerpts from an interview of Michael Lewis, author of "The Big Short", by CNN's Fareed Zakaria on Sunday:

"LEWIS: So there is - very clear that there's reckoning in the future, exactly what form it takes is less clear. I mean, it is incredible where we sit right now. If you told me in - in early 2009 that all of these big Wall Street firms would be back even bigger and paying big bonuses and essentially socialized, and then their loss is socialized but the gains privatized and that the American people would put up with it? That's the incredible thing is that there isn't a social revolution. ...
That's right. And the question I have is what happens if the United States Treasury ceases to be a credible backstop? What happens when marketers say we don't really want to lend to the United States anymore? Then you have - then you get the depression. They you get - then you get a much, much bigger problem. ...

Lewis makes two important points.

One is that we're headed for a depression -- something that few in Washington or New York want to admit.

Second, he points out that the bankers are back committing the same kind of fraud that they did in the credit bubble years.

This is something that can't be repeated often enough: The same people who caused the last crisis are still in the same jobs, committing the same kind of fraud again, and are causing a new crisis.

The credit crisis was caused by generational fraud committed in practically every financial and real estate firm in the world. The nihilistic Generation-Xers, beset by hatred and contempt for Boomers and Silents, created synthetic securities (mortgage-backed and others) that they knew were fraudulent, and sold them to investors around the world, making huge amounts of money. Their Boomer bosses, who were totally incompetent at anything except arguing with their parents and each other, just went along with the fraud because they were making huge amounts of money as well.

It was just a few years ago when I was ridiculed for the above characterizations, but today few people who would doubt them. In fact, a new article in Rolling Stone by Mike Taibbi called "Why Isn't Wall Street in Jail?" is a compendium of crimes by people who are still in their jobs, committing new crimes.

I see this all the time when I watch CNBC or Bloomberg TV. As I recently reported, financial executives come on and openly lie about stock valuations. It astounds me these crooks can openly commit new crimes right in front of our eyes, though it's no more astonishing than the crimes we see committed every day in Washington.

Here's a coincidence. As I'm typing this, the movie "Inside Job," about the financial crisis, has just won the Oscar for best documentary, and the producer Charles Ferguson says, "Forgive me, I must start by pointing out that three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail, and that's wrong."

I write about the financial crisis all the time, as well as geopolitical crises around the world, and I just can't believe how fucked up the world is. I have to keep asking myself whether I'm crazy or the world's crazy, and it depresses me that it's the world that's crazy. As I write my web log every day, I feel like I'm watching an awful movie and they've locked the theatre doors and won't let me out.

I'll close by repeating my favorite quotation from Friedrich Nietzsche: "Insanity in individuals is something rare - but in groups, parties, nations and epochs, it is the rule."

Additional notes

Turkish businessmen are experiencing increasing anti-Turkish xenophobia in Morocco, a country where previously they've been welcomed. The result is that many Turks are fleeing the country, and they fear that some spark could launch widespread violence. Hurriyet (Istanbul)

There's a growing political crisis in India over claims that food prices are surging, while food is rotting in storage. Business Standard

The internet call by China's netizens to stage their own "Jasmine Protests" is apparently panicking Chinese Communist Party officials, who acted like thugs during Sunday's attempted rallies. Foreign reporters were singled out and assaulted. BBC

A number of iPhone and iPad scams are targeting kids. The scam is illustrated by the Smurf's Village app. The app is free, but it's made the vendor huge amounts of money. How? Because kids who play the app have to spend $10-100 of real money each time they want to buy some Smurf Berries to play in the game. This kind of crap infuriates me, but it fits well today because the main article is about the financial crisis. Pad Gadget

Ten things Americans waste the most money on. 24/7 Wall Street

(Comments: For reader comments, questions and discussion, see the 28-Feb-11 News -- Peripheral stock markets continue to plunge, pressuring the center thread of the Generational Dynamics forum. Comments may be posted anonymously.) (28-Feb-2011) Permanent Link
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Generational Dynamics Web Log for 28-Feb-2011 28-Feb-11 News -- Peripheral stock markets continue to plunge, pressuring the center

Peripheral stock markets continue to plunge, pressuring the center

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Generational Dynamics Web Log for 28-Feb-2011
28-Feb-11 News -- Peripheral stock markets continue to plunge, pressuring the center