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Rajiv
08-16-07, 01:31 AM
Webster Tarpley (http://en.wikipedia.org/wiki/Webster_Tarpley) has an article at online journal (http://onlinejournal.com/)

Fed attempts to bail out bankrupt Wall Street speculators; Cheney demands staged terror attacks, war with Iran -- part 1 (http://onlinejournal.com/artman/publish/article_2304.shtml)


On August 9-10, the European Central Bank, the Bank of Japan, the Federal Reserve, plus the central banks of Australia, Norway, Switzerland, and other countries “injected” the equivalent about a third of a trillion dollars ($325 billion) into the money systems of the world. The Bank of Japan handed out a dramatic ¥1 trillion, about $8.5 billion. The European Central Bank showed signs of panic, or of realism, by spewing out about €160 billion over two days. Their goal was to stave off a spreading panic at bond trading desks and in the capital markets of the world about junk bonds, collateralized debt obligations (CDOS), mortgage backed securities, and other paper debt instruments.

At about 9 AM on Friday August 10, the Chicago futures markets suggested that the Dow Jones Industrial average would open down about 190 points. That meant the potential for spreading stock market panic, with the DJIA closing down 1,000 to 2,000 points or more by the end of the day, quite possibly pitching more banks and hedge funds into bankruptcy. Such an event would also tend to awaken the US middle class to the fact that their 401 (K) and IRA pension plans were being liquidated. This would make the financial crisis a political crisis as well, and perhaps stoke the fires of impeachment. Helicopter Ben therefore followed his predecessor, Bubbles Greenspan, on the path of bailout, although on a larger scale than what Greenspan had ever attempted in public. Bernanke and the New York Fed bought up $38 billion of toxic mortgage-backed securities from the principal hyenas of Wall Street -- led, we can be sure, by Goldman Sachs, Bear Stearns, Lehman Brothers, J.P. Morgan Chase, Merrill Lynch, and Citibank. For bailout purposes, the banks were given a sweetheart interest rate, just 4 percent, less than the 5.25 percent target Fed funds rate used for interbank lending, and much less than the 6.25 percent the Fed requires from banks coming to its own discount window under normal circumstances. The $38 billion, injected in three doses during the course of the day, in addition to other Fed measures, was almost enough to prop the market up for eight hours -- the Dow closed with a loss of 31 points. So the central banks will need to provide more fixes, sooner rather than later.
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Wall Street derivatives monsters -- too big to bail out

It would take more than $38 billion to bail out Goldman, Bear, Merrill, and the rest. The bonds of the firms just mentioned are already rated as high-risk junk. The Wall Street banks and investment banks represent a black hole into which literally trillions of dollars could disappear without a trace -- it is enough to cite the derivatives holdings of JP Morgan Chase and Citibank, who are listed in the spring 2007 report of the Controller of the Currency as having $105 trillion in derivatives between them, and the reality is a multiple of that. In addition, there is fear of the unknown. This past week traders from Rick Santelli in Chicago to London stock touts have reported that a large financial entity -- something probably bigger than Goldman Sachs -- has been selling off a portfolio of some $10 to $15 billion in value. No one has said publicly what this entity is, or what this “unprecedented event” might represent. A few days ago, oil hit an all-time high of $78 per barrel. It then fell back 10 percent, because so much of the price of oil -- at least $30 at present levels -- is pure hedge fund speculation. And these hedge funds, as they near bankruptcy, massively sell off oil futures. Gold has taken some nasty dