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Anyone who has seen "The Sound of Music" knows that Austria played a pivotal role in the development of the European war in the 1930s.
Europe's major bank failures began in Austria in 1931, triggering mass panic and bank failures throughout Central Europe. By the end of the year, there were over 6 million unemployed, and the resulting social tension gave rise to Communism and Naziism, and the rise to power of Adolf Hitler.
And so deep memories were stirred on Sunday, when Austria's two far-right parties, the Freedom Party and the Alliance for the Future of Austria, together took nearly 29% of the vote in the general elections.
The Social Democrats won the election with 30%. But they, and the conservative People's Party, with 26%, suffered their worst results since 1945, while the far right showed its greatest strength since the end of World War II.
The coalition of the center parties, the Social Democrats and the People's Party, had ruled until recently. But, like many governments today, the Austrian government became paralyzed with bickering, and they were forced to call a new election.
Heinz-Christian Strache, the leader of the Freedom Party, has been accused of links to neo-Nazis, but he denies that. The Freedom Party has called for a halt to immigration and a ministry for repatriating foreigners. The election campaign targeted young people, and focused on economic and income issues. It is also opposed to globalization and to being part of the European Union.
In 2000, when the Freedom Party briefly became part of Austria's governing coalition, Austria received sanctions from the European Union, and Israel recalled its ambassador from Vienna.
Today, the reaction is expected to be less harsh, largely because right-wing anti-immigrant parties have been gaining in other European countries, including Switzerland, Netherlands, Belgium and Denmark.
However, an Israeli Ministry spokesman said that:
The rise of the far right in Austria may or may not have great significance, as it may simply be a protest vote against the incompetence of the current government.
However, as the change in political direction coincides with the continuing collapse of the world financial system, the fears of a repeat of the events of the early 1930s are being stirred.
(Comments: For reader comments and discussion, see the
Austria thread of the Generational Dynamics forum.)
(29-Sep-2008)
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Banks in America and Europe are falling like dominoes, as credit constructor tightens its grip.
As of Monday morning, it was already clear that the promise of a that the "Bailout of the World" (BOTW) plan would solve everyone's problems.
In Europe, bank activity was almost frozen, as interbank lending interest rates (as measured by the TED Spread and the Libor/OIS spread that I mentioned last week) rose to historic highs.
Furthermore, on a weekend when America's Wachovia bank failed and had to be bailed out, European banks seemed to be falling like dominoes, with three banks failures in Europe: Germany's Hypo Real Estate Holding AG had to be bailed out, Britain's Bradford & Bingley was nationalized, and and the Netherlands and Luxembourg partially nationalized Dutch-Belgian banking giant Fortis NV with a $16.4 billion rescue. European stock markets fell 5%.
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The big shock of the day came around 1:40 pm, when the votes started coming in from the House of Representatives on the bailout bill, and it became clear that the bill was going to lose. The Dow Industrials index was already down 270 points, but it immediately fell another 350 points within just a few minutes. The index recovered slightly, but then fell several hundred more points in the last few minutes of the trading day.
I've gone into this detail because I want to emphasize the atmosphere of total panic that was pervading the Wall Street atmosphere today.
The market indexes are now 25% from their October, 2007, highs. At some point, the fall in share prices will trigger forced selling, leading to a worldwide panic.
The Bailout of the World plan is, at its bottom, an expensive psychological ploy to "restore confidence in the markets," but it doesn't change the fundamentals enough to make any real difference.
It used to be that the Fed could lower interest rates 1/4% to get a huge psychological boost among investors, but now even the promise of $700 billion doesn't do the trick. Investors have decided, "Fool me once, shame on you; fool me twice, shame on me."
Even so, pundits have been predicting what everyone will do next: There will be another attempt at some point to pass the bailout bill; the Fed will lower interest rates again. These are both quite possible.
Pundits are expecting a continuing bloodbath on Tuesday, but in fact it's equally probably that the stock indexes will rise, possibly by a great deal.
What's going on are two sides of the same coin -- panic buying and panic selling. Both of them are panic, and what's particularly significant of the last few days is that the level of panic, whether up or down, has been increasing.
It's worthwhile to take another look at what happened in 1929. If we look at my Dow Jones historical page, we can see what happened before the 1929 crash, some of which is extracted here:
1929: Daily change in Dow Industrials
--------------------
Mon 10-07 ( +6.32%)
Tue 10-08 ( -0.21%)
Wed 10-09 ( +0.48%)
Thu 10-10 ( +1.79%)
Fri 10-11 ( -0.05%)
-------------------
Mon 10-14 ( -0.49%)
Tue 10-15 ( -1.06%)
Wed 10-16 ( -3.20%)
Thu 10-17 ( +1.70%)
Fri 10-18 ( -2.51%)
------------------
Mon 10-21 ( -3.71%)
Tue 10-22 ( +1.75%)
Wed 10-23 ( -6.33%)
Thu 10-24 ( -2.09%) Black Thursday
Fri 10-25 ( +0.58%)
-------------------
Mon 10-28 (-13.47%) Black Monday
Tue 10-29 (-11.73%)
Wed 10-30 (+12.34%)
Thu 10-31 ( +5.82%)
Fri 11-01 (Closed)
-------------------
Mon 11-04 ( -5.79%)
Tue 11-05 (Closed)
Wed 11-06 ( -9.92%)
Thu 11-07 ( +2.61%)
Fri 11-08 ( -0.70%)
-------------------
Mon 11-11 ( -6.82%)
Tue 11-12 ( -4.83%)
Wed 11-13 ( -5.27%)
Thu 11-14 ( +9.36%)
Fri 11-15 ( +5.27%)
-----------------
As you can see, the 1929 crash was not a huge 20-30% drop in one day. There were several days of wild swings over many days, netting sharply down. It's important to remember that the stock market didn't just fall one or two days; it continued to fall for four years, and from 1929-33 stocks had fallen 90%, to 10% of their peak values.
Here's a comment from a web site reader:
No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks
Read More Here: Link: http://www.rgemonitor.com/ Nouriel Roubini on Sep 28, 2008.
A recent IMF study of 42 systemic banking crises across the world provides evidence on how different crises were resolved. http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
Government purchase of bad assets was the exception rather than the rule. It was used only in Mexico, Japan, Bolivia, Czech Republic, Jamaica, Malaysia, and Paraguay.
The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.
It is pathetic that Congress did not consult any of the many professional economists that have presented - many on the RGE Monitor Finance blog forum - alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners."
It doesn't make any difference whether they had talked to the "professional economists" or not. Roubini, the IMF, and the others still don't understand what's going on.
This collapse has been in play at least since the dot-com bubble began in 1995. The bubble grew for 13 years, morphing into a real estate bubble and a credit bubble, and now it's going to collapse for many years.
The deflationary spiral is accelerating, and things are getting much worse very quickly. I'm expecting a generational crash (the first since 1929) pretty soon. Forced selling is picking up among hedge funds, and it won't be long before it turns into total panic. So now would not be a good time for anyone to make any monetary commitments.
It's worth remember again that we're waiting for a similar epochal event -- the massive generational panic that will be remembered forever. This must occur at some point. The last one occurred in 1929, and the next one is overdue. Millions or tens of millions of investors around the world will panic and try to sell everything, causing computer systems to crash or be clogged for hours, or perhaps a day or two. This MUST happen, and it might happen this week, next week, or in the weeks that follow, but it seems very close right now.
(Comments: For reader comments, as well as more frequent
updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read
the entire thread for discussions on how to protect your money.)
(29-Sep-2008)
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The details of the $700 billion Bailout of the World (BOTW) plan are now being evaluated by investors around the world.
The fight is not yet over, but there's a basic agreement in place. According to the plans, it will be debated in Congress during the week, and passed as a bill by the end of the week.
The American public is overwhelmingly opposed to the BOTW -- by something like to 300 to 1, according to what I've heard.
The two Presidential candidates completely punted on this question during the debates. Their scripted answers threaded the needle between not endorsing anything so unpopular, and not rejecting something that might save the world.
In fact, there's one overwhelming fear in Washington that's so great that it overshadows everything else and makes everything else almost irrelevant. It's not a great fear of economic meltdown: It almost seems to be taken for granted that some kind of economic meltdown is in the cards. No, the greatest fear for each of these Washington officials is the fear of being blamed for the economic meltdown.
In listening to the commentary for the last few days about the BOTW, the most telling thing that I've heard was the answer by Treasury Secretary Henry M. Paulson Jr. to these questions: "Why are we in such a rush? Why can't we do this in stages? Why do we have to approve the entire $700 billion in just a couple of days?"
The answer: "We have to restore confidence to the markets, and we need the full amount to do that, and we have only a couple of days to do that before we face disaster." (This is paraphrasing, but that's essentially what he said.)
As this weekend progresses, we've been faced with a familiar deadline: The bailout agreement has to be reached by about 7 pm ET on Sunday, because that's when the markets are opening Monday morning in Asia. 7 pm Sunday ET has been a do or die deadline for several recent weekends.
And listening to the pundits this weekend, they're all going to be holding their breath watching the markets on Sunday evening and Monday morning.
"If it doesn't work, then we face disaster on Monday, but I don't think that's going to happen," said one.
The phrase "doesn't work" means "doesn't restore confidence to stock market investors."
There's an airhead quality to all this discussion. There's no connection with anything real. It's not exactly like playing a move in a chess game ("If I do this, he does that, then I do this.")
It's more like a big poker game: "I've lost every bet so far. This time I'm going to go all in, and bet every penny I have on the next turn of the card. I hope this works."
It's hard to overestimate how incredible this is, since it's not a poker game. The prevailing view in Washington is that the fate of the entire world economy hinges on the turn of a card, and I don't think that there's anyone who even claims to have any idea which way that card is going to turn.
And so, everyone in Washington is going to be paying rapt attention
to the markets on Monday, because you have to be a very nimble player
to avoid the greatest catastrophe of all -- being blamed.
(28-Sep-2008)
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South Korea is considering retaliatory economic action, if North Korea goes ahead with its plans develop nuclear weapons. South Korea has been providing massive food and energy aid to North Korea, and is considering suspension of the energy aid. Foreign Minister Yu Myung-hwan points out that a resumption of nuclear weapons development would violate an existing 2006 UN Security Council resolution, and added, "This is related to the 'action-for-action' principle. North Korea is well aware of how we will react if it goes beyond the current parameters."
The situation is viewed very gravely in South Korea, because the two countries are technically still in a state of war, since the Korean War armistice in 1953.
According to a statement by Defense Minister Lee Sang-hee, following the North Korean announcement, "North Korea maintains a vast military and forward deploys more than 70 percent of its ground forces. It stands ready to mount a surprise attack any time. It continues to develop weapons of mass destruction such as nuclear, chemical and biological weapons and missiles and is a grave threat to the stability, not only of the Korean peninsula, but also the region."
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In fact, according to a study (PDF) by the Congressional Research Service, North Korea spends the highest percentage of its GDP of any country in the world on military expenditures. This is despite the fact that the country's Communist government is unable to feed its people, resulting in frequent famine and starvation. In view of the country's spending priorities, it's reasonable to conclude that the country is preparing for war, and it's reasonable to assume that war would be directed against both South Korea and its hated enemy, Japan.
Concern has been heightened by the statements of a North Korean defector that North Korean president Kim Jong-il had used the disarmament negotiations as a ploy to get international aid, and that he already had an inventory of nuclear material and weapons.
According to the typical punditry in Washington, the North Koreans changed their minds because the Americans were insisting on inspecting their nuclear facilities. This is part of the hubris that assumes that everything that happens anywhere in the world happens because Washington does something or doesn't do something.
What's much more likely is that the sudden announcement was precipitated by an ongoing succession struggle.
When Kim Jong-il failed to appear on September 9 at 60th anniversary celebrations for the country, speculation about ill health began immediately.
It's now been 44 days since Kim has appeared in public, although North Korean officials have angrily denied that Kim is in ill health, and are bitterly criticizing "speculation by ill-intentioned people." It's now widely assumed that Kim has suffered a paralyzing stroke. This will be confirmed or refuted on October 10, when Kim is expected to appear at another major anniversary celebration.
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North Korea resumes nuclear weapon development amidst generational succession struggle:
South Korea is considering retaliatory economic action,...
(27-Sep-2008)
North Korea shuts down nuclear reactor.:
North Korea's Yongbyon nuclear facility was closed on Saturday,...
(16-Jul-07)
South Korea gives in to North Korea demands, and supplies rice unconditionally:
So far, North Korea seems to be reneging on its promises to dismantle its nuclear program....
(22-Apr-07)
It's the Year of the Pig in North Korea:
On Kim Jong-il's birthday, he gloats about humiliating the U.S. ...
(17-Feb-07)
South Korean politicians are 'euphoric' over North Korea nuclear deal:
The young "386 generation" that run the government may well be in over their heads....
(16-Feb-07)
South Korea to deploy deadly robots on border with North Korea:
This is the scariest video you've ever seen....
(3-Feb-07)
North Korea announces a nuclear weapon test.:
Has Pyongyang passed the point of no return?...
(9-Oct-06)
Iranian representatives witnessed North Korea's July 4 missile tests:
According to Assistant Secretary of State Chris Hill,...
(21-Jul-06)
Why did China agree to join a U.N. Security Council resolution condemning North Korea?:
Henry Kissinger has one theory, but mine is quite different....
(19-Jul-06)
In an Independence Day surprise, North Korea launches multiple test missiles towards Japan:
Sticking its thumb in the eye of the United Nations and the United States,...
(4-Jul-06)
North Korea exporting women into slavery:
10,000 to 15,000 North Koreans, mostly women, are working as slaves...
(30-Dec-05)
North Korea plays a little joke on the world:
North Korea's "no more nuclear" pledge startled the world, but now they say, "Ha, ha, fooled ya."...
(21-Sep-05)
U.N. predicts severe North Korea famine this fall:
This could be a reason why North Korea is close to preemptive war....
(10-Aug-05)
North Korea agrees to resume nuclear non-proliferation talks:
The six-party talks will start the week of July 25, thirteen months after the last round,...
(9-Jul-05)
Rumsfeld expresses alarm over militarization of China and North Korea:
Defense Secretary Donald Rumsfeld spoke in Singapore on Saturday...
(4-Jun-05)
World becoming panicky over North Korean nuclear test threat:
UN nuclear chief calls it "disastrous"; US lawmaker calls it a "cataclysmic" event....
(10-May-05)
Korea - Japan relations nosedive over long-disputed islands:
2005 is supposed to be "Korea-Japan Friendship Year,"...
(18-Mar-05)
North Korea announces that it will resume testing missiles:
North Korea continues its war mobilization begun a year ago,...
(04-Mar-05)
Ambassador to Japan calls North Korean threat "deadly":
While the Bush administration has been trying to give a muted, non-alarming response to the North Korean threat,...
(18-Feb-05)
North Korea says Japanese sanctions will trigger "war" and an "effective physical" response:
Japan has threatened to freeze food aid to North Korea and impose other sanctions...
(16-Dec-04)
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A succession battle would throw the country into enormous turmoil for a long time. The Kim family has ruled North Korea since it declared independence in 1948, and speculation centers on his children, as well as his fourth wife, Kim Ok, who visited Washington in 1999.
It's also possible that the succession struggle is being dominated by China, who will act to install a China-friendly leader in North Korea.
Kim Jong-il, born in 1941, is a survivor of WW II and the subsequent war between North and South Korea. Like America's "Silent generation," the children who grow up during a crisis war suffer a kind of generational child abuse, and turn into reserved, indecisive adults.
His children and his young fourth wife have no such inhibitions, and are going to be far more confrontational and competitive. The new announcement of the resumption of nuclear development is exactly the kind of brinksmanship that one would expect of a more arrogant younger post-war generation.
Even if Kim recovers his health, the current development signals a new period of great international turmoil over North Korea's intentions. If the defector's statements are true, then North Korea could be ready to launch nuclear missiles at South Korea or Japan in a fairly short time frame. And, as usual, what matters in these situations is the perceptions rather than the truth. If the masses of South Koreans or Japanese believe that North Korea is now preparing for war, the probability of a miscalculation spiraling into war becomes greater.
An editorial from the German paper Süddeutsche Zeitung describes the situation as follows:
It seems that the country is now going through an important transformation. The negotiated disarmament program is being sacrificed and uranium enrichment is being restarted. North Korea is making itself dangerous again, thus destroying the progress achieved in negotiations over the past six years.
Why? There is no obvious answer to so much irrationalism and from the outside it is hard to understand the motives. It is obvious that the outrageous provocations have something to do with the credible reports about the poor health of Kim Jong Il. If Kim is really not recovering or is even already dead, then the North Korea that will be unleashed on the world will be marked by power struggles and wild survival tactics. The restarting of the nuclear program would be a central part of any claim to power. Whoever has the bomb has the power. The country is once again becoming one of the world's problem cases."
From the point of view of Generational Dynamics, there will be a
crisis war of Korean unification with near 100% certainty, and that
Japan will be pulled into this war. My expectation is that China
will be North Korea's ally in this war, especially because China is
already planning for a war with America over Taiwan.
(27-Sep-2008)
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Officials are bitterly divided over the $700 billion Bailout of the World (BOTW) plan, as meetings ran into the night on Thursday evening. The bailout plan appeared to be in disarray, as leading Republicans proposed an alternative plan.
The original plan, advocated by Secretary of the Treasury Henry M. Paulson Jr. and Federal Reserve chairman Ben Bernanke, gives the Administration authority to pay up to $700 billion for near worthless mortgage-back securities from financial institutions.
The theory is that, one day soon, the bubble will return, and the government can sell those securities and make money. (Please stop. I can't type when I have tears in my eyes from laughing so hard.)
The new plan, proposed by Alabama Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, would authorize the the Administration to loan $700 billion to financial institutions. Once the bubble returns, they would pay back the loans with interest, and the government would make money. (Once again, I can't stop laughing.)
The real news on Thursday is that people are now speaking of a "credit market crash." Banks simply are unwilling to lend money to each other at interest rates the borrower can afford.
Yesterday I posted a graph of the TED spread, which has risen again today. Here's a graph of the Libor-OIS spread posted Thursday on the FT site:
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Libor measures the interest rate for bank to bank lending for 3 months; OIS (Overnight Index Swaps) measures the interest rate for overnight lending. Usually it's more risky to lend someone money for 3 months than for overnight, and so the interest rate is normally a little higher.
The above graph shows that this difference in interest rate is historically higher.
What all this means is that interbank lending is frozen. Bloomberg tv referred to it several times as a "credit market crash." A US News article uses the same words.
A USA Today article points out that many banks would now be collapsing, if it weren't for massive lending by the Fed.
Today's explanation is the same as yesterday's explanation: The leaking of the credit bubble is accelerating, the amount of money in the world is disappearing more quickly. The deflationary spiral is accelerating. The $700 billion from the Bail Out the World plan wouldn't even begin to keep up.
There are some people who, after many months and years, are finally beginning to understand this. The credit bubble was created by "leveraging" -- using a little money to borrow a lot. This was done by everyone: People bought homes with no money down, often lying about their income, or they used credit cards to pay their living expenses. And financial institutions would buy securities "on margin," often paying on 2-5% of the cost, and borrowing the rest. This means that they "leveraged" their money by 50 to 1 or 20 to 1.
Now everyone's talking about "deleveraging." Gillian Tett wrote a Financial Times article that summarizes this:
In the go-go days of the credit bubble, Washington policymakers blithely assumed that the Western financial system had plenty of capital to cope with any potential risks. Consequently, as one former BIS official admits: "Worrying about leverage wasn't fashionable at all - no one wanted to hear."
Fast-forward a couple of years and, my, how those Western financiers are having to eat humble pie (even to the point of accepting a helping hand from the once-ailing Japanese). After all, the events of the past year have now made it patently - horrifically - obvious that the Western banking system has become dangerously undercapitalised in recent years, to the point where even the Federal Reserve is having to shore up its defences.
Moreover, it is now also clear that Western policymakers are belatedly trying to correct this state of affairs. The days when high leverage, mega bonuses and wacky instruments were equated with financial virility have gone; instead a more humble, back-to-basics and slim-line approach is what investors are demanding. Thus, deleveraging is now all the rage - in whatever form it might take."
So far, so good. Tett points out that deleveraging must now occur for most firms. This is something that a lot of people are saying. But she added the following interesting paragraph:
In other words, suppose that investment banks cut their leverage ratios from 30 times to 20 times. That one action would cause $6 trillion dollars in assets to be sold, and since that money was essentially "created" from credit, there would be $6 trillion dollars less money in the world. And it would be much worse if the cut the leverage ratios to 10 times, or 5 times, or (gasp!) two times.
And that doesn't even count hedge funds!
That's a good example of why money is disappearing in the world, and also explains why the $700 billion Bail Out the World plan doesn't have a snowflake's chance in hell of making much of a difference, whether it passes or not.
Thursday also saw the biggest bank failure in history: Washington Mutual Inc. has collapsed, and its assets will be acquired by JP Morgan Chase & Co.
A web site reader posted the following question in the Generational Dynamics forum:
The answer is that it means all of the above, if you don't have the very highest credit rating, and even then, you'll be paying sky-high interest rates. It's very hard to get credit now, but in a while it'll be almost impossible.
So we have two very different pictures here: On the one hand, we have the clown circus in Washington, with bickering politicians arguing over a plan that can't possibly work. Why are the circus clowns performing? Because they hope to get our votes in a couple of months. What a sad, pathetic bunch.
When the credit bubble was expanding, there was plenty of money around, and it was like a huge champagne party for the everyone from consumers who lied to get loans to investment executives who lied to investors that their mortgage-backed securities were "good as cash."
Now the champagne party is over, and a lot of people are going to be hurt badly, undoubtedly including many people reading this web site, unfortunately.
It's a very, very sad time. If you're nostalgic for the old days, whether for the champagne party or for your long-lost youth, then take a moment and relax, and listen to Judy Garland and Mel Tormé sing "The Party's Over" on the New Year's episode of the Judy Garland Show:
Now you must wake up,
All dreams must end.
Take off your makeup,
The party's over.
It's all over, my friend.
(26-Sep-2008)
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Desperation sets in as credit markets continue to seize up.
I've posted over 1,200 articles on this web site over the years, and I've often expressed amazement about what's going on, but I think that I can safely say that it all pales to insignificance compared to what's been happening in Washington this week. The overwhelming insanity leaves me breathless unless I can shut it out of my mind. The phrase "rearranging the deck chairs on the Titanic" comes to mind.
Things are being said and done this week that will go down in history. Things have been said that will be repeated over and over, like Herbert Hoover's "Prosperity is just around the corner," his constant mantra as the country sank deeper and deeper into the Great Depression.
There are many lists of dumb-sounding statements from officials speaking in 1929. How about: "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." - Andrew W. Mellon, U.S. Secretary of the Treasury, December 31, 1929.
Today's Secretary of the Treasury, Henry M. Paulson Jr., joined Fed chairman Ben Bernanke to testify before the Joint Economic Committee of Congress on Wednesday.
Actually, it wasn't just testimony. Ben Bernanke was haggard, grim-faced and ashen. His opening statement was a desperate plea, begging Congress to spend $700 billion to Bail out the World (BOTW), so that the world could be saved:
While perhaps manageable in itself, Lehman's default was combined with the unexpectedly rapid collapse of AIG, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets. These conditions caused equity prices to fall sharply, the cost of short-term credit--where available--to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets--a flight to quality--sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth. ...
Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."
But the congressmen were very skeptical. They demanded answers to questions that Bernanke couldn't answer: "Is $700 billion the actual cost?" "What's so urgent that we have to pass this bill this week?" "Suppose we pass the bill -- are you sure it will work?"
In fact, they made it clear that the public is VERY negative about the BOTW bill. One pundit said that constituent calls to congressmen were running 99 to 1 AGAINST the bill.
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Meanwhile, the credit markets continue to seize up. One measure of how bad things are is called the "TED spread," the difference between 3-month interest rates for Treasury bills and European dollar bank loans. (TED = Treasury vs Eurodollar).
As you can see from the graph, there were three previous crisis points: August 2007, when the credit crisis began; December 2007, when the Fed began its aggressive liquidity programs; and March 2008, when Bear Stearns had to be rescued.
Now, in September, 2008, the credit crisis is worse than ever. We've already had the nationalization of Fannie Mae and Freddie Mac, the bailout of AIG, the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America, and several other related changes. Wall Street is already unrecognizable from where it was just a month ago, and the credit crisis is worse than ever.
The Bailout of the World (BOTW) is Ben Bernanke's last desperate attempt to stave off a new Great Depression.
As his Great Historic Experiment collapses, Ben Bernanke scrambles to save his reputation:
Who "lost" the economy? The finger-pointing is getting intense....
(15-Jan-2009)
Ben Bernanke's Great Historic Experiment is at the brink:
Desperation sets in as credit markets continue to seize up....
(25-Sep-2008)
Fed Chairman Ben Bernanke defends his Great Historic Experiment before Congress:
The Fed-led rescue of Bear Stearns last week was closely questioned...
(7-Apr-08)
A historic day in Ben Bernanke's Great Historic Experiment:
In its biggest move yet, the Fed bails out a collapsing Bear Stearns....
(15-Mar-08)
Bernanke's historic experiment takes center stage:
An assessment of where we are and where we're going....
(27-Aug-07)
Ben Bernanke's Great Historic Experiment:
Bernanke doesn't believe that bubbles exist. His Fed policy will now test his core beliefs....
(18-Aug-07)
Ben S. Bernanke: The man without agony :
Bernanke and Greenspan are as different as night and day, despite what the pundits say.
(29-Oct-2005)
Federal Reserve congratulates itself on jawboning policy:
Fed says it propelled the economy upward merely by promising to keep interest rates low....
(17-Sep-04)
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I've criticized many bizarre beliefs and statements that Bernanke has said before -- especially that the 1930s Great Depression could have been avoided if the Fed had lowered interest rates sooner, or that jawboning affects the economy, but fundamentals don't.
But the centerpiece of Ben Bernanke's life has been his Great Historic Experiment, and the failure of the Great Historic Experiment must be apparent, even to him.
The plea he made to Congress today was an act of desperation, on two levels:
He enjoys at least the consolation that he'll be able to blame Congress for the disaster.
One more thing:
When I wrote my 2003 book, Generational Dynamics: Forecasting America's Destiny, I never really understood how Congress could have passed the Smoot-Hawley Tariff Act in June 1930. The law was opposed by President Hoover's administration and overwhelmingly by economists at the time. But it was several months after the 1929 stock market crash, and Americans were blaming high unemployment on foreigners stealing jobs away from Americans. The public demanded that the law be passed. The Smoot-Hawley act didn't didn't help the American economy, but it crippled imports from other countries, especially silk from Japan. Japan was already suffering economically anyway, but this act shut down its silk industry. It infuriated the Japanese, who invaded Manchuria and China in subsequent years, and bombed Pearl Harbor a few years after that.
Assuming that the current political trend continues -- if the BOTW bill is delayed or watered down -- it will be seen as a disastrous move by Congress, and may even be seen as the CAUSE of the crash, just as many people see the Smoot-Hawley Tariff Act as the CAUSE of much of the misery of the Great Depression.
On Wednesday evening, President Bush made a televised address to the nation, outlining the danger and calling on Congress to pass the BOTW bill. His speech contained warning language that hadn't been heard publicly before. It's not clear yet whether the speech will spur the public to support the BOTW bill, or whether it will cause people to become even more anxious and panicky.
From the point of view of Generational Dynamics, of course, the BOTW
bill won't have any effect one way or the other, whether it's passed
or not. The financial calamity is coming.
(25-Sep-2008)
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And we have some expert advice on preserving your savings.
Democrats and Republicans voiced standard ideological objections to the proposed Bailout of the World, and some of them were very nasty.
The Democrats complained that the bailout helps the banks, but doesn't help the man on the street, the average homeowner being foreclosed.
 |
The Republicans complained that the bailout gives too much power to the Federal government, and to one person (Treasury Secretary Henry Paulson).
Perhaps most vicious was was Republic senator Jim Bunning, who said, "This massive bailout is not a solution; it is a financial socialism, and it's un-American." Whew!
I admit to being fairly bemused, watching the Washington circus, because the proposed $700 billion BOTW won't make any difference at all to what's coming.
There are $6 trillion in money market funds, and the fear is that people will panic and draw their money out. The size of the real estate bubble is over $5 trillion.
And there are $62 trillion in credit default swaps. CDSs played a prominent role in the previous rescue efforts -- for Bear Stearns, Fannie Mae, Freddie Mac, AIG -- and now there's pressure to regulate them.
A web site reader pointed out to me that, according to the latest figures from the Bank of International Settlements (BIS), there are not just $750 trillion in credit derivatives in portfolios around the world, as I'd said, but there are now $1,000 trillion. It's nice to know that the credit bubble is still expanding somewhere, but that's $1 quadrillion.
When I was a kid, my friends and I were more comfortable dealing with numbers than with girls, and so we got involved in various number discussions. We learned the names of the large numbers -- hundreds, thousands, millions, billions, trillions, quadrillions, quintillions, sextillions, all the way up to vigintillions. (This is the American system - the European system is a little different.)
We knew that many of these numbers were essentially imaginary. We figured that there might be a million or billion of something. But unless you count atoms and molecules, there was certainly nothing in the trillions (this was the 1950s) or anything higher.
So today we have $1 quadrillion in credit derivatives, and that makes my brain explode.
We've been debating this subject in the new Generational Dynamics forum..
One person suggested that these credit derivatives are imaginary, but they're not. They are very real, and they're like tens of trillions of time bombs that will be going off whenever there's a sufficiently big "credit event." Maybe those credit derivatives are sufficiently interlocked so that the explosion of one time bomb will cause a vast chain reaction. Maybe those credit derivatives are so correlated that there's one particular kind of credit event that will cause 10% of them to explode at the same time.
The thing is, nobody has any idea. There are no measures, no sensors, no devices that tell us the nature of this $1 quadrillion in credit derivatives. They're like a huge ocean that's calm on the outside, but may explode and drown everyone at any time.
