Rolling US Economy Into The Shitbin Thread

moral for me as an investor (once I cover my recent debt injection) - if you want to invest in any sector, wait it out for a 12 month low. if it doesn't happen, you missed the boat, try again next year.

I usually make those decisions during the long holidays I take at my country house in the Algarves.

lolz. even if i ever have money i doubt i'd ever risk speculating on the market.

Yes. My advice to clients these days is to invest in property -- it's as safe as houses! I specifically recommend Florida condos. There are some crackerjack deals all over the coast.

Or, if you want something even safer, stash those dollars in a trunk and bury the trunk. And don't tell anyone where it is. Now THAT money won't be going ANYWHERE. Unless the dollar falls further of course.

Hmm.

It's been a while since I thought about finance with any real depth, but that Taleb column seems like such crap. Academic financial models hardly work better than random chance? Is that not entirely the point? If he and his buddies can predict the market so much more effectively than 150,000 business schools teaching the MPT, why the hell is he making his money writing pop-culture social science books and not trading?

haha this buddy of mine was telling me this weekend how his neighbor (whom I know) keeps $20K in cash in his basement in a safe. I'm not sure if I should mention this, but Mr. Sock Drawer is a chiropractor.

dude seriously who tells people that shit? good way to put you and your family in danger.

Academic financial models hardly work better than random chance? Is that not entirely the point? If he and his buddies can predict the market so much more effectively than 150,000 business schools teaching the MPT, why the hell is he making his money writing pop-culture social science books and not trading?

I think his point is not that he can predict the market better than the models, but rather that the models give those who use them a false sense of security.

http://ichart.finance.yahoo.com/3m?cadusd=x

thanks to abanana

November 9, 2007, 12:34 pm
Midday Tidbits — 99 Problems for the Dollar
Posted by Tim Annett

How much Rocawear could these euros buy?
# First Gisele, then China, now Jay-Z? Earlier this week, reports (later denied) that supermodel Gisele Bundchen was demanding to be paid in euros rather than dollars led to many jokes that surely this must be a sign of a bottom for the little-loved greenback. Nobody was laughing much when a Chinese political official badmouthed the buck later in the week, leading to the latest of many dollar selloffs. Now, either as another sign of the bottom, or just another kick to the dollar’s ribs on the way down, rapper Jay-Z has joined the dollar-bashing party. In the video for his new single, “Blue Magic,” at about 1:20 in, when Jay says, “I don’t spin on my head, I spin work in the pots so I can spend my bread,” the “bread” he is preparing to spend is a big stack of euros, not dollars. Et tu, Jay-Z? — Mark Gongloff (Hat Tip: Jesse Pesta)

http://online.wsj.com/media/jayz_c_20071109113234.jpg

from the Financial Times (http://www.ft.com/cms/s/0/7b6160be-9b80-11dc-8aad-0000779fd2ac.html?nclick_check=1)

In his letter, Mr Lahde said he expected the collapse in value of subprime mortgage-linked securities to be repeated for bonds backed by commercial property loans in a deep recession – which he also predicts.

“Our entire banking system is a complete disaster,” he wrote. “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.” He also said he would be putting some of his own profits into gold and other precious metals.

I re-read the LTCM book ("When Genius Failed") over the holiday, and it's frightening given the pattern of subprime investments.

yeah platinum looks really good right about now. are there any metals looking particularly under-valued?

so if some random dude off the street (i.e. me) wanted to buy platinum or whatever, is that possible? Is that just a recipe for getting screwed? How would one go about it anyway??

call a broker dude and then shop whatever he says.

there are precious metal mutual funds and stuff, through morningstar and other fairly reputable investment groups. I think those would be easier and less costly than trying to stockpile a bunch of platinum in the commodities markets

not to mention that those funds tend to diversify sources and ideally mitigate risks better than turning your garage into a foundry and hoping you don't get robbed or burn the house down.

there's also buying gold and silver coins at your local coin shop - unfortunately the dealer knows the value of a buck so you won't be getting any super deals

When my mom worked as a bank teller she bought every silver coin that crossed her window for 20 years.

http://bigpicture.typepad.com/photos/uncategorized/2007/12/10/crisis_20071209.gif

oh, bernankepaws ...

http://ichart.finance.yahoo.com/t?s=%5EDJI

long overdue

Added wonkiness just now from Stratfor:

---

China and the Arabian Peninsula as Market Stabilizers
By George Friedman

The single most interesting thing about today's global economy is what has not occurred. In 1979, oil prices soared to slightly more than $100 a barrel in current dollars, and they are approaching that historic high again. Meanwhile, the subprime meltdown continues to play out. Many financial institutions have been hurt, many individual lives have been shattered and many Wall Street operators once considered brilliant have been declared dunderheads. Despite all the predictions that the current situation is just the tip of the iceberg, however, the crisis is progressing in a fairly orderly fashion. Distinguish here between financial institutions, financial markets and the economy. People in the financial world tend to confuse the three. Some financial institutions are being hurt badly. Those experiencing the pain mistakenly think their suffering reflects the condition of the financial markets and economy. But the financial markets are managing, as is the economy.

