Rolling US Economy Into The Shitbin Thread

are people holding lots of swiss paper to dump on the market when they retire? is there a mass retreat into swiss currency from scary things like stocks or american bonds? That's what I mean by commodities being high. The "so-called-smart" (lol smarter than any of us) crowd is already in up to their elbows in chicago now. I always try to think three steps ahead (lol not rich yet).

I know what you are getting at, but is there a mass retreat into commodities? I'm not saying there isn't, I'm saying I don't know - basically because I don't know how 'mass' mass is? At this stage of the game I'm happy enough just to be debt-free and with savings that could last a couple years in event of job loss. Can't see every being 'rich', more about a buffer ( but then how many people have any kinds of savings cushion? even rich people! who mightnt be so rich if can't liquidate assets in falling knife selloff!)

Whats chicago?

chicago is the US commodities trading floor. it's where hardcore gamblers test their black box shit before trying it out on the "easy money" on wall street. smaller fortunes die far more horrible deaths in chicago on the daily, while the chubby ivy kids wring their hands in NYC over the perfumes of such unproven ideas as GOOG or APPL.

Anecdotally, a coworker told me that when he went to have his taxes prepared this weekend, his Girl April related to him that people are coming in crying, lost their job, their house, and please please jesus I just need a few dollars more, please don't make me owe the government too.

If people out in the boondocks are having that kind of a year already, I don't know whether that means bottom by june or if we're in for a double dip.

hmm im kinda seeing commodities (ok well gold) as long term hedge. volatility of thats tuff (and silver!!) wouldn't dare trade or try shorting it. i figure somewhere between 10-25% in gold as hedge for next 4 years or so. If it doesn't do well, silver lining means its maybe not as tin hat out there as it looks

I see a big fat wad of stupid people selling off gold in quantity over the next decade until it's down to half of what is is now. I'll be wrong as usual, of course, I thought houses couldn't possibly go for half a million dollars out in the middle of goddamned nowhere, with no seaside and a horrific commute. On the other hand, I'm still right about that last part, after a terribly cruel and horrific fashion that's done nobody any good.

Tin Hat Time: When do you think the banks realised what was going to happen? How much of it do you think was actually planned rather than incompetency (I'm not saying it was planned - and at face value the banks are major losers in this - but after the dust clears?) I mean, we've been here many times before? (though perhaps not in this scale, and it does look like unwinding of a post ww2 bubble as much as a post 01 bubble in many respects)

I've been wondering about that too, but in my naive eyes it seems more like an inadvertent conspiracy of self-interest than a deliberate conspiracy, i.e. everyone who stood to make any kind of fee or commission on anything didn't give a fuck about the results of their actions.

At the same time it's hard to understand how major financial institutions could design and insurance companies could insure instruments based on an assumption that real estate would rise forever.

Bubbles are shared illusions, a lot of people make a lot of money out of the shared illusions. Whether the institutions realised it or not they were building a game of timebomb pass the parcel. I think a lot of institutions did know what was going on because they were selling their dross off the books as soon as they could.

I lean more that way too....generally (The UK banks knew in 2001 I think - maybe didn't expect to go on as long as it did).

Yes to "everyone who stood to make any kind of fee or commission on anything didn't ive a fuck about the results of their actions" as in 'I'll be long gone when shit hits fan', but this doesn't explain higher up the chain - at what point did they know

(Semi?)-engineered downturns in the past (1907, 1913) seem to have been a lot...quicker? I'm just curious as to who is going to come out of this a winner (at face value the writedowns look bad for the banks, but on the other hand haven't JP Morgan basically just been 'given' Bear Stearns - after getting the means to do it...kind of from themselves - dunno if misreading that but it seems that way)

Market manipulation has become the standard way for the rich to make money.

For example, some brilliant child in a hedge fund seems to have discovered that the world market for rice is huge, but prices have traditionally been set in the U.S. on the Chicago Merc trading floor.

Because rice is far from a staple in the USA, that market was fairly small. Small == easy to manipulate. Lately, the number of rice contracts traded has tripled. Not coincidentally, the world price of rice has shot up. And somebody has been making a killing. This whole thing is about as real as the Enron-induced electricity "shortage" in California in 2002.

Food riots in third world nations are apparently a small price to pay for mega-profits for some hedge fund and a big bonus for some smart kid... amirite?

inadvertent conspiracy of self-interest
qft

this doesn't explain higher up the chain
I think it's the that people who really knew were one step from the top and could pass the blame upward to the very top, and those guys were off playing bridge and not giving a fuck

yeah I mean my impression of the big ibanks and insurers and audit firms is consistently that b-school grads bust their balls "work hard party hard" trying to get up to that rarefied echelon and then once they're there actually showing up to the office more than once a week is below their station

I know a lot of dudes at big ibanks (and hedge funds, for that matter) that fucking work all the time. Most of them are in their 40s and are pricks.