So Congress is debating the BOTW -- for $700 billion. $700 billion is 0.07% of $1 quadrillion. It's like tossing a bucket of water into the ocean. It makes no difference at all.
It's worth remembering that the world has been here before, from the point of view of Generational Dynamics. If you go back through history, there are many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash.
These massive generational crashes occur every 70-80 years. Each one occurs when the survivors of the previous one are all gone, and so they're spaced by the approximate length of a human lifetime. We're overdue for the next one.
A web site reader sent me the following:
One just asked about how on Fox they are talking about "Credit Swaps" and asked me if I knew anything about that! It's hit the mainstream!
These are people around my age who are reasonably intelligent professionals. They have IQs of maybe around 120 and have a few hundred thousand in net worth.
They have all left themselves wide open to losses. They have absolutely no idea what is going on. So they have come to me because they don't trust anything they hear from the financial industry and figure I can answer their questions (they admit that). Once I answer them, they just go do whatever I tell them to do. There's no hesitation.
They are telling me how much is in their accounts, exactly what it is, and then asking me what to do with it. I have been warning every one of these people for years and am finding out that they never listened to or absorbed one thing I said! I guess only when two lunkheads like Bernanke and Paulson go on TV and say that the financial system is within days of collapse does it register that oh my God, that's what I've been saying all along.
UNBELIEVABLE!!!"
I wrote back to ask him what advice he gave, so I could repost it, and he sent me the following. This top-notch financial advice from an expert:
Question number two was from a guy who had $250,000 in a Deferred Compensation account. You might know that many people have these types of accounts and that there are only certain options available to them. I told him that "what you would want to do is look at the money market funds offered and then pick a "treasury only" money market fund if they have that option. Otherwise, look at the prospectus for each fund offered and pick the one with the least amount of junk paper in it. That would probably be the one that pays the least interest. The other thing you might be able to do is get into a short term US government bond fund with maturities in the 2-5 year range or something like that."
Question number three was from someone who asked if they should go to the bank and take out their cash and how to do it. I advised them to call the bank and speak to someone who they are familiar with about what they would like to do. I mentioned that any withdrawal over $10,000 will likely trigger a SAR (Suspicious Activity Report) and that will be on file in Federal government database in Detroit for something like 7 years. I advised them to speak with the rep at the bank to confirm that. I warned them not to go to various branches and try to withdraw amounts less than $10,000 in order to avoid an SAR as that is called "Structuring" and is a federal crime. I told them that the bank would not likely have the amount of cash on hand that they were looking to withdraw or may not be wanting to give it up due to liquidity concerns, but that perhaps the bank could order the cash and have it available for pickup the next day. They aborted the conversation before I was able to explain that Federal Reserve notes are partially backed by junk now that the Fed has exchanged their good collateral out through the TSLF, and that t-bills are probably the better option. Although, at this late date I am not really sure whether there would be enough time to establish a treasury direct account and I do not really know whether having a bank hold treasury bills is 100% safe. I think so but am just not sure as I never considered that option."
As usual, it's impossible to predict the exact timing of the coming crisis, but it seems very close now.
Once the full crisis is on, the attitude of the nation will change
dramatically. The Congressmen will stop bickering, and they'll be
only to happy to give plenty of power to someone -- the Secretary of
the Treasury or the Fed Chairman or the next President -- anyone they
think can end the crisis and stop the awful pain.
(24-Sep-2008)
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"Pakistan's 9/11" has left the country in a state of shock, reeling from the terrorist attack in Islamabad, the nation's capital, on Saturday evening. At least 53 people were killed, and 266 were injured.
 |
A huge truck bomb, carrying 600 kg (1300 pounds) of high-quality explosives, exploded at the entrance to the Marriott Hotel. The bomb left a vast crater, 40 feet wide and 25 feet deep, shattering windows in buildings hundreds of yards away. It ruptured a gas pipeline, triggering a huge blaze throughout the hotel.
The Pakistani Government is blaming al Qaeda operatives for the terrorist bombing.
The hotel was located a block or two away from the federal government buildings in Islamabad.
The bombing occurred just hours after Asif Ali Zardari, widower of Benazir Bhutto, who won the election for President just days ago, gave his maiden speech to Parliament, in which he said that Pakistan is passing through a critical phase and must root out all forms of terrorism and extremism from its soil:
Let everyone have an opportunity to make an informed judgment about the risks to our beloved country and about how we should move forward with responsibility and clarity of vision."
At 2 am Sunday morning, he gave another speech, this time to the nation:
[I appeal to] all democratic forces to come forward and save Pakistan.
We will not be afraid of these cowards. We will not fear these cowardly attacks. Pakistan is a fearless and steadfast nation. We Pakistanis believe that our death is in the hands of Allah and we do not fear dying.
Death will come one day but Inshallah (god willing), we will purify Pakistan of this cancer. The day will come when all these people (terrorists) will bow before you."
The successful bombing is a tremendous shock to the Pakistani people. It occurred in the heart of Islamabad - the equivalent would be an explosion a block away from the White House in Washington. For that reason, it's being called Pakistan's 9/11.
It occurred at a time when government meetings were in progress, and the truck supposedly had to pass through five or six security checkpoints to reach the Marriott.
The Pakistanis are going through a process of increasing horror that is very similar to the process Americans are going through over the financial crisis.
Up until 2-3 weeks ago, most Americans were living in a dreamland of denial, believing that the bubble (and their 401Ks) would begin to grow again soon, and that people like me who said we were headed for a financial meltdown were either crazy or motivated by some ideology (though I've never been sure what ideology).
In the last two weeks, Americans have seen some major "terrorist bombings" occur: The Fannie and Freddie nationalization, the Lehman Brothers bankruptcy, the AIG bailout, and now the $800 billion bailout being worked on over the weekend.
These "terrorist bombings" have frightened ordinary Americans, and made them suddenly realize that their savings and their entire way of life are at stake. This is causing an American "regeneracy" to begin -- referring to the end of political bickering, and the restoration of civic unity for the first time since the end of World War II.
(For information about the term "regeneracy," see "Basics of Generational Dynamics.")
Now let's return to Pakistan.
Up until a month ago, when Pervez Musharraf resigend as President, the entire Pakistani population was in a state of total denial about the suicide bombings that were going on. The "logic" was this: The reason for the suicide bombings was that Musharraf was cooperating with the Americans, and the suicide bombings were really targeted at the Americans. And so, the fantasy reasoning continued, when Musharraf goes, then the violence will disappear automatically.
Since then, there have been several "terrorist bombings". The biggest until now occurred two days after the resignation in the town of Wah, just outside of Islamabad. The Pakistani people are now realizing that their entire way of life is at stake.
The reactions will be similar among government officials in Washington and Islamabad:
At some point, something so horrible will happen that a complete
regeneracy will occur, in both America and Pakistan, and then the
real crisis will begin.
(22-Sep-2008)
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Discuss world events and generational theory.
I've been wanting to set up a Generational Dynamics forum for a long time, and I now have.
I know a lot of people have wanted to be able to discuss the issues of this forum with other people, and now you have a place to do it.
The forum address is http://GenerationalDynamics.com/forum.
I'm hoping to have invited guests give e-lectures and possibly even e-courses in the future.
I thank the ever-increasing number of readers of this web site for continuing to visit, and I hope that this forum adds value for you.
You can still use the comment link at the top of the page to send me an individual comment.
For all my online friends and acquaintances, I wish you the best as
we're apparently very close to entering a true crisis period. I hope
that this web site has helped you prepare for this day, and I hope
that this web site can continue to help you get through it.
(21-Sep-2008)
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Congress and administration officials are working through another weekend to try to find a way to prevent a systemic financial crisis.
According to the NY Times story:
WASHINGTON It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.
Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.
When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.
As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program Good Morning America, the congressional leaders were told that were literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.
Mr. Schumer added, History was sort of hanging over it, like this was a moment.
When Mr. Schumer described the meeting as somber, Mr. Dodd cut in. Somber doesnt begin to justify the words, he said. We have never heard language like this.
What you heard last evening, he added, is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.
Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.
You have the credit lines in America, which are the lifeblood of the economy, frozen. Mr. Schumer said. That hasnt happened before. Its a brave new world. You are in uncharted territory, but the one thing you do know is you cant leave them frozen or the economy will just head south at a rapid rate.
As he spoke, Mr. Schumer swooped his hand, to make the gesture of a plummeting bird. You know wed be lucky ... he said as his voice trailed off. Well, Ill leave it at that. ...
Lawmakers in both parties described the meeting in Ms. Pelosis office on Thursday night with Mr. Paulson and Mr. Bernanke as collaborative, and that they were prepared to put politics aside to address the needs of the American people."
According to several commentators on Friday, a major issue being address is a possible worldwide panic on money market funds. Furthermore, the effects of the Lehman Brothers bankruptcy are still being felt.
From the point of view of Generational Dynamics, there are three important points:
What we're seeing now is the first signs of the regeneracy. This situation is so serious that political bickering has been sharply reduced, though not yet eliminated. Once an actual panic occurs, then the real regeneracy will occur.
(For information about the term "regeneracy," see "Basics of Generational Dynamics.")
I'll repeat what I've been writing for the last six months:
I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate.
Things must be very close now, and I could probably increase the "3%" figure to about 10%.
A big sign of how close things are is the major "crash upward" in
several of the world's stock markets -- 6% in two days on Wall
Street, 8% in Europe, and 26% in Russia.
(20-Sep-2008)
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Stock markets stage huge comeback as giddy investors pile in.
Exactly one year ago today, central bankers here and in Europe flooded the markets with liquidity, far in excess of what had been expected.
The results were spectacular. The credit crunch was brought to a halt. The markets had been falling, but now they shot up 2½% in a single day. They kept on going on, reaching a new high on October 9.
Do you remember what that massive monetary loosening was, Dear Reader? The fed lowered the Fed Funds rate by a full ½ point, when only ĵ point was expected. At the same time, the Bank of England guaranteed that depositors in the faltering Northern Rock Bank would be safe.
What was huge and massive a year ago now seems like a tiny baby step. Since then, Northern Rock Bank has been nationalized. Several American financial institutions have been rescued or nationalized as well -- many in just the last two weeks!
 |
On Thursday, government officials took two major new actions:
It's worth noting that the credit crunch is not in money generally, but most specifically in US dollars. The Fed will make dollars available to foreign banks, which can then lend the money to other banks and businesses.
This is similar to actions taken by the Fed in the past, except that it involves a much larger chunk of money.
This new agency would buy up all those pesky near-worthless CDOs and other mortgage-backed securities.
The first announcement didn't cause much of a stock market rally at all. It was the second announcement that really caused the big rally.
Did you get that, Dear Reader? The infusion of $180 billion of new capital didn't have much effect, but the announcement that government officials were going to have a meeting caused a huge market rally. I've said this a million times, but it's worth saying again: What's happening on Wall Street has absolutely nothing to do with reality.
The idea behind this new agency (the revival of the RTC) is that it would restore the banking system by buying up all the outstanding securities that had turned out to be worthless.
Does the US government have enough money to do that?
"Well of course it does," you might say. "The government can print all the money it wants."
Well, that has certain practical difficulties. A few days ago, we described how the Fed was almost out of money.
The Treasury Dept. could sell Treasury bills, or offer them in exchange for near-worthless mortgage-back securities, but how much are we talking about?
A new report published by Standard & Poors on Thursday (summarized on the FT Alpha site) says that things are getting worse.
 |
What's interesting about the above chart is that it shows that the loss assumptions are worse for securities issued in 2006 than for securities issued in 2005, and worst of all for securities issued in 2007.
I've pointed this sort of thing out many times on this web site, and it's very important. By 2006, and certainly by early 2007, it was obvious that the assumptions underlying the creation of these securities were fallacious. But instead of stopping the issuance of faulty securities, the investment banks issued MORE of them, with even MORE faulty terms. This is circumstantial evidence of massive fraud.
But now turning to Thursday's S&P report:
The market is still searching for an equilibrium price on trillions of dollars of structured securities, in particular at the higher end of the ratings spectrum."
So according to S&P's report, there are trillions of dollars of more bad news to come.
The Federal government's budget deficit is twice as big as last year's deficit. The deficit was just under $300 billion for the first 9 months of the fiscal year, and raising that deficit by an additional trillion or two is not politically feasible.
The word "trillions" may be misleading because it leads you to think it might be just a few trillion. Keep in mind that there are $60 trillion dollars in credit default swaps outstanding, and there are $700 trillion of credit derivatives outstanding.
There is simply no possibility that the federal government will absorb all the losses endured by banks through worthless mortgage-back securities.
That's what makes Thursday's huge rally so remarkable. It was based on a meeting, a rumor, a plan, and an implied promise that can't possibly be fulfilled. But that's standard for investors, isn't it.
As I've said, it's really clear that no one has any idea what's going on or what's going to happen next. Look at all the historic events that have occurred in the last few days -- they were all unthinkable as of just a week or two ago.
Listening to pundits on Thursday, you hear statements like this: "This was more of the same, but it's a LOT more of the same. The Fed has to get ahead of the problem. By flooding this money into the banking system, and taking these steps, people will begin to regain confidence in the financial system again. This is the time to buy stocks -- there are a lot of bargains out there, at prices we haven't seen in years. A lot of people will be kicking themselves in a year or two for not buying now, when prices are so low."
These are commonly held views, and they're absolutely incredible. They say that fundamentals are completely irrelevant to the current crisis. The only thing that matters, according to this view, is "confidence," and that depends only on putting on a big circus in Washington, with lots of jawboning.
I started criticizing this "jawboning as policy" concept in 2004. It took me that long because I needed a very long time to realize that government official like Ben Bernanke could actually hold this moronic view.
Here's what I wrote at that time (17-Sep-04) in Federal Reserve congratulates itself on jawboning policy:
The spectre of deflation forces a historic change in economic theory:
Economists are shocked that the fight against inflation is over....
(8-Nov-2008)
What's coming next: Understanding the deflationary spiral:
Why are the dollar and the yen getting stronger, while the euro is getting weaker?...
(27-Oct-2008)
Roubini: The situation is "sheer panic," as hundreds of hedge funds are going bust:
Policy makers may need to close markets for one or two weeks....
(24-Oct-2008)
There's never before been a day like this on Wall Street.:
Possible exception: One of the days just before or after the 1929 crash....
(11-Oct-2008)
Ben Bernanke's Great Historic Experiment is at the brink:
Desperation sets in as credit markets continue to seize up....
(25-Sep-2008)
Government promises to buy bad debt to end the credit crisis:
Stock markets stage huge comeback as giddy investors pile in....
(19-Sep-2008)
Another stunning and historic bailout: Fannie Mae and Freddie Mac:
Giddy investors are popping the champagne corks....
(9-Sep-2008)
Long-term negative market trends asserting themselves strongly:
Stock and commodities prices plummet as worldwide foreclosures and recessions worsen....
(5-Sep-2008)
Money supply contracts dramatically, as credit markets continue to seize up.:
Former IMF chief: Worst of global financial crisis is yet to come....
(24-Aug-2008)
As commodities plummet worldwide, the meaning is unclear.:
We speculate on some possibilities....