What we are seeing is the convergence of two massive forces. Oil prices, along with primary commodity prices in general, have soared. Also, one of the periodic financial bubbles -- the subprime mortgage market -- has burst. Either of these alone should have created global havoc. Neither has. The stock market has not plummeted. The Standard & Poor's 500 fell from a high of about 1,565 in mid-October to a low of 1,400 on Oct. 19. Since then, it has rebounded as high as 1,550. Given the media rhetoric and the heads rolling in the financial sector, we would expect to see devastating numbers. And yet, we are not.

Nor are the numbers devastating in the bond markets. By definition, a liquidity crisis occurs when the money supply is too tight and demand is too great. In other words, a liquidity crisis would be reflected in high interest rates. That hasn't happened. In fact, both short-term and, particularly, long-term interest rates have trended downward over the past weeks. It might be said that interest rates are low, but that lenders won't lend. If so, that is sectoral and short-term at most. Low interest rates and no liquidity is an oxymoron.

This is not the result of actions at the Federal Reserve. The Fed can influence short-term rates, but the longer the yield curve, the longer the payoff date on a loan or bond and the less impact the Fed has. Long-term rates reflect the current availability of money and expectations on interest rates in the future.

In the U.S. stock market -- and world markets, for that matter -- we have seen nothing like the devastation prophesied. As we have said in the past, the subprime crisis compared with the savings and loan crisis, for example, is by itself small potatoes. Sure, those financial houses that stocked up on the securitized mortgage debt are going to be hurt, but that does not translate into a geopolitical event, or even into a recession. Many people are arguing that we are only seeing the tip of the iceberg, and that defaults in other categories of the mortgage market coupled with declining housing markets will set off a devastating chain reaction.

That may well be the case, though something weird is going on here. Given the broad belief that the subprime crisis is only the beginning of a general financial crisis, and that the economy will go into recession, we would have expected major market declines by now. Markets discount in anticipation of events, not after events have happened. Historically, market declines occur about six months before recessions begin. So far, however, the perceived liquidity crisis has not been reflected in higher long-term interest rates, and the perceived recession has not been reflected in a significant decline in the global equity markets.

When we add in surging oil and commodity prices, we would have expected all hell to break loose in these markets. Certainly, the consequences of high commodity prices during the 1970s helped drive up interest rates as money was transferred to Third World countries that were selling commodities. As a result, the cost of money for modernizing aging industrial plants in the United States surged into double digits, while equity markets were unable to serve capital needs and remained flat.

So what is going on?

Part of the answer might well be this: For the past five years or so, China has been throwing around huge amounts of cash. The Chinese made big, big money selling overseas -- more than even the growing Chinese economy could metabolize. That led to massive dollar reserves in China and the need for the Chinese to invest outside their own financial markets. Given that the United States is China's primary consumer and the only economy large and stable enough to absorb its reserves, the Chinese -- state and nonstate entities alike -- regard the U.S. markets as safe-havens for their investments. That is one of the things that have kept interest rates relatively low and the equity markets moving. This process of Asian money flowing into U.S. markets goes back to the early 1980s.

Another part of the answer might lie in the self-stabilizing feature of oil prices, the rise of which should be devastating to U.S. markets at first glance. The size of the price surge and the stability of demand have created dollar reserves in oil-exporting countries far in excess of anything that can be absorbed locally. The United Arab Emirates, for example, has made so much money, particularly in 2007, that it has to invest in overseas markets.

In some sense, it doesn't matter where the money goes. Money, like oil, is fungible, which means that if all the petrodollars went into Europe then other money would flow into the United States as European interest rates fell and European stocks rose. But there are always short-term factors to consider. The Persian Gulf oil producers and the Chinese have one thing in common -- they are linked to the dollar. As the dollar declines, assets in other countries become more expensive, particularly if you regard the dollar's fall as ultimately reversible. Dollars invested in dollar-denominated vehicles make sense. Therefore, we are seeing two massive inflows of dollars to the United States -- one from China and one from the energy industry. China's dollar reserves are derived from sales to the United States, so it is stuck in the dollar zone. Plus, the Chinese have pegged the yuan to the dollar. The energy industry, also part of the dollar zone, needs to find a home for its money -- and the largest, most liquid dollar-denominated market in the world is the United States.