Can anyone recommend good articles on speculation as a factor in current commodity price spikes?

The US government has denied speculation is behind the spikes; quite odd they would even take any position in it in the first place.

prevents them from having to take the ibanks to task next week after half the world goes to shit. see dystopian screenplay thread update on food riots already going down. "we told you last week, speculation had nothing to do with it."

My cousin's son was an ibanker in wall street and died recently of a "mysterious heartattack" at age 26. Yeah..."work hard party hard" sometimes die hard 2 (i'm awful, i know)

But if you're doing cocaine 11 times a day just to make it through your 70 hour workweek for a job you don't even like I don't know how much unlimited sympathy you deserve

Well he wasn't exactly doing all that coke to help the poor or because it was the only way he could feed his family.

As I recall, Dick Cheney publically and scornfully dismissed the idea that the California energy price hike was due to market manipulation back in 2002, too. That inconvenient fact was tossed down the memory hole after the Justice Department took Fastow and Lay to court.

well and even in 2002 dick cheney lying through his ugly teeth wasn't really newsworthy

Yeah it was more of a "this is how what all the other bros at work are doing too" thing. Or whatever.

smartest guys in the room is an excellent documentary btw

yeh, When Genius Failed (about LTCM) is a good kinda-complementary read

Man, if genius keeps failing on us like this, we might have to stop acting surprised!

I don't think anybody on this thread was surprised! mainly because we're not geniuses I guess

My point was mainly that having this administration deny market manipulation is about as trustworthy as letting the flies look after the picnic.

The US government has denied speculation is behind the spikes

LOLOLOLOLOLOL.

Happened upon this excerpt in Wikipedia. Might be sort of obvious, but it's still worth reading:

Inequality of wealth and income

Marriner S. Eccles who served as Franklin D. Roosevelt’s Chairman of the Federal Reserve from November, 1934 to February, 1948 detailed what he believed caused the Depression in his memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951):

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. [Emphasis in original.] Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

Basically, this is how capitalism is built to operate. During the Eisenhower admisitration the highest U.S. income tax bracket was, iirc, 90%. Corporate taxes were much higher, too.

How odd it is that the mainline USA conservatives persistently want to portray the 1950s in the USA as some kind of lost paradise, while simultaneously maintaining that any country that levied such taxes would by absolute necessity be a hell on earth.

lol do not try and reason w/those people

you guys didn't miss this ultimate schadenlol did you?

http://calculatedrisk.blogspot.com/2008/04/mortgage-woes-for-mortgage-bankers.html

DC downtown commercial space was still shitty as of a year or so ago, I can't imagine how bombed-out and desolate it might wind up looking as things get worse. Government can borrow on blood and tears, but non-profits and lobbyists run on cash and interest. My laughter is raucous and frequent but also hollow.

which is worse right now in US, commercial or residential property? and which tanked first? News over here has always focused on residential. But this side commercial tanked first probably 12-18 months ago but didn't really get reported. The press in UK started switching to bears about 8-10 weeks ago, but its really gathering pace just this last week or so as the realisation that main street has a neutron bomb parked on it can no longer be denied

The pace in the UK i think may be much quicker than in the US. We went surprisingly quickly from "subprime is a US problem" to "top 10 subprime areas of the UK", from "will the *US* go into recession" to "the coming UK recession", but most surprisngly (even given UK press sensationalism), from "UK has a strong economy" to "oh shit, we are way more indebted than america" - speed of the last change seemed to be almost overnight - the denial about this point was very strong for a loooong time

Sorry meant to say theres a lot of speculatively built office blocks and small scale 'commercial on ground floor with apartments above' that have been built over last 2 years here - and the residential has been taken up at least to a degree but where the commercial section has NEVER been occupied. large residential oversupply in the uk is open secret but, relatively may be even worse in commercial premises

Back on the commodities thing.

We've had commodities futures and derivatives for the best part of 200 years now they are a useful way of managing risk and spreading income for producers and users of commodities. Yes there have always been speculators with no interest in production or use of commodities but rarely have they had the power to distort markets in the way hedge funds have now. Most economists believe that distorting markets is dangerous in the long term, leading to inefficiencies that leave people hungry and out of work. The some hedge funds are pissing in the fountain as badly as if we had price controls or high trade tariffs.

from the WSJ

------------------------
Volcker's Demarche
April 9, 2008

'You don't have to predict it. We're in it." Thus did Paul Volcker respond to a question Tuesday about whether he still predicted a "dollar crisis" in the coming years. We hope current Federal Reserve Chairman Ben Bernanke is paying attention.

Mr. Volcker, a former Fed chief, has a well-earned reputation for straight talk, but there is always strong institutional pressure not to second-guess one's successors at a place like the Federal Reserve. This makes his speech to the Economic Club of New York all the more remarkable for the sharp questions he raised about inflation, Fed independence and moral hazard.