(11-Aug-2008)
Alan Greenspan calls this a "once in a century" liquidity crisis.:
Says that the "big surprise" is the "impressive" American economy...
(3-Aug-2008)
More questions from readers on finance and investing:
Anxious readers wonder what's going on, what to do next....
(18-Jul-2008)
Pundits and analysts are baffled by the market's performance:
They have some interesting fantasies, as well....
(10-Jul-2008)
Questions from readers on finance and investing:
On fraud, the FDIC, China, and other subjects....
(23-Jun-2008)
Royal Bank of Scotland issues global stock crash alert:
"A very nasty period is soon to be upon us - be prepared,"...
(18-Jun-2008)
A clearer explanation of credit default swaps.:
How credit default swaps (CDSs) present a systemic risk to the global financial system...
(4-Jun-2008)
WSJ's page one story on Bernanke's Princeton "Bubble Laboratory" is almost incoherent:
So is Thursday's speech on bubbles by Fed Governor Frederic S. Mishkin....
(18-May-2008)
Brilliant Nobel Prize winners in Economics blame credit bubble on "the news":
Meanwhile, the deflationary spiral is in progress, but hyperinflation is not....
(27-Apr-08)
Investment bank UBS is now "writing down" clients' auction rate securities:
From individual investors to tech firms, people are losing their money....
(29-Mar-08)
Both consumer and commercial credit is disappearing as deflationary spiral accelerates:
Wall Street markets plummet 3% on Tuesday, as service sector contracts sharply....
(6-Feb-08)
Will hyper-inflation make the dollar worthless (like the Weimar republic)?:
I've gotten this question several times this week from web site readers,...
(21-Dec-07)
Questions and answers about the "credit crunch":
What's going on, and what you can do about it....
(6-Dec-07)
Understanding deflation: Why there's less money in the world today than a month ago.:
As the markets continue to fall, the Fed is increasingly in a big bind....
(10-Sep-07)
Bernanke's historic experiment takes center stage:
An assessment of where we are and where we're going....
(27-Aug-07)
Ben Bernanke's Great Historic Experiment:
Bernanke doesn't believe that bubbles exist. His Fed policy will now test his core beliefs....
(18-Aug-07)
Japan's real estate crash may finally end after 16 years:
To see where America is going, look what happened in Japan....
(20-Feb-07)
This week's financial data points to trend back toward deflation.:
Several inflationary indicators are down for June...
(17-Jul-04)
| ||
The claims are based on a study led by Fed Governor Ben Bernanke. The study found that merely by making statements that interest rates would be kept low for a "considerable period," the Fed changed public expectations so much that the values of stocks increased from 2003 to 2004. The conclusion is that the Fed can continue to use verbal statements to affect the economy positively.
I cannot say how strongly I disagree with this conclusion. It presumes that stock prices are based totally on emotions, and not on fundamentals.
Maybe that does work once, for a few months, but could Bernanke and the others possibly believe this strategy could ever work again? The only reason it worked this time is because it's never been used before. If it's ever tried again, people will remember, and won't be fooled a second time. ...
What really bothers me about all this is that Fed governors actually seem to believe this stuff.
I listen to high-priced analysts on TV all the time, and for them there's never any bad news. When stocks go up it's good news because stocks are going up; when stocks go down, it's good news because prices are low and people can buy more stocks cheaply. If these analysts were more balanced in their appraisals I might find them more credible, but when it's good news all the time, my conclusion is that they're in a serious state of denial.
Bernanke's report leads me to conclude that the Fed governors are in denial too, if they really believe that they can continue to get away with using a jawboning policy.
As we've previously said, the fundamentals are clear that we're in a period of long-term deflation, and can expect prices to fall by 30% in the next few years. Jawboning might postpone (and indeed has postponed) that result, but the fundamentals will win out sooner or later."
In 2004 I was simply astonished, but today it infuriates me that our Fed Chairman could believe such blithering nonsense, and is basing his entire policy on it.
Thursday's announcements are just more of the same that we've been getting for years. Say the right thing, do the right dance, have the right ringmaster, and investors will "regain confidence," and start expanding the bubble again. The journalists eat it up, the analysts sagely agree. What a pathetic bunch of idiots running things.
There's still a lot of debate surrounding the question of whether we're headed for a deflationary spiral versus whether we're headed for hyperinflation.
Hopefully, those who still believe that we're headed for hyperinflation will be able to see for themselves in the next few days how impossible that is.
The Fed is now injecting $180 billion of new money into the banking system. That should cause enormous amounts of hyperinflation right there.
Instead, what you'll see is a continuing deflationary spiral.
The credit bubble created hundreds of trillions of dollars of new money. The credit bubble is leaking now, and those trillions of dollars are disappearing. The Fed is injecting $180 million, and that's a tiny, paltry, drop-in-the-bucket sum compared to the leaking of the credit bubble.
On Thursday afternoon at about 4:30, CNBC reported "an astounding headline" that total money market fund assets are down $169 billion in the last week. This is based on a a new report by the Investment Company Institute.
This adds to other anecdotal evidence that panic selling is increasing.
This has been happening on international markets as well. The worst hit is the Russian stock market, whose index has fall 60% in the past quarter. Panic selling has been so prevalent that Russian President Dmitry Medvedev has had to shut down the stock market for most of the week.
See "Panic selling may be close, as money market fund 'breaks the buck,'" for more information
on the consequences of panic selling.
(19-Sep-2008)
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The man with 86 wives, and a fatwa against Mickey Mouse.
Saudi cleric Sheikh Muhammad Munajid is at it again.
 |
Last month, he was criticizing the Olympics games as impure because there were bikini-clad women competing.
Now he says that Mickey Mouse must die!:
If a mouse falls into a pot of food if the food is solid, you should chuck out the mouse and the food touching it, and if it is liquid you should chuck out the whole thing, because the mouse is impure.
According to Islamic law, the mouse is a repulsive, corrupting creature. How do you think children view mice today after Tom and Jerry?
Even creatures that are repulsive by nature, by logic, and according to Islamic law have become wonderful and are loved by children. Even mice.
Mickey Mouse has become an awesome character, even though according to Islamic law, Mickey Mouse should be killed in all cases."
But Mickey Mouse's troubles don't compare to the troubles of Mohammadu Bello Abubakar, a Nigerian man with 86 wives and 170 children.
In the Quran, Mohammed limits the number of wives that a man can have to 4. (Polygamy is absolutely essential in warring societies, since a woman whose husband is killed in war still needs the protection of a husband.)
So Abubakar was arrested, and charged with "insulting religious creed" and "unlawful marriages".
When I heard this story reported on the BBC, the (female) anchor said that "a man can get into a great deal of trouble with 86 wives."
Abubakar was quoted as saying, "Only a real man could handle 86 wives. Other men would have difficulty handling even just 10 wives."
To which I would add: A lot of men get into trouble with just one
wife.
(18-Sep-2008)
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It's beginning to sink in.
One reader wrote as follows:
Hell, the week isn't over yet!
That's my expectation.
It's a weird feeling just sitting here and watching the market crash. You can see it coming but there's not a blessed thing you can do about it."
It's never too late to start preparing. Don't wait until you run out of choices. Take steps today to preserve as much money as you can.
Amazing! An analyst who actually takes price/earnings ratios into account! They'll probably have to fire him now.
This comes from someone in the Silent generation:
Brother, can you spare a dime?
I am SO glad I paid off the house and car and rental condo, moved my account over to [a Federal Credit Union], and got a lot of the major work done on the house, yard, and self before this hit. It's a pity I am no longer up to such things as putting in vegetables myself.
I've been advising people to seek out any genuine Senior Citizens among their kinfolk and acquaintances and get their stories before it's to late."
This is a sensational idea. If you have somebody in your life who's 70 years old or older, then get a tape recorder and go talk to that person. Find out what you're going to be facing in the next few years.
The following is from an old online friend, living in Florida:
Here's what I wrote in answer to a question from a web site reader several months ago, "More questions from readers on finance and investing":
Answer: "Picture a world where you're a 30 year old father with 3 kids under 5, you've lost your job with no hope of getting another job, so you and your family have to live for the foreseeable future on what you have today. How would you change your life?
You would save every penny, knowing that if you can save a dollar today, then that dollar may save your life a year from now. You would cut out every expense not necessary for survival - magazine subscriptions, piano lessons for the kids, clothes, movies, pizzas, wide-screen tvs, lights left on when nobody's around, driving when you can take the bus, etc., etc.
The best advice I can give you is to speak to your family now, tell them what's coming and why you have to save every penny, and then follow through.
One more thing: Many people should start thinking about moving in together. Two families sharing a home will save a lot of money. If your rich cousins have a couple of extra bedrooms in their mansion, ask them if you could live there. You'll both save a lot of money."
I thank the ever-increasing number of readers of this web site. I spend most of my spare time on this web site, but it's you that make it all worth it.
The amount of e-mail has been increasing, but I'm still managing to answer pretty much all of it, although sometimes it takes me longer than it used to. As usual, you're invited to send me a comment or question via the "COMMENT" link at the top of each page.
I'll end with the same message I've given many times: No politician can stop what's coming, any more than they can stop a tsunami. You can't stop what's coming, but you can prepare for it. Treasure the time you have left, and use it to prepare yourself, your family, your community and your nation.
Once again, my friends: Treasure the time you have left.
(18-Sep-2008)
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Ordinary people with 401Ks will start losing their investments.
For the average man trying to raise a family and hoping that his 401K and other investments are safe, the year-long credit crisis, with its talk of "collateralized debt obligations" and "credit default swaps" has been something that affected only major institutions, not him.
For him, the soothing words of government officials that "the fundamentals are sound" and "nobody has lost money in an FDIC-insured account in 50 years" have been all he needed to continue to trust that the "system" is OK, and that he and his family are OK. In particular, he felt that his money market funds are ok.
Now a money market fund has announced that it will "break the buck." The value of its assets has fallen sharply, thanks to big investments in the now bankrupt Lehman Brothers.
The Reserve Primary Fund, run by the New York-based Reserve Management Corp., is reducing the value of its shares from $1.00 per share to 97˘ per share. This means that a person with a 401K who had $10,000 invested yesterday has only $9,700 today. Actually, he can't get his money out at all, so really he has no money today.
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There's panic in the air. The soothing words of politicians are no longer working. People no longer worry about whether they can earn ĵ% more interest; they're worried about losing their money.
Several commentators have said that there's anecdotal evidence that people are already pulling money out of their money market funds, and S&P is keeping its eye on 9 other money market funds that may be close to the same decision, thanks to heavy investments in Lehman.
A lot of people where hoping that the bailouts of Fannie and Freddie, and then of AIG would end the problems. I heard some total idiots on CNBC Wednesday say that stock prices are poised to take off.
But, Dear Reader, nothing has changed. ABSOLUTE NOTHING. The real estate bubble is still collapsing. Thanks to "resets" in adjustable rate mortgages, the foreclosure rate will continue at least well into 2010. There's no question about this. Bailing out AIG has NOTHING to do with that. And price/earnings ratios are still at astronomical levels. Bailing out AIG has nothing to do with that either.
You have to understand, Dear Reader, that NOTHING has changed. This cannot possibly get better. It MUST get worse, MUCH worse. It's a mathematical certainty, no matter what the idiots on CNBC or in Washington or on the campaign trail say.
As we've said many, many times, from the point of view of Generational Dynamics, if you go back through history, there are many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash.
These are called "generational crashes" because they occur every 70-80 years, just as the generation of people who lived through the last one have all disappeared, and the younger generations have resumed the same dangerous credit securitization practices that led to the previous generational crash. After each of these generational crashes, the survivors impose new rules or laws to make sure that it never happens again. As soon as those survivors are dead, the new generations ignore the rules, thinking that they're just for "old people," and a new generational crash occurs.
I've described a generational crash as an elemental force of nature, like a tsunami. There will be millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, and not having believed it was even possible, suddenly in a state of total mass panic, trying to sell all at once. It's impossible to predict the date when that will happen, but it's going to happen with absolute certainty.
It's worth noting that at the end of Wednesday's trading session, the
Dow Industrials index was 26% below the high that occurred last
October, as you can see from my Dow Jones historical page. At this depth, a massive panic becomes
increasingly likely.
(18-Sep-2008)
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In a stunning turn of events that is widely recognized as desperate, the US will become 80% owner of American International Group (AIG) Inc., the world's largest insurer, in return for an $85 billion loan.
The alternative was that AIG would declare bankruptcy. AIG stock lost 21% on Tuesday alone, ending at $3 per share, down from $70 a year ago.
Government officials felt that they had no choice, because of "systemic risk."
AIG and its subsidiaries don't just provide insurance for cars and homes. They also provide insurance for corporate defaults, in the form of credit default swaps (CDSs).
The nationalization of Fannie Mae and Freddie Mac 10 days ago caused a "CDS event," as I described last week. Last week's CDS event is causing interlocking CDSs to unwind. That process is still ongoing, and it's final result is still unknown.
(For a discussion of credit default swap (CDS) counterparty risk, see "Brilliant Nobel Prize winners in Economics blame credit bubble on 'the news.'")
An AIG bankruptcy would cause a much large CDS unwinding. AIG is insuring $441 billion of fixed-income investments, including $57.8 billion in mortgage-backed securities.
There have already been $25 billion in CDS asset writedowns for AIG in the last nine months, and there will be more. But if AIG were to go bankrupt, then it would have cost OTHER companies some $180 billion dollars.
(As the old saying goes, a billion here and a billion there, and pretty soon you're talking about real money.)
As regular readers of this web site know, we're less interested in the specifics of actual events than we are in changes of behavior and attitude. The Fed and the Treasury Dept. were widely praised a couple of days ago, when they didn't bail out Lehman Bros., but let the investment bank go bankrupt.
If you look at the hierarchy of financial organizations that are crucial to the operating of a healthy worldwide financial system, you have central banks (like the Fed or the European Central Bank or the People's Bank of China) at the top of the heap. The next layer is commercial banks, like Citibank and Bank of America; commercial banks are highly regulated, but have always had access to central bank funds in case of emergency. The next layer is investment banks, like Bear Stearns and Lehman Brothers; the Fed arranged an orderly collapse of Bear Stearns and received much criticism, in contrast to the praise for allowing Lehman Brothers to simply go bankrupt.
Normally, an insurance company would be so many layers down that no one would ever consider allowing the government to bail it out.
That's why Tuesday's actions are so stunning and breathtaking.
In order for Tuesday's actions to occur, the financial community, and the public in general, must believe that the situation is so entirely desperate that there's no choice.
Nonetheless, this decision will be widely debated.
From the point of view of Generational Dynamics, we see the acceleration of events. We first had Bear Stearns in March. The past ten days have been incredible!! We make history every day! First Fannie and Freddie, then Lehman, now AIG. Oh, and let's not forget that Merrill Lynch is going out of existence -- it is being acquired by Bank of America.
Compare this preceding paragraph with the following one, which I wrote last year in "The bubble that broke the world":
This is the kind of thing that we're headed for. As usual, precise
dates cannot be predicted, but we seem to be accelerating in that
direction. If you haven't read "The bubble that broke the world," you should do so
now.
(17-Sep-2008)
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The pictures tell the story.
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Nobody knows what's going to happen next.
But there is one thing that will happen for sure at some point: A massive generational panic and crash, when millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, and not having believed it was even possible, suddenly try to sell everything in a mass panic. This will bring down computer systems for hours, perhaps even for a day or two, as people watch tv in glazed horror as their life savings disappear.
I've estimated that the probability of a major financial crisis (generational stock market panic and
crash) in any given week from now on is about 3%. The probability of
a crisis some time in the next 52 weeks is 75%, according to this
estimate.
(16-Sep-2008)
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As McCain and Obama converge on the Iraq issue, Afghanistan is rarely mentioned.
Bob Schieffer on Face the Nation gave some Sunday morning advice to the candidates on using farmyard animals in their campaign speeches:
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But if this campaign is going to be about animals in the news, here are some helpful references that I offer to which ever side wants them.
For example, if a candidate looks frazzled, describe him as "looking like a horse that was rode hard and put away wet." I got that one from a guy I used to work with here.
If it comes down to one of those "what if" situations, try the old bullfrog parable that "if bullfrogs had side pockets, they'd carry six-shooters, and wouldn't be afraid of snakes."
Or this one: "If the dog hadn't stopped to use the phone, he would have caught the rabbit."
If a candidate gets stage fright during the coming debate, his opponent may want to charge him with being "nervous as a cat in a room full of rocking chairs."
Being from Alaska, Gov. Palin probably knows this one: "Unless you're the lead dog pulling the sled, the scenery is the same wherever you go." I have no idea how to use that one, but it does present an interesting word picture.
I hope the candidates find these suggestions handy.
On the other hand, they may find my suggestions "about as useful as socks on a rooster."
But no matter. I just think we need to get past this debate on lipstick. It's just sooooo cosmetic."
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So the lipstick debate continues to be a sign of the times. The debate all this past week has just been a rehash of the 1960s "women's lib" debate.
I can't recall hearing the word "Afghanistan" on the Sunday morning news shows (though I did see it appear on the bottom of the screen scroll on CNN).
If any candidate spends even five minutes during the week talking about Afghanistan, then that would be the most important five minutes of the week.
In whatever brief remarks they ever make, when they talk about Afghanistan, they're all generally extremely confrontational and warlike.
As we head for a major war in that region, it's a shame that we end
up spending so much time talking about barnyard animals.
(14-Sep-2008)
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The nominal deadline: 7 pm ET Sunday, when the Asian stock markets open.
In March, it was Bear Stearns. Last weekend, it was Fannie Mae and Freddie Mac.
This weekend it's Lehman Brothers Holdings Inc.
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As we wrote several days ago, the investment bank Lehman Brothers appeared close to collapse. Not only that, but no one on Wall Street or in Washington had any idea at all what's coming next.
There's a growing sense of panic on Wall Street and Washington, as the financial system that's served since the Great Depression appears to be crumbling. Last year I compared the financial system to a huge, bloated mansion, where different gables and rooms and other portions keep falling off into the ravine below. Central bankers run around the mansion with hammers and nails and glue, but pieces keep falling off, and the fear grows that the entire mansion will collapse into the ravine.
According to an article in Friday's WSJ:
With the share prices of Lehman Brothers Holdings Inc., Merrill Lynch & Co. and other financial firms on a roller coaster, the crisis could be entering a critical stage.
The Federal Reserve has already slashed interest rates to counteract a deepening credit freeze and instituted its broadest expansion of lending facilities since the Great Depression to keep financial markets functioning. Over the weekend, the nation's two main mortgage finance firms -- Fannie Mae and Freddie Mac -- were placed under government control.
Federal officials and market players are struggling with the same issues: Why haven't the steps taken so far calmed the system? What can policy makers do next? Should the U.S. government let a big institution fail rather than stage another potentially costly bailout?"
Washington and Wall Street officials are getting desperate. On Friday evening, the heads of major Wall Street firms were summoned to a meeting by government officials from the Fed and Treasury Dept. They said, in no uncertain terms, that Lehman must be rescued, through sale of the company or some kind of orderly liquidation.
According to a NY Times article:
Mr. Geithner told the participants that an industry solution was needed, no matter what, and that it was not about any individual bank, according to two people briefed on the meeting but who did not attend. They said he told them that if the industry failed to solve the problem their individual banks might be next. ...
Policy makers fear its losses could ripple through the financial industry at a time when banks and securities firms are trying to overcome $500 billion in write-downs."
What's interesting is that game of "chicken" is being played:
Bank of America and two British firms, Barclays and HSBC, have expressed interest in bidding for Lehman Brothers, according to people briefed on the situation. But they have indicated that their bids are contingent upon receiving support from the government, just as it did with the rescues of Bear Stearns, and the government-sponsored agencies, Fannie Mae and Freddie Mac.
But Mr. Paulson and Mr. Geithner made it clear to the company, its potential suitors and to the meeting participants on Friday that the government has no plans to put taxpayer money on the line. The government is deeply worried that its actions have created a moral hazard and the Federal Reserve does not want to reach deeper into its coffers. Instead, Mr. Paulson and Mr. Geithner insist that Wall Street needs to come up with an industry solution to try to stabilize Lehman Brothers and calm the markets.
Still, some of the other Wall Street banks, facing billions of dollars in losses themselves, have resisted this approach. They argue that Lehman Brothers overreached and brought its current troubles on itself. If there are no bidders for Lehman Brothers, these banks say they can collect their collateral and liquidate the troubled firms assets. In this high-stake game, they may also be trying to call the governments bluff, knowing that if push came to shove, it would provide financial support."
The tension and anxiety are palpable. I heard pundits describe the situation as "scary."
The banks are demanding that the government backstop any deal, just as the government has already backstopped the deals with Bear Stearns, Fannie and Freddie.
The government is saying that this kind of backstopping has got to stop because of "moral hazard." In this view, the problems have been getting worse because the previous backstopping has encourage more bad behavior among banks, who assume that they'll be bailed out.
Since nothing that either the banks or the government have tried is working, they're essentially blaming each other for causing the problems, and "struggling to understand" why nothing they do has worked.
Maybe now is a good time to re-post the graph that I've posted many times before.
As I've been saying hundreds of times since 2002, the stock market is overpriced by a factor of more than 200%, as I described in "How to compute the 'real value' of the stock market," indicating that we're entering a new 1930s style Great Depression. In 2002 I had no idea what scenario we would follow to reach that point, but the end result has always been certain with 100% probability.
Here's the first graph that I used in that article:
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The historic average of the P/E1 (price divided by one-year trailing earnings) is about 14. From 1995 to the present, it's averaged around 25, creating a huge bubble. By the Law of Mean Reversion, the price/earnings ratio will fall well below 10 for a dozen years or so. You can see that it's poised to fall quickly in the near future, leading to a stock market crash.
So when I see a sentence like, "Officials and market players are struggling to understand why the steps taken so far haven't calmed the system," I come away amazed. The above graph, and the article that it's from, are not based on some fantastical computational algorithms (like the ones that "financial engineers" used that got us into the structured finance mess.) Nor is the above based on some specific political ideology or some specific economics ideology (like the "Austrian school" or "Keynesian economics" or "monetarist economics."
This is a simple price/earnings computation (also called "valuations") that Wall Street uses all the time. And anyone can see, just by glancing at it, what's coming.
So why are these people "struggling to understand"? Are they total morons?
There's a principle, in ethics and in law, that public figures who might influence investors MUST tell the truth. Depending on how you interpret this, public figures might include government officials, corporate CEOs, financial journalists, financial analysts, and so forth.
Unfortunately, with the breakdown in ethics that's occurred in the last ten years, as Boomers and Gen-Xers have taken senior management positions everywhere, the forces of political correctness have decreed that certain lies are "good," and certain lies are "bad."
An example of a "bad lie" was pointed out by the SEC in July: "False rumors can lead to a loss of confidence in our markets. ... During the week of March 10, 2008, rumors spread about liquidity problems at Bear Stearns, which eroded investor confidence in the firm, ... and a crisis of confidence occurred late in the week."
And so, if someone anonymously posts a rumor -- and the rumor later turns out to be false -- and the rumor was negative in nature, then it's a "bad lie." Of course, the rumors they're talking about turned out to be true.
On the other hand, if a corporate CEO or a government official says something POSITIVE, rather than negative, then the rumor is a "good lie," even if the rumor turns out to be false.
For some reason, a negative rumor posted anonymously by someone deserves the harshest condemnation, even though only the stupidest investor would ever believe an anonymous rumor. It's a "bad lie," even if it turns out to be the truth.
But a positive rumor, stated openly by public officials is a "good lie," even though it causes thousands of investors to lose a great deal of money.
That's how twisted everything is today.
And so, for example, several months ago, government officials told the public that Fannie Mae and Freddie Mac were sound, and that the public should invest in Fannie and Freddie stock as a good, solid, long-term investment.
Unfortunately, those shares were wiped out last weekend, when Fannie and Freddie were effectively nationalized.
So you might say, "Well, six months ago these government officials didn't know what would happen. They weren't lying; they were simply mistaken."
Ahhh, but the ethics are MUCH more complicated than that.
Because the same government officials who encouraged investors to buy stock shares also were responsible for structuring the nationalization effort in such a way that those stock shares would be wiped out.
The reasoning is simple: People who buy stock shares own a part of the company. They make money if the company does well, and they lose money if the company is does poorly, or is nationalized.
This is the concept of "moral hazard" that everyone talks about. If the government bails out the stock holders after bad behavior by the company, then the government is encouraging more bad behavior.
In other words, if I sell you my car, telling you it's in great shape, and you pay me, but then I smash it up as I'm delivering the car to you, who's responsible for the smashup? You? Me? The car?
I think you would say that I owe you a refund, and it would make no difference if I told you that I wasn't lying when I sold it to you.
At any rate, stock fund manager Bill Miller of Legg Mason Value Trust purchased 79 million shares of Fannie and Freddie, at prices ranging from $5 to $50 per share. By Tuesday, shares were selling at 88 cents each, and so investors in this mutual fund lost some 90% of their investments.
By contrast, bond fund manager Bill Gross of Pimco Total Return invested almost $100 billion in Fannie and Freddie bonds. The nationalization was structured so that bond holders would be protected, and so investors in his mutual fund gained some 20% on their investments.
Can anyone tell me why the deal was structured so that one mutual fund was wiped out, while the other made huge amounts of money? Why is one "moral hazard," and the other isn't?
Was Bill Miller just being naïve when he believed government officials who encouraged investors to purchase Fannie and Freddie stock shares? Or was he swindled when those same government officials actively reneged on their statements and pulled the plug on stock shares?
So now we hear that these same people are "struggling to understand why the steps taken so far haven't calmed the system." I said that these people must be morons, but there's more.
These people say any crap that they want, with no regard for the truth. The lie to themselves, to each other, and to the public.
And as I discussed in "Brilliant Nobel Prize winners in Economics blame credit bubble on 'the news'," with respect to Joseph Stiglitz, 2001 Nobel Prize Winner in Economics, not only do these guys say any crap that comes into their head, not only do they lie to themselves, each other and the public, they also think that all the rest of us are idiots. Because if a Nobel Prize winner in economics can say such incredibly stupid and inane things and get a Nobel prize, then obviously his assessment of people as idiots must be correct.
As I've said many times on this web site, the stench of corruption and fraud is beyond belief, and it constantly sickens me and infuriates me. These people on Wall Street and in Washington and in university economics departments are so depraved that it's almost impossible not to throw up. See: "'Operation Malicious Mortgage' indicts 406 people including Bear Stearns execs."
The real "moral hazard" is listening to anything that these people say.
Something happened last weekend that's never happened before: The nationalization of Fannie and Freddie caused a "CDS event" involving trillions of dollars of credit default swaps.
Recall that a CDS is a contract between two people, that acts like an insurance policy. The insurance pays off if the company named in the CDS (usually a completely unrelated third company) defaults on its bonds.
If you have fire insurance on your home, then a "fire insurance event" that triggers payment of the insurance is a fire in your home.
If you have a CDS for some company, then a "CDS event" triggers payment of the insurance.
Well, the nationalization of Fannie and Freddie caused a "CDS event" linked to Fannie's and Freddie's bonds. It potentially could trigger trillions of dollars in payments.
This is ironic, of course, because it's the stock holders that lost 95% of their investment. The nationalization protected the bondholders with government guarantees, so bond holders actually made money. So although trillions of dollars in CDS payments might be theoretically possible, in actual practice the payoffs will be very small, or nonexistent.
So there you go. The reason that the nationalization was structured to protect bondholders is that they didn't want to trigger large CDS payments. All that stuff about "moral hazard" was just more crap. Moral hazard had nothing to do with it.
Question: How can you tell whether a government official, or financial executive, or financial journalist or financial analyst or financial commentator is lying? Answer: Watch to see whether his mouth is moving.
(For those interested in the math behind the creation of CDOs from CDSs, see "A primer on financial engineering and structured finance." For a discussion of credit default swap (CDS) counterparty risk, see "Brilliant Nobel Prize winners in Economics blame credit bubble on 'the news.'")
Speculators are beginning to see a pattern here:
One way to tell whether the market thinks that a company is close to default is to watch the cost of credit default swaps (CDSs) that insure the company's bonds.
Take American International Group (AIG) Inc., the largest U.S. insurer, for example.
In May, I wrote about AIG's sad story. Last December, they had put on a spectacle bragging about how clever they had been, avoiding the writedown disasters that had struck Citibank, Merrill Lynch, and other companies. In May the announced massive first quarter writedowns, and were silent about whether there were more to come.
AIG has been suffering further losses, but Rodney Clark of S&P's ratings agency says, "AIG has sufficient capital and liquidity to meet its policy obligations and potential collateral requirements, which are significantly greater than the expected cash losses on the mortgage-related assets." Given the track record of these agencies, this statement may be anywhere from a near-truth to a total lie. History provides no reason to believe it since, if it's a lie, it's a "good lie."
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Still, the market apparently doesn't believe S&P. (I wonder why?) We know this because the price of credit default swaps on AIG debt has ballooned.
On Thursday, you could buy CDS insurance protection on $10 million of AIG bonds for $668,000 per year. On Friday, it had shot up to $764,000 per year. For comparison, "normal" rates are about $100,000 per year.
Moving into the realm of banks, Washington Mutual (WaMu) Inc. has also seen its CDS prices balloon. To protect $10 million of WaMu bonds against default for 5 years, investors must pay about $4.15 million up front, and $500,000 annually, to protect $10 million of WaMu bonds against default for five years.
AIG and WaMu are now going through the same kind of shelling that brought down Bear Stearns and Lehman. Whether these two companies can survive much longer remains to be seen.
The Generational Dynamics forecasting methodology has, in summary, two components: The first is a long term trend component that tells you where you're going to end up, but doesn't tell you how you'll get there, or how long it will take. The second is the collection of short-term daily events that lead you to the final result. You use the long-term trend component to guide your interpretation of the short-term events. The result is a forecast with a very high probability of success (usually 80-90% or more), in a time frame of a few weeks or months.