The United States has created an odd dollar zone drawing in China and the Persian Gulf. (Other energy producers such as Russia, Nigeria and Venezuela have no problem using their dollars internally.) Unhinging China from the dollar is impossible; it sells in dollars to the United States, a linkage that gives it a stable platform, even if it pays relatively more for oil. Additionally, the Arabian Peninsula sells oil in dollars, and trying to convert those contracts to euros would be mind-bogglingly difficult. Existing contracts and new contracts managed in multiple currencies -- both spot and forward managed -- would have to be renegotiated. Any business working in multiple currencies faces a challenge, and the bigger the business, the bigger the challenge. The Arabian Peninsula accordingly will not be able to hedge currencies and manage the contracts just by flipping a switch.

This provides an explanation for the resiliency of U.S. markets. Every time the news on the subprime situation sounds so horrendous that it seems the U.S. markets will crash, the opposite occurs. In fact, markets in the United States rose through the early days, then sold off and now have rallied again. Where is the money coming from?

We would argue that the money is coming from the dollar bloc and its huge free cash flow from China, and at the moment, the Arabian Peninsula in particular. This influx usually happens anonymously through ordinary market actions, though occasionally it becomes apparent through large, single transactions that are quite open. Last week, for example, Dubai invested $7 billion in Citigroup, helping to clean up the company's balance sheet and, not incidentally, letting it be known that dollars being accumulated in the Persian Gulf will be used to stabilize U.S. markets.

This is not an act of charity. Dubai and the rest of the Arabian Peninsula, as well as China, are holding huge dollar reserves, and the last thing they want to do is sell those dollars in sufficient quantity to drive the dollar's price even lower. Nor do they want to see a financial crisis in the U.S. markets. Both the Chinese and the Arabs have far too much to lose to want such an outcome. So, in an infinite number of open market transactions, as well as occasionally public investments, they are moving to support the U.S. markets, albeit for their own reasons.

It is the only explanation for what we are seeing. The markets should be selling off like crazy, given the financial problems. They are not. They keep bouncing back, no matter how hard they are driven down. That money is not coming from the financial institutions and hedge funds that got ripped on mortgages. But it is coming from somewhere. We think that somewhere is the land of $90-per-barrel crude and really cheap toys.

Many people will see this as a tilt in global power. When others must invest in the United States, however, they are not the ones with the power; the United States is. To us, it looks far more like the Chinese and Arabs are trapped in a financial system that leaves them few options but to recycle their dollars into the United States. They wind up holding dollars -- or currencies linked to dollars -- and then can speculate by leaving, or they can play it safe by staying. In our view, these two sources of cash are the reason global markets are stable.

Energy prices might fall (indeed, all commodities are inherently cyclic, and oil is no exception), and the amount of free cash flow in the Arabian Peninsula might drop, but there still will be surplus dollars in China as long as it is an export-based economy. Put another way, the international system is producing aggregate return on capital distributed in peculiar ways. Given the size of the U.S. economy and the dynamics of the dollar, much of that money will flow back into the United States. The United States can have its financial crisis. Global forces appear to be stabilizing it.

The Chinese and the Arabs are not in the U.S. markets because they like the United States. They don't. They are locked in. Regardless of the rumors of major shifts, it is hard to see how shifts could occur. It is the irony of the moment that China and the Arabian Peninsula, neither of them particularly fond of the United States, are trapped into stabilizing the United States. And, so far, they are doing a fine job.

wrong thread!!!

see where it says "into the shitbin?!" not "buoyed by foreigners!"

Hahaha. BUT IT'S ABOUT ECONOMICS!

kudlow.jpg

http://www.whatnotreviews.com/images/personal_finance/jim_cramer_book.gif

Fight to the death.

for a while, i've had a flip line about how the only time to worry about illegal immigrants is when they start leaving. and there they go.

Good column from Martin Wolf in the FT today about why the credit crisis is a paradigm-shifting event:

http://www.ft.com/cms/s/0/90126fca-a810-11dc-9485-0000779fd2ac.html

Alan Greenspan's take on how we got where we are, from the WSJ:

The Roots of the Mortgage Crisis

And after reading that Statfor thing:

http://seattletimes.nwsource.com/html/travel/2004067332_webchinesetourists12.html

Yes, maybe new competing thread is a good idea. Then again, having a In Da Shittybins vs. Boyed By Fauranurz fight here makes the thread more fun (IMHO)

Hmm.. now if we can just get all those Chinese tourists to buy a couple of houses while they're here.