On the dollar, Mr. Volcker's blunt talk of crisis is a welcome tonic to the devaluationist consensus that now dominates Washington. The world has been staging a run on the greenback, with damaging results if it continues. Mr. Volcker noted that when "concerns about recession are rife," the central bank will be tempted to "subordinate the fundamental need to maintain a reliable currency" to the impulse to shore up a flagging economy. The danger is that you lose both battles, as the U.S. did in the 1970s, and wind up with stagflation.

The present climate, Mr. Volcker told his audience, reminded him of nothing so much as the early 1970s. Then as now, certain commodity prices were rising fast – he cited oil and soybeans as two examples. Then as now too, these were explained away as speculative price run-ups and not as a harbinger of a broader inflationary trend.

We all know how that ended, and Mr. Volcker knows better than anyone. He was the one who, at the end of that decade, had to step in and raise interest rates to punitive levels to break the back of that bout of inflation. With commodity prices spiking again – soybeans are $12 a bushel today compared to $7 a year ago – Mr. Volcker is warning the Fed not to let inflationary expectations become embedded once again.

Mr. Volcker also argued Tuesday that the Fed's strenuous efforts on behalf of the housing market risked looking "biased to favor particular institutions or politically sensitive constituencies," in this case the housing industry. He did not argue that no government intervention was warranted – the crisis was, he said, "too threatening" for the government to stand aside.

But the Fed has a particular duty to defend the integrity of the "fiat currency" in its charge. And exchanging dollars for "mortgage-backed securities of questionable pedigree" both raises the specter of moral hazard and potentially undermines the world's faith in the integrity of the Fed's balance sheet. Unless the Fed can shut the door it opened with its guarantee of $29 billion worth of Bear Stearns paper – which "seems highly unlikely," in Mr. Volcker's words – it will have to take on oversight of the institutions it is now implicitly back-stopping.

Related to this, Mr. Volcker argued against a further extension of this implicit Fed guarantee to hedge funds or private-equity groups, whose failure pose little risk to the system as a whole. Right about now wouldn't be the worst time for such a hedge-fund blowup, if only to show that the Fed will let it fail.

In recent days, another former Fed Chairman, Alan Greenspan, has been making the rounds defending his legacy. Mr. Volcker, with the benefit of some additional distance from his time at the Fed, offered something more useful: A diagnosis of our current predicament and some sound warnings about the dangers of a Fed that responds too easily to political pressure and fails to protect the value of the dollar.

Isn't it that the volatility, or spikes, are speculation ( and the equivalent drops are sell offs to meet margin calls), but the upward trend is because inflation is out of the bag and has been for a long time, but now even official inflation is wriggling loose?

that is probably true but I think that speculation is driving a longer an bigger spike than we have seen before.

When do you think this spike started?

Difficult to say, the hedgies provide a very good (as in dangerously efficient) feedback look for any economic process. It started as a purely demand related phenomenon. I guess at whatever point the hedgies started to get bored with credit derivatives.

given the amount of money hedgies and ibanks spend on complex quant modeling I seriously doubt that boredom drives the derivative (and other complex vehicles) market.

I think there is has been way too much of a rush to proclaim a gold bubble (or a wheat bubble! what???) we have a bubble that last for years on end sustained entirely by cheap credit, the credit bubble busts and we're suddenly supposed to be in another bubble already? but bought with what? credit? the credit thats so much harder to get hold of? how does this work?

if this is a bubble the central banks and the IMF better hurry up and sell off their gold at the top of this 'bubble', no?

Which comes back to the fed and the printing presses...where is that helicopter money actually going?

banks

Seems there will be some winners from all this then. Rather like in previous episodes

f this is a bubble the central banks and the IMF better hurry up and sell off their gold at the top of this 'bubble', no?

shame they did it years ago.

Seems there will be some winners from all this then. Rather like in previous episodes

Seems to be the same people every time.

I don't think it is boredom driving the commodities bubble but I do think that some of those quant modeling chaps have discovered just how to create a beneficial (to them) feedback loop to increase the returns they can make from economic phenomena.

Well the IMF are getting ready for a big sell off aren't they?

there's probably a growing market in hedge funds that deal with distressed companies or sectors.

quant modeling is so sophisticated that the investor is usually totally clueless about where the growth is actually coming from. Most popular modeling at hedge funds is based on complex debt structure and bank rates...this year is going to be an interesting year for hedges, that's for sure. I suspect most models don't account for a) a downturn this size, b) government intervention or c) more regulation. There's a lot of uncharted waters and turbulence in hedge funds right now.

http://www.schoolnutrition.org/Index.aspx?id=2813

"Free" lunches starting to cost school districts money as a result of rising food and gas consts.