Every analyst and pundit tries to make forecasts based on short-term events. Their forecasts have only a 50-50 chance of being right, because basically they're guesses. Generational Dynamics predictions, based on analyses of short-term events, have a very high probability of being right because the long-term generational trend component provides guidance.
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(See "List of major Generational Dynamics predictions" for more information about these predictions.)
In this case, the long-term generational trend, which I first started talking about in 2002, was that the stock market was overpriced by a factor of 200%+ and that we would enter a new 1930s style Great Depression, probably in the 2006-2007 time frame.
In August, 2007, I wrote, "The nightmare is finally beginning." Generational Dynamics is based on changes in attitudes and behaviors of great masses of people, entire generations of people. I observed that the "credit crunch" had had a massive effect on the attitudes and behaviors of investors, and so the long-term prediction was coming to pass. I expected to see that within weeks or a few months.
Now, just over a year later, we see the daily events quickening. The short-term trends and events are matching up more closely to the long-term trend prediction. Here's what's happened since August, 2007:
Here's how a NY Times article describes it:
So far, they have all been wrong.
Since the financial crisis first hit in August 2007, markets and the financial industry have gone through a series of swoons, each more dizzying than the last. Last week, the crisis reached a new pitch, as Lehman Brothers, the fourth-largest United States investment bank, struggled to avoid joining Bear Stearns on the trash heap, and Washington Mutual, the largest savings and loan, saw its shares briefly fall below $2.
Now even Wall Streets professional optimists have given up predicting exactly when their industry might stabilize. One senior executive at a top investment bank, speaking anonymously so he could speak freely, recently observed that the crisis was entering its 19th inning, with no ending in sight."
If a story like this had appeared a year ago, the author would have been called crazy. Today, these attitudes are the norm.
However, it's important to understand that these people, these experts, haven't yet come to the point where they realize what's going to happen. These people are "struggling to understand why the steps taken so far haven't calmed the system" because they don't really understand what's going on, or what a deflationary spiral really means.
What's most significant is the learning curve of Fed chairman Ben Bernanke himself. I've written several times about Ben Bernanke and his Great Historic Experiment, and his belief that the 1930s Great Depression could have been avoided if the Fed had simply lowered interest rates sooner.
Ben Bernanke is considered the world's leading expert on the Great Depression, and his views that the 1930s Depression could have been easily avoided have dominated university macroeconomics. Now the conclusion of his life's work has been proven wrong, as one "fix" after another has led only to a worse situation.
Here's an interesting excerpt from the same NY Times article:
The restraint in the credit markets will last quite some time, Dr. Sohn said. In the mortgage business, which saw the worst excesses, loan practices may remain stricter for at least a decade, he said. The results will be both positive and negative, he said."
Sohn reflects a fairly standard and widely held view: That the credit crunch will only last another year or so, and then it will take 10 years to get over it. This of course is a change from even a few months ago, when it was widely believed that the credit crunch would be over by now, and the economy would be in bubble mode again by the end of this year.
But this is another attitude trend -- the length of time that mainstream economists expect the economy to be affected by this. In the last year, this estimate has gone from a few weeks to a few months to ten years. At some point, they'll understand that this event will affect the entire lifetimes of the survivors -- just as the 1930s Great Depression did.
I've estimated that the probability of a major financial crisis (generational stock market panic and
crash) in any given week from now on is about 3%. The probability of
a crisis some time in the next 52 weeks is 75%, according to this
estimate.
(13-Sep-2008)
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All the talk about lipstick in the Presidential campaign debate has motivated me to dig into my files, and find the following story that originally appeared in the Wall Street Journal on November 26, 2001, just a few weeks after 9/11:
By Emily Nelson
Lipstick sales are red hot. So why is no one smiling?
The reason is that women traditionally turn to lipstick when they cut back on life's other luxuries. They see lipstick, which sells for as little as $1.99 at a supermarket to $20-plus at a department store, as a reasonable indulgence and pick-me-up when they feel they can't afford a whole new outfit. "When lipstick sales go up, people don't want to buy dresses," says Leonard Lauder, chairman of Estée Lauder Cos.
Lauder's Leading Lipstick Index tracks lipstick sales across Estée Lauder's many brands, which account for sales of about half of all prestige cosmetics in the U.S. and include Stila, Origins, Bobbi Brown, MAC and Prescriptives. Since the Sept. 11 terrorist attacks, the index is up braodly, says Mr. Lauder. The index also climbed during past recessions, such as in 1990.
MAC factories started running extra shifts to produce more lipstick after Sept. 11. In the past three weeks, sales of MAC lipstick, and lip gloss have grown 12% at stores open at least a year, compared with the year earlier.
"It's like getting a haircut. It makes you immediately feel better," says Meredith Foulke, a 21-year-old senior at Auburn University who recently sprung for a sparkly "Sweet Cherry" Clinique Liquid Lipstick, while shopping at Dillard's in Auburn, Ala. This year, she doesn't plan on splurging for a new suede handbag, she says, "but there's always lipstick."
Lipstick sales at mass retailers tracked by Information Resources Inc., the market-research firm, rose 11% from August through October compared with a year ago.
Sales of lipstick at Borghese Cosmetics Inc. are also up 12% since mid-September vs. last year, spurred on by saleswomen wearing T-shirts emblazoned with the American flag and the words, "love, peace and lipstick." Company executives in New York designed the T-shirts after noticing shoppers buying lipsticks and expressing "a sense of defiance that 'they' aren't going to disrupt our lives and take away our simple pleasures," says Georgette Mosbacher, the New York-based company's chief executive.
Deep, bright lipstick shades, with names like "berry," "red glorioso" and "vino divino," are now most popular, while pale, neutral shades aren't selling as well, Ms. Mosbacher says. "This is the case of wanting to brighten up ... [Lipstick] has always made women feel good."
Lipstick, which dates to ancient Egypt along with makeup in general, often reflects women's attitudes. During the 1920s, for example, mass marketing of makeup in the U.S. took off, women got the right to vote, and bright red lipstick was popular.
Other cosmetic items don't tent to benefit from the lipstick effect. The high-margin prestige cosmetics that drive overall sales are rarely discounted; more typically, stores offer free gifts with a purchase. When upscale department store Bergdorf Goodman, part of Neiman Marcus Group Inc., held a sale for selected shoppers last month, it offered 30% off everything except cosmetics.
Indeed, Borgheses's Ms. Mosbacher is lowering her overall sales expectations for the year to a 9% to 12% increase, down from 15% before Sept. 11. Estée Lauder also reduced its overall sales expectations, saying its other business, particular duty-free airport shops, is hurting.
Lipstick sales might be even higher, if not for brands that promise to stay on longer, reducing the need to buy another stick. Top-selling lipsticks include Cover Girl Outlast lipstick and Max Factor Lipfinity, which claim to stay on for eight hours. Both brands are owned by decidedly practical consumer-products maker Proctor & Gamble Co.
An ad for Revlon's Absolutely Fabulous lipstick, shot last spring, seems particularly appropriate with its hint of stock market woes and lipstick-as-comfort-food tone. The ad shows a woman in front of what looks like the New York Stock Exchange trading floor, and it reads, "On a bad day, there's always lipstick."
Wall Street Journal, Monday, November 26, 2001, pages B1, B4"
So lipstick sales were a sign of recession in 2001. If that's true,
then what do "lipstick on pigs" debates mean about the significance
of the election campaign today?
(11-Sep-2008)
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Lehman Brothers Holdings Inc. share prices fell a record 45 percent on Thursday, as rumors swirled that the investment bank might collapse. Lehman is scheduled to report third quarter earnings next week, but to prevent further speculation, Lehman has rescheduled the earnings announcement to today (Wednesday). Lehman will also announce "strategic initiatives" to remain afloat.
Tuesday's 45% fall in Lehman stock prices occurred on a day when Wall Street stock indexes all fell 2½-3½%, pretty much reversing the euphoric, giddy gains of Monday.
Lehman has previously announced $8.2 billion in writedowns of assets in its portfolio -- mortgage-back securities and other near-worthless securities. On Wednesday, Lehman CEO Richard Fuld is expected to announce further asset writedowns, and make rosy promises about the future.
The problem is that you'd have to be crazy to believe anything that Fuld says about the future. As I wrote yesterday, and many times before, open lying has become the norm on Wall Street, increasingly as Generation-Xers and Boomers have taken senior management positions over the last decade. If Fuld believes that Lehman is about to fall off a cliff on Thursday, he'll still make up a bunch of lies on Wednesday to claim that everything is OK. Making up a bunch of lies is the norm these days.
Bear Stearns had to be rescued in March because a bankruptcy would have caused an international systemic financial crisis, according to later testimony by Ben Bernanke.
The crises appear to be coming faster and faster, now. There was the Bear Stearns rescue in March, and then things seemed relatively calm until the Fannie and Freddie bailout last week. Now we potentially have a Lehman crisis.
It's not surprising that the crises are coming faster, since the worldwide deflationary spiral is accelerating. There's less money in the world than there was yesterday, and companies have to compete with one another over what's left. It's the opposite of what happened during the credit bubble, when the world was being flooded with new money. Even stupid decisions were rewarded with riches. Today, financial institutions are playing a kind "musical chairs" game with liquidity: each time the music stops, the one without the liquidity collapses.
The funny thing is that there's no way to know what's going on. Will Lehman collapse tomorrow, Friday, next week, or not at all? If Lehman goes down, will it cause a worldwide financial crisis - a stock market crash?
I feel fairly certain that there isn't anyone in the world who knows, or who even thinks he knows.
To say that we're in uncharted territory is an understatement. Nobody has a clue what's going to happen next.
I've estimated that the probability of a major financial crisis (generational stock market panic and
crash) in any given week from now on is about 3%. The probability of
a crisis some time in the next 52 weeks is 75%, according to this
estimate.
(10-Sep-2008)
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Giddy investors are popping the champagne corks.
As I listened to the pundits talk about the Fannie /Freddie bailout, I was struck, as usual, by how narrow their discussions were.
As usual, pundits were talking about what happened TODAY -- stocks were up 3% on Asian, European and North American markets, "proving" that the problems were solved. These are people who believe that "history always begins this morning." The closest any of them came to a historical view is that some of them said, "See? They should have done this five years ago when I said they should, and then there wouldn't have been any credit crisis."
Har, har.
Returning to the world of reality, we see one emergency measure after another being put forth by the US government (by the Fed or by the Treasury Dept.) to handle the current crisis, with each new bailout larger than the last one.
Can that continue? Does the US Government have infinite resources?
Here's an interesting graphic that Michael "Mish" Shedlock posted on his blog last month:
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The different acronyms refer to different Fed programs to provide money to banks caught in the credit crunch.
What it shows is that the Fed is running out of liquid assets. Almost all of those other things are illiquid assets, mostly valued at phony market prices. For example, the TAF refers to the Fed's "Term Auction Facility," that allows banks to borrow money from the Fed, posting as collateral mortgage-backed securities that may be almost worthless.
So basically, the Fed has few arrows left in its quiver.
That leaves the Treasury. Theoretically this is a bottomless pit, since the Treasury can "print money." Well, maybe it could print money once upon a time, a century or two ago, but today Treasury can't "print money." What it CAN do is borrow money by issuing Treasury bonds, and selling them to anyone who'll buy them.
The Chinese particularly have been buying them, and we owe China an incredibly large sum of money.
The Chinese have also been buying another kind of bond besides Treasury bonds. Can you guess what, Dear Reader? Yes, they've been buying Fannie and Freddie bonds, also called "GSE bonds." Fannie and Freddie have been borrowing money like mad.
Normally, they borrow money so that they can lend it out again to prospective homeowners who need a mortgage. It's a nice system, as long as it keeps working. Well, it turns out that Fannie and Freddie have been keeping bogus books, not taking into account the fact that there are many, many foreclosures. And if those mortgage loans aren't going to be repaid, then Fannie and Freddie won't get the money they need to pay back the money that China and others lent them by buying GSE Bonds.
And recently, China has been cutting back on buying GSE bonds because -- guess what, Dear Readers -- yes, because the Chinese have figured out that Fannie and Freddie were going to default on those bonds. Those clever Chinese!
And so, the government is now bailing out Fannie and Freddie, essentially by saying that GSE Bonds are backed by the full faith and credit of the US Federal Government.
So now the GSE Bonds are JUST AS GOOD as the Treasury Bonds. And the Chinese can buy GSE Bonds again. And if there's ever any problem with those GSE Bonds and they default, why, the Treasury will pay to back them up. And where will the Treasury get the money to back up the defaulting GSE Bonds? Can you guess, Dear Reader? Why yes, you got it -- Treasury will borrow the money from the Chinese by selling more Treasury Bonds to the Chinese. Do you think those clever Chinese have figured that out, too?
This stuff just leaves me breathless.
And there's another interesting wrinkle to all this. As I understand it, the government is backing the GSE Bonds, but not Fannie and Freddie stock. So if you're a poor schmuck in the stock market whose broker told you that Fannie and Freddie stock was a "good as gold," guess what? You're screwed.
This is how fortunes are made. Bill Gross from Pimco invested heavily in GSE Bonds, and then lobbied Washington hard to get this kind of bailout. Bill Miller of Legg Mason invested heavily in Fannie and Freddie stocks, and is facing financial disaster.
And there's more: It appears that US regional banks were heavily invested in Fannie and Freddie stocks, while foreign banks were more heavily invested in Fannie and Freddie bonds. So the foreign banks will make out better than the US regional banks in this bailout although, let's face it, it's all just Chinese money anyway.
For months, Treasury officials were claiming that Freddie and Fannie were doing well, and would not be bailed out. No one really believed that, but still, that's what the officials were saying.
Then on Monday, I saw Steve Liesman on CNBC interview Treasury Secretary Hank Paulson. Here's one exchange:
Paulson: Oh, absolutely, no role. Steve, we have been working around the clock for weeks. People say to me, you always do these things on the weekends. We have been working every weekend. The amount of work that has been done here by the Federal Reserve, the OCC, FHFA, my team here at Treasury, we have been analyzing data, looking at the situation, getting ready. And we moved as quickly as we could move and as was appropriate. If we could have moved quicker, we would have done that."
And so, guess what? When Treasury officials said that they weren't planning any Fannie/Freddie bailout, they were lying. They were working "around the clock for weeks," taking breaks only to tell the public that they weren't doing anything.
Of course this is a "good lie," as opposed to other kinds of lies, called "bad lies." But I tell you again, Dear Reader, you should not believe anything about finance that any journalist, analyst, executive, politician, or government official tells you. The norm today, on the right and the left, is to lie openly. And it's ok because everyone knows that everyone is lying (except for the people who don't know, and therefore get screwed).
And that brings us to corporate earnings. This is a game we've been playing for several quarters now. We keep track of the estimated earnings growth for each quarter, and see how the estimate changes from week to week.
Back in March, Thomson Financial was providing the following earnings growth estimates for 2008:
Period Earnings growth estimate as of 3-March (Thomson Financial) ------- -------------------------------------------- Q1 2008 2.6% Q2 2008 3.5% Q3 2008 20.0% Q4 2008 50.0%
Actual Q1 earnings growth was -17.5%. Actual Q2 earnings growth was -22.1%.