"LOL HONGKOUVER!"

http://www.lakelandsd.com/tutorial/sinking.jpg

http://farm2.static.flickr.com/1180/753867454_b2849f7a8b_o.jpg

Seamus Milne in today's Guardian

It might be entirely true that the channeling of foreign-held dollars back into USA investments is preventing large amounts of shit from reaching the fan, this dynamic will only hold things in place if the Chinese tolerate a drastic fall in the value of their dollar-holdings. That fall is inevitable unless the USA makes a hard turn from its present course.

What I see as most likely is the Fed will hold interest rates steady, even as the recession becomes apparent in February-March of 2008. The recession will put increasing pressure on mortgage holders from the real estate bubble and loan defaults will increase through out the year as unemployment rises. This will cause the banking system to scream in pain, crying for lower interest rates.

At that point, the Fed is screwed. Lowering rates would further crash the dollar. Not lowering rates would crash the banking system. They'll choose the dollar. Then we'll see the real crisis appear. Whether we can wiggle out of it will depend on whether the central bankers of the world can agree on a plan.

The USA has benefitted enormously from becoming the world's reserve currency at a time of ballooning international trade. It's about time for the world to reclaim the keys to the world economy. I would expect some sort of 'currency basket' to be devised to replace dollars as the reserve currency by 2011. Either that, or big dose of chaos.

As usual, I do not claim to hold any special expertise in the Economics of the Future. I just read, watch, think and make my best guess.

http://invivoanalytics.com/2007/12/17/the-real-yield-negative-interest-rates/

note use of real CPI including energy, food etc. instead of what keeps getting reported as CPI in the press

forecast: (hyper)inflation or deflation?

presume will go for former but i still dont really get how this is done when wage inflation would be severely constrained

None dare call it stagflation.

No deflation is in sight in the USA, apart from housing prices unbubbling.

How this is done when wage inflation is severely constrained is simple enough. We'll import our inflation as the dollar buys progressively less in foreign markets, including raw materials (think: oil) and manufactured goods (think: almost everything in WalMart).

The USA has the most globalized economy. The erosion of USA wages will slow the price inflation down, but the loss of purchasing power will be the pertinent gauge to watch, not just wages or prices.

not helping
http://www.economist.com/images/20071208/20071208issuecovUS400.jpg

Increasing the money supply through....more credit? But won't it need takers? And institutions to happy to lend more?

The world is awash in dollars already. All that is necessary is for a signifigant portion of foreign dollar holdings to be repatriated for the USA money supply to balloon. When a nation refuses to accept its own currency... well, let's just say it isn't done by solvent nations.

As for lending and credit, when the private sector won't borrow, the government can always step in. If the government is a poor credit risk, it will just have to offer more interest, won't it? If the USA government cannot borrow even at high rates of interest... well, let's just say that is rarely the case with solvent nations.

So like, wtf is about to happen in real terms? Are we most likely looking at a depressed economy where it's tough to find a job and we have to cut our expenses a lot or a genuine crisis?

the world is awash in dollars..agreed. don't rate cuts mean yet more dollars though? meaning (hyper)inflation (possibly).

i guess foreign dollar holdings dont want to repatriate...but doesn't this make those holdings look less pleasant with each cut?

The Economist has been getting progressively worse under the new editor-in-chief
I would love to hear how "cheap food" is going to end when McDonald's is on the verge of waging its economy of scale on an even wider variety of foods across an even larger geographical range - are they all of a sudden going to have so much competition that they lose their price control?

What's to happen, in real terms?

I think it will be a very slow-motion sort of economic deterioration that will basically look like a recession with stagflation for a while, with continued degradation of infrastructure from year to year. Just a steady impoverishment, falling down from our past levels of opulence.

Whether it turns into a really nasty 'hot' crisis will depend a lot on the quality of USA politics - both among the politicians and the general public.

In the past, the USA has shown the ability to toughen up, change direction and do what has to be done to get the nation going the right way again. Whether this can happen again depends largely on how tightly the general public clings to its delusions and its old, comfortable ways of thinking and how much they are encouraged to stay deluded by leaders who shovel out loads of platitudes instead of useful information.

I can't say the signs are very good for our chucking away our delusions and facing up to the problems we've caused ourselves any time soon. We still have several more layers of fat and comfort to strip away before we come into contact with hard, sharp reality. When we reach that point, it could go any direction - but I'd bet on the country getting its act together eventually.

If we could only get rid of those damned Armageddon-believers I'd feel a whole lot more confident about where we'll be in 20 years.