We're now able to begin posting the table of third quarter S&P 500 average corporate earnings estimates, based on figures from CNBC Earnings Central supplied by Thomson Reuters:
Date 3Q Earnings growth estimate as of that date ------- ------------------------------------------- Mar 3: 25.0% Apr 1: 17.3% Start of previous (2nd) quarter Jul 1: 12.6% Start of quarter Sep 5: 0.8%
We're playing the same game that we've been playing for several quarters, with the same results. Each week, analysts give bloated earnings estimates that they have to lower in the following weeks, as actual earnings start coming in.
 |
As earnings estimates fall, price/earnings ratios go up, and they're really skyrocketing these days, as shown in the above diagram, which is Friday's version of the graphic that appears on the bottom of the home page of this web site.
Investors pushed price/earnings ratios up because they actually BELIEVED the 25% figure that was coming out in March.
Investors and pundits today just CAN'T BELIEVE that the bubble is still leaking, and that the bubble isn't going to start growing again. They are going to be shocked beyond belief.
On Monday, the Fannie and Freddie bailout caused investors to push up stock market indexes by several percentage points in Asia, Europe and North America. The reasoning is as follows: "The Fannie and Freddie bailout is so huge that it must be the end of all the financial problems." Doesn't that make sense to you, Dear Reader? It doesn't to me either, but that's what investors are telling themselves.
I've estimated that the probability of a major financial crisis (generational stock market panic and
crash) in any given week from now on is about 3%. The probability of
a crisis some time in the next 52 weeks is 75%, according to this
estimate.
(9-Sep-2008)
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The backdrop is Pakistan's fury over US armed forces assault into Pakistan's tribal areas
As Pakistan's government continues to appear to disintegrate before `our eyes, the Parliament elected Asif ali Zardari as President by a large majority.
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Zardari's rise to power is nothing short of breathtaking. He married the leader, Benazir Bhutto, of the Shia-based Pakistan's People's Party (PPP) in the 1980s. When Bhutto became Prime Minister in 19881990 and again in 19931996, Zardari became embroiled in numerous financial scandals, and was jailed from 1997-2004 on various charges, including corruption and even murder. There was an almost zero chance of his ever achieving high public office in Pakistan, but that changed with the assassination of Benazir Bhutto last December.
Desperate Pakistan government capitulates to Taliban in Swat Valley:
The government agrees to impose Sharia law in exchange for "peace"...
(23-Feb-2009)
India's Prime Minister Singh formally accuses Pakistan re Mumbai terrorist attacks:
It's one thing when a low-level official makes an accusation,...
(7-Jan-2009)
After Mumbai's "26/11" nightmare finally ends, India - Pakistan relations face crisis:
Enraged Mumbaikers are demanding action and change today,...
(30-Nov-2008)
Pakistan-based Lashkar-e-Taiba suspected in terrorist attack on Mumbai (Bombay), India:
It's a "War on Mumbai" by an attack from the sea....
(27-Nov-2008)
Pakistan nears bankruptcy, as China refuses aid:
Pakistan will forced to seek unpleasant help from the IMF,...
(20-Oct-2008)
Islamabad Pakistan: Massive Taliban/al-Qaeda terrorist bombing:
"Pakistan's 9/11" has left the country in a state of shock,...
(22-Sep-2008)
Asif Ali Zardari, widower of Benazir Bhutto, wins Pakistan presidency:
The backdrop is Pakistan's fury over US armed forces assault into Pakistan's tribal areas...
(8-Sep-2008)
Pakistan's government coalition dissolves following dispute over Taliban:
As fighting rages in Pakistan's tribal areas,...
(26-Aug-2008)
Pakistan government crisis deepens, following Musharraf's resignation:
The government is completely rudderless as suicide bombers shock the country....
(23-Aug-2008)
Pakistan government combines chaos with paralysis as Musharraf is threatened with impeachment.:
The army may have to step in....
(8-Aug-2008)
Pakistan is paralyzed as Tehrik-e-Taliban advances in NorthWest:
Pakistan army abandons negotiations for war to prevent imminent takeover of Peshawar...
(29-Jun-2008)
Pakistan's tribal areas have become the world nerve center for al-Qaeda terrorism:
Al-Qaeda now has "free reign" and "safe haven" in this region....
(6-Apr-08)
Benazir Bhutto killed by suicide bomber after election rally in Rawalpindi:
Here's what to watch for in the next few hours and days....
(27-Dec-07)
Pakistan: Over 106 dead in spectacular assault on radical mosque in Islamabad:
Radical students hoped to spark an Islamic revolution against Musharraf....
(12-Jul-07)
Riots in Karachi, Pakistan, threaten Musharraf's presidency:
Thirty people were killed and hundreds were injured on Saturday...
(13-May-07)
Al-Qaeda resurging in Afghanistan and Pakistan:
Al-Qaeda's greatest threat is to Britain and Europe....
(19-Feb-07)
"Koran in toilet" rumor is uniting Muslims around the world:
From Gaza to Indonesia, Muslims are shouting "Death to America."...
(15-May-05)
Pakistan "Black Day" protests fail:
Continuing a worldwide trend of increased militarization and police power, President Pervez Musharraf...
(02-Jan-05)
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Zardari successfully formed a coalition with opposition leader Nawaz Sharif, head of the Pakistan Muslim League-Nawaz (PML-N) party. But the coalition was united only as long as their common enemy, then-President Pervez Musharraf, was in power. Once Musharraf resigned, the coalition dissolved, leaving the government in chaos and the country rudderless.
Saturday's election occurred against the backdrop of increasing Pakistani fury against Americans for American-led Nato ground assaults into Pakistan's tribal areas. The attacks occurred on Wednesday morning in Taliban strongholds in North Waziristan.
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The occurrence of the Nato assault, which has not been confirmed by Nato or Americans, is still widely believed in Pakistan, and is causing sharp political conflicts.
The assault is considered to be a major test for Zardari and his new administration.
Thus, Zardari's first action, after becoming President on Saturday, was to confirm the closing of the major supply route through Pakistan for supplying the Nato forces. This route runs from the port of Karachi, in the far south of Pakistan, to the outskirts of Peshawar and through the Khyber Pass to the battlefields of Afghanistan.
However, that much now appears to be only half the story. According to news reports on Sunday, Pakistan's Ministry of Defence and Ministry of the Interior were taking opposing positions on the closing of the Nato supply route. It's now claimed that the closing of the Khyber Pass route was only a "temporary disruption" caused by terrorist militant activity, that only about 20 trucks were held up, and that now they're free to go.
It's really hard to know what to make of this except that it's one more sign of the total disintegration of the Pakistan government.
And that's not Zardari's only problem.
Suicide attacks are becoming commonplace. On Saturday, a suicide blast in Peshawar killed 35 people.
Inflation is rampant and the economy is stagnating.
Even more significant is the increase in tensions between Sunni and Shia groups. Kurram province in the tribal areas is now the scene of massive fighting between Sunni and Shia tribesmen. The clashes are between the Shia Turi tribe and the Sunni Bangash tribe. The Bangash tribe are allied with the Taliban and al-Qaeda, who triggered the violence starting around April, 2007.
There are severe shortages of food and medicines in Kurram, and the death toll in the last month has risen to 700.
It doesn't take rocket science to figure out how fragile Zardari's government is. Even Zardari's life must be considered in danger as a Shia leader, after his wife was killed last December by a Sunni terrorist.
Zardari himself is well aware of the perception of that Pakistan is disintegrating. In his acceptance speech on Saturday, he said that the democratic process needs total commitment from all political forces.
"Pakistan's democracy is being closely watched and there are arguments being made about its inability to hold," said Zardari. "It's a challenge, not only for me and for the democratic forces, but also for the people of Pakistan. We have to prove wrong the perception that Pakistan and democracy cannot go together. I want to tell all those doubting our nation's commitment for a representative political order, that ours is the nation that has made the biggest sacrifices for the cause of democracy. Ours is the nation that has looked dictatorship in its eyes.... Ours is the nation that braved the might of the state, yet fought on the streets for their right to determine their own destiny."
But few people believe that Zardari has the political and popular strength to pull the country together. One opposition party, Awami Tehrik, condemned atrocities unleashed by the Nato and American forces, and said that these barbaric actions were clear proof that the new government was pursuing the imperialist policies of Musharraf government, and that all the decisions were being taken in Washington.
Others talk about a return to 'politics of revenge, retribution and blatant self-interest' of the 1990s.
From the point of view of Generational Dynamics, we seem to be seeing the major change in public opinion that I've been describing.
Before the recent resignation of Pervez Musharraf as President, the entire Pakistani population appeared to be in a state of total denial about what was going on. The "logic" was this: The reason for the suicide bombings was that Musharraf was cooperating with the Americans, and the suicide bombings were really targeted at the Americans. And so, the fantasy reasoning continued, when Musharraf goes, then the violence will disappear automatically.
The euphoria surrounding Musharraf's resignation dissipated almost immediately, thanks to several suicide bombing attacks immediately following the resignation. The biggest occurred in the town of Wah, just outside of Islamabad, Pakistan's capital. Two suicide bombers simultaneously attacked two separate entrances of a large manufacturer of munitions at shift change time. 70 people were killed.
What I believe is happening is that these terrorist attacks are now causing the Pakistani people to panic, and are part of a continuing "regeneracy." The term "regeneracy" is a term from generational theory, and it refers to the point where a population's civic unity is regenerated for the first time since the end of the previous Crisis war.
(For information about the term "regeneracy," see "Basics of Generational Dynamics.")
In the case of Pakistan, the unity appears to be regenerating separately on the Sunni and Shia sides of the population. This will cause increasing political conflict on the two sides, leading to armed conflict. There is already plenty of Shia vs Sunni violence going on in Kurram, as we described. And in India, where the Hindus historically have sided with Shia Muslims against Sunni Muslims, protests and violence are continuing in the disputed Kashmir and Jammu provinces.
From the point of view of Generational Dynamics, a re-fighting of the
massively genocidal war following the 1947 Partition is coming with
absolute certainty. This war will involve numerous ethnic groups,
but underlying it will be Sunni Muslims versus Hindus + Shia Muslims.
(8-Sep-2008)
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He says the surge succeeded because of some magic new military technique.
Bob Woodward is a good reporter, and he became famous in the 1970s by leading, along with Carl Bernstein, the reporting of the Watergate coverup by President Richard Nixon. Woodward is such an admired icon among the Boomer left that he can report almost anything he wants, and his word isn't even questioned.
Woodward himself is extremely liberal, and I wouldn't be surprised if he was completely in the tank for the election of Barack Obama. So the publication of his new book The War Within: A Secret White House History, 2006-2008, at this particular time has to be assumed to be his contribution to Obama's election. The book is published by Simon & Schuster, owned by CBS.
In his Sunday night appearance on CBS's 60 Minutes, he made a number of claims about the Iraq war and "the surge":
Rather, Woodward reports, "groundbreaking" new covert techniques, beginning in 2007, had enabled U.S. military and intelligence officials to locate, target and kill insurgent leaders and key individuals in extremist groups such as al-Qaeda in Iraq.
Woodward does not disclose the code names of these covert programs or provide much detail about them, saying in the book that White House and other officials had cited national security concerns in asking him to withhold specifics. But he quotes "several authoritative sources" as saying that "85 to 90 percent of the successful operations and 'actionable intelligence' had come from" these breakthrough techniques."
This is so ridiculous that only Bob Woodward could publish it and only liberal Boomer journalists and politicians could possibly believe it.
First off, if there really is some huge breakthrough technology (say, the army can now "beam" soldiers instantly from one place to another, as in Star Trek), then Woodward's mere mention that he knows about it is an act of treason.
It's far more likely that there's some much less revolutionary technology or other he's talking about. Maybe it's a new high-powered microphone that can pick up farawar conversations, or maybe it's a more accurate firearm of some kind. More likely it's a combination of several small incremental technology and technique improvements. Who knows? If it saves American soldiers' lives, or if it helps defeat al-Qaeda in Iraq, then it's worthwhile, and it's worthwhile keeping it secret from an idiot like Bob Woodward.
But to claim, as Woodward does, that the surge was so successful only because of this "groundbreaking" technique or technology is unimaginably absurd. The American armed forces have had for years far more advanced technology than anything that al-Qaeda in Iraq had, and no additional increment was going to be enough to defeat the entire al-Qaeda effort in Iraq.
And if it were, then why hasn't it annihilated the Taliban in Afghanistan?
You know, come to think of it, that's a good question. If Woodward wants to credit the surge's success to "groundbreaking" technique or technology, then why isn't it working in Afghanistan, and if not, then why do you assume that it worked in Iraq? During the next month or so, he's going to be on one news show after another, interviewed by reporters who are also completely in the tank for Obama. Do you think a single one of them will ask that question?
Ironically, Woodward is absolutely correct in saying that the surge "was not the primary factor behind the steep drop in violence there during the past 16 months."
As I began writing in 2003, Iraq is in a generational Awakening era, and so a civil war in Iraq is impossible, and terrorist attacks against Iraqis are likely to backfire against the terrorists. That's exactly what happened. As far as I know, I'm the only person in the world, on the right or left, who has correctly and consistently predicted what would happen in Iraq.
(For the original August, 2003, prediction, see "Terrorist suicide bombings in Iraq may backfire against terrorists." For a lengthy analysis of the Iraq war, see "The Iraq war may be related to the bombing of Hiroshima and Nagasaki." For general information on Generational Dynamics predictions, see "List of major Generational Dynamics predictions.")
And this brings us to one more problem with Bob Woodward's claims. He paints the surge as a complete gamble, pursued for purely political reasons, opposed by almost everyone in the military.
I know that's ridiculous because it was in April, 2007, that I wrote the lengthy analysis, "Iraqi Sunnis are turning against al-Qaeda in Iraq." When I wrote that essay, it had already been clear for several months to soldiers on the ground in Iraq that the war was beginning to turn against al-Qaeda. The surge would speed things up and consolidate the victories. The Administration knew all that long before I did, so the surge was no gamble.
If Woodward had said: "The surge was not the primary factor behind
the steep drop in violence. The steep drop in violence occurred
because Iraq was in a generational Awakening era, and the Iraqis were
turning against the al-Qaeda invaders," then I'd have to agree with
him, and he could help Obama get elected by telling the truth. But
what he actually said was moronic, and totally typical of today's
liberal reporters.
(7-Sep-2008)
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Stock and commodities prices plummet as worldwide foreclosures and recessions worsen.
Investors continue to say how puzzled they are that the stock market keeps falling. On Thursday, when the Wall Street indexes fell 3%, I heard one financial pundit say, "I can't understand why investors are so pessimistic. Productivity numbers are up."
These are people whom I like to describe as "believing that history always begins this morning."
On this web site, I look at the world from the point of view of systems dynamics through time. The world's political, social and financial trends all have to be looked at as worldwide systems changing through time. Those who look at only recent data might as well look at the thermometer to decide whether it's going to snow next winter.
It was in 2002 and 2003 that I began telling people, and posting on this web site, that we were entering a new 1930s style Great Depression, probably by the 2006-2007 time frame. It was last year in August that I wrote, "The nightmare is finally beginning."
Frankly, I had expected the fall to occur more rapidly. I hadn't counted on the super-aggressive actions by the Fed and central banks around the world to postpone the inevitable.
These central bankers have been congratulating themselves and each other for preventing a major collapse, but look at the Dow Jones Industrial Average for the past year:
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Since the market peaked last year on October 9, the market has been falling almost steadily. Every time it spikes up a bit, the pundits say that the worst is over, and they're caught by surprise again when the downward trend occurs again.
As I've said many times, this MUST happen with 100% certainty, since the market is overpriced by a factor of over 200%, and has been substantially overpriced since 1995. By the Law of Mean Reversion, the market MUST fall to Dow 4000 or below, and stay there for years.
(For information on why the stock market is overpriced, see "How to compute the 'real value' of the stock market.")
During the last year, we've seen many continuing trends. The foreclosure rate continues to climb, and home prices continue to fall. The asset writedowns by financial institutions continue unabated.
But there has been a significant change within the last couple of months: It appears that the commodities bubble is leaking, and may be close to crashing.
Prices of oil, gold and other commodities have been falling sharply. The Baltic Dry Index, which measures the demand for international shipments of dry goods (such as iron ore) has also been falling sharply.
Incidentally, blogger Michael "Mish" Shedlock has been receiving hate mail over his writings on gold. Shedlock's only a kid, and I wish him the best, but he's got a problem because he's been advising his readers to buy gold.
The spectre of deflation forces a historic change in economic theory:
Economists are shocked that the fight against inflation is over....
(8-Nov-2008)
What's coming next: Understanding the deflationary spiral:
Why are the dollar and the yen getting stronger, while the euro is getting weaker?...
(27-Oct-2008)
Roubini: The situation is "sheer panic," as hundreds of hedge funds are going bust:
Policy makers may need to close markets for one or two weeks....
(24-Oct-2008)
There's never before been a day like this on Wall Street.:
Possible exception: One of the days just before or after the 1929 crash....
(11-Oct-2008)
Ben Bernanke's Great Historic Experiment is at the brink:
Desperation sets in as credit markets continue to seize up....
(25-Sep-2008)
Government promises to buy bad debt to end the credit crisis:
Stock markets stage huge comeback as giddy investors pile in....
(19-Sep-2008)
Another stunning and historic bailout: Fannie Mae and Freddie Mac:
Giddy investors are popping the champagne corks....
(9-Sep-2008)
Long-term negative market trends asserting themselves strongly:
Stock and commodities prices plummet as worldwide foreclosures and recessions worsen....
(5-Sep-2008)
Money supply contracts dramatically, as credit markets continue to seize up.:
Former IMF chief: Worst of global financial crisis is yet to come....
(24-Aug-2008)
As commodities plummet worldwide, the meaning is unclear.:
We speculate on some possibilities....
(11-Aug-2008)
Alan Greenspan calls this a "once in a century" liquidity crisis.:
Says that the "big surprise" is the "impressive" American economy...
(3-Aug-2008)
More questions from readers on finance and investing:
Anxious readers wonder what's going on, what to do next....
(18-Jul-2008)
Pundits and analysts are baffled by the market's performance:
They have some interesting fantasies, as well....
(10-Jul-2008)
Questions from readers on finance and investing:
On fraud, the FDIC, China, and other subjects....
(23-Jun-2008)
Royal Bank of Scotland issues global stock crash alert:
"A very nasty period is soon to be upon us - be prepared,"...
(18-Jun-2008)
A clearer explanation of credit default swaps.:
How credit default swaps (CDSs) present a systemic risk to the global financial system...
(4-Jun-2008)
WSJ's page one story on Bernanke's Princeton "Bubble Laboratory" is almost incoherent:
So is Thursday's speech on bubbles by Fed Governor Frederic S. Mishkin....
(18-May-2008)
Brilliant Nobel Prize winners in Economics blame credit bubble on "the news":
Meanwhile, the deflationary spiral is in progress, but hyperinflation is not....
(27-Apr-08)
Investment bank UBS is now "writing down" clients' auction rate securities:
From individual investors to tech firms, people are losing their money....
(29-Mar-08)
Both consumer and commercial credit is disappearing as deflationary spiral accelerates:
Wall Street markets plummet 3% on Tuesday, as service sector contracts sharply....
(6-Feb-08)
Will hyper-inflation make the dollar worthless (like the Weimar republic)?:
I've gotten this question several times this week from web site readers,...
(21-Dec-07)
Questions and answers about the "credit crunch":
What's going on, and what you can do about it....
(6-Dec-07)
Understanding deflation: Why there's less money in the world today than a month ago.:
As the markets continue to fall, the Fed is increasingly in a big bind....
(10-Sep-07)
Bernanke's historic experiment takes center stage:
An assessment of where we are and where we're going....
(27-Aug-07)
Ben Bernanke's Great Historic Experiment:
Bernanke doesn't believe that bubbles exist. His Fed policy will now test his core beliefs....
(18-Aug-07)
Japan's real estate crash may finally end after 16 years:
To see where America is going, look what happened in Japan....
(20-Feb-07)
This week's financial data points to trend back toward deflation.:
Several inflationary indicators are down for June...
(17-Jul-04)
| ||
Many other advisers and brokers are in the same situation. As I wrote several times in the past, if you're an economics expert, journalist, investment broker, mortgage lender, analyst, regulator, pundit or politician, then I suggest that you'd better have your underground bunker picked out, because people are going to be coming after you. And if you're an ordinary person who's embezzled or cheated, thinking nobody would bother to check, then things are going to change, and all your past actions will be scrutinized and audited.
As has been apparent for a long time now, the worldwide deflationary spiral is really gripping everything. There's less money in the world every day than there was the day before, and that decrease appears to be accelerating. Money is being pulled out of the stock markets, and now it's being pulled out of the commodity markets.
Banks are desperate for money. One bank, National City, is actually paying its customers $200 to close their home equity credit lines.
(Incidentally, you should avoid closing any sources of credit at this time, since it may be years before you can get new credit again.)
What's particularly significant is what's happening in China. The entire country of China has been in an economic bubble for the last few years, and it was only a matter of time before the bubble burst. I've often speculated China's bubble might burst after the end of the China Olympics games. Now that the games are over, that may well be happening.
We're still waiting for the epochal event -- the massive generational panic that will be remembered forever. This must occur at some point. The last one occurred in 1929, and the next one is overdue.
A generational crash is an elemental force of nature, like a tsunami.
There will be millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, and not having believed it was even possible, suddenly in a state of total mass panic, trying to sell all at once.
Computer systems will crash or will be clogged for hours, or perhaps even for a day or two. People who had hoped to get out just as the collapse is occurring will be totally screwed, and will lose everything. Brokers and other institutions will go bankrupt.
I've estimated that the probability of a major financial crisis (generational stock market panic and
crash) in any given week from now on is about 3%. The probability of
a crisis some time in the next 52 weeks is 75%, according to this
estimate.
(5-Sep-2008)
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This was the third Prime Minister to step down in three years.
Prime Minister Yasuo Fukuda resigned on Monday in an effort to break a political deadlock.
"If we are to prioritize the people's livelihoods, there cannot be a political vacuum from political bargaining, or a lapse in policies. We need a new team to carry out policies," Fukuda said. "I thought it would be better for someone else to do the job than me."
Fukuda's unpopularity stems mostly from a worsening economy, but his administration has been largely overshadowed by Japan's relations with China and Korea.
The same was true of Fukuda's predecessors. Junichiro Koizumi's relations with China were constantly strained by his annual visits to the Yasukuni shrine. The shrine honors 2.3 million war dead, including some who have been declared as World War II war criminals.
When Koizumi stepped down in September, 2006, the new Prime Minister was Shinzo Abe. Abe was the first PM to be elected from the generation born after World War II (like America's Boomer generation), and he was considered to be young and hawkish.
Abe's government was brought to collapse within a year, mainly because of highly visible scandals in national health and pension systems.
Abe's replacement was a surprise choice -- Yasuo Fukuda reverted to the older generation of survivors of World War II. Kids who grow up during a crisis war (like America's Silent Generation) are distinguished by their willingness to bring about compromise.
Fukuda was particularly skillful at compromise, and even developed a good relationship with China, thanks to a four-day "feel-good" trip to Beijing in January of this year. However, that wasn't enough to save him, as problems with the economy continued.
Still, Fukuda's resignation came as a surprise, especially since he had reorganized his cabinet only a month ago. His new cabinet members were particularly stunned.
The most likely candidate to replace Fukuda is Taro Aso, the secretary-general of Fukuda's Liberal Democratic Party (LDP). Aso is also from an older WW II survivor generation, but he's thought to be more hawkish than Fukuda. South Koreans particularly expect Korea-Japan relations to become tenser, with Aso as PM. However, Aso's ascension to PM is not yet certain.
A constant theme of this web site is that one country after another, among those who fought in WW II as a crisis war, is becoming paralyzed. We've seen in Japan before, and we've also seen Pakistan disintegrating before our eyes, as well as paralysis in Israel, Europe, France, and even, to some extent, in the United States.
Speaking of paralysis, Thailand's government has become frozen, thanks to massive political protests in Bangkok by groups determined to bring down the government -- for the second time in two years.
This governmental paralysis comes about because the generations born after the previous crisis war (WW II) do not know how to govern; in fact, they can do little else besides bicker and argue.
From the point of view of Generational Dynamics, this is what will
lead to a Clash of Civilizations world war. The initial crisis might
occur in the Mideast, the Caucasus, the Indian subcontinent, or in
the Pacific, but governments in all of these regions will be
increasingly paralyzed until some major event forces them to react.
(4-Sep-2008)
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Will "football diplomacy" save the day?
Last February, when the West allowed Kosovo to secede from Serbia over strong Russian objections, Vladimir Putin, then President of Russia, was quoted as saying something to the effect the West didn't understand what it was unleashing with this move.
It appears that Putin's prediction was correct, although Russia and Putin himself is responsible for at least some of the consequences.
 |
The Kosovo secession was used by the Russians as much of the justification for the secession of the two provinces (Abkhazia and South Ossetia) from Georgia.
And now, the issue of Nagorno-Karabakh is causing rising nationalist feelings in the southern Caucasus nations -- Turkey, Armenia and Azerbaijan.
These nations are sharply split along the Muslim / Orthodox fault line. Turkey and Azerbaijan are Muslim nations, while Armenia, through the Armenian Apostolic Church, is an Orthodox Christian nation -- like Georgia and Russia.
For all of these nations, World War I and the period 1915-22 was a crisis war. During this time, the Ottoman Empire, led by Turkey, was destroyed, and massive ethnic and religious genocide occurred throughout the entire northern and southern Caucasus.
Although genocide occurred on all sides, Of particular importance today was the 1915 slaughter of hundreds of thousands of Armenians, living with Turkey's borders. From the point of view of Generational Dynamics, this was unambiguously an act of genocide, though probably no worse than acts of genocide by other ethnic and religious groups in the region.
However, this particular slaughter has been singled out to have particular political significance almost a century later. The West insists that Turkey's actions were genocidal -- and the West is right. Turkey insists that it was an act of war similar to the acts of war by other nations at the time -- and Turkey is right. This was a generational Crisis war, and in generational Crisis wars, genocide is committed by everyone.
From 1988 to 1994, Armenia and Azerbaijan fought a war over the Nagorno-Karabakh enclave of Azerbaijan, which has a large Armenian population. Armenia won the war, and gained control of about 15% of Azerbaijani territory, creating hundreds of thousands of Azerbaijani refugees. Both Azerbaijan and Turkey closed their borders and imposed a blockade, closing off Armenia's trade routes to Europe and Asia.
The southern Caucasus became frozen at that point. None of the three countries has been willing to change the status quo. In particular, the blockade continues.
Several major events are now shaking up the status quo:
In recent weeks, anxious Turkish politicians have been proposing to mediate the Russia-Georgia dispute, by introducing the "Caucasian Stability and Cooperation Platform," a Turkish proposal to provide a process for resolving disputes.
The implication is that Turkey will reestablish diplomatic relations with Armenia.
In fact, a change may take place this Saturday, as there is a possibility that Turkish President Abdullah Gül will travel to Yerevan to watch the football (soccer) match sitting alongside Armenian President Serzh Sarksyan.
The possibility of the Turkish President going to Yerevan for any reason is generating a great deal of controversy in Turkey. Leaders in the opposition party are forbidding their members of Parliament from attending.
Other changes may be occurring. Azerbaijanis are very nervous about Gül's planned trip to Yerevan, and some commentators claim that Azerbaijan may be planning war with Armenia.
Protest groups in Yerevan are mobilizing, in case Gül does go to the football game on Saturday. The Armenian Revolutionary Federation will have thousands of demonstrators on hand Saturday, demanding independence for Nagorno-Karabakh.
This closes the circle with Kosovo, which was granted independence from Serbia earlier this year. Serbia is an Orthodox country, Kosovo is Muslim. Azerbaijan is Muslim, while Armenia and Nagorno-Karabakh are Orthodox.
| Conflict risk level for next 6-12 months as of: 11-Aug-2008 | ||||
|---|---|---|---|---|
| W. Europe | 1 | Arab Israeli | 3 | |
| Russia Caucasus | 3 | Kashmir | 3 | |
| China | 2 | North Korea | 2 | |
| Financial | 3 | Swine/Bird flu | 3 | |
| ||||
From the point of view of Generational Dynamics, the Caucasus region
is quite possibly the most dangerous region of the world, because
it's the deepest into a generational Crisis era. Generational
Dynamics predicts that the entire region will re-fight the genocidal
wars across the Orthodox/Muslim fault line that have occurred so
frequently in previous centuries.
(3-Sep-2008)
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This is hilarious to watch.
 |
In the movie Terminator, and in the current television series, Terminator: The Sarah Connor Chronicles, the world is invaded by robots from the future. These robots can change shape and appearance as necessary. And if you are lucky enough to "kill" one of these robots, even if you dissolve them in acid, then they find a way to pull themselves together and reassemble themselves.
The Modular Robotics Lab (ModLab), at the University of Pennsylvania is doing research on "modular robots" that have similar properties. The robots consist of small modules that can fit together in different ways, and change configuration as necessary. They're sometimes even able to repair themselves.
One of the projects is a robot that can reassemble itself after an explosion.
The following video shows the robot reassembling itself after being kicked to pieces:
If you saw the the 2004 movie I, Robot, then you may recall that intelligent robots were living side by side with human beings. That was a movie, but the technology will soon become quite real.
At some point, probably some time in the late 2020s, computers will be intelligent enough so that they'll be responsible for their own research and development as necessary to invent new, more powerful versions of themselves (although time travel as in Terminator will still be impossible).
 |
At this point, known as the Singularity, computers will quickly become so much more intelligent than humans that they'll displace humans as the major "species" on earth. Whether the human race will survive long after 2030 is not known, and is impossible to predict.
The development of a robot that can reassemble itself after an
explosion, or other catastrophic event, is just one more step on the
road to the Singularity.
(1-Sep-2008)
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1=Low risk
2=Med
3=High
4=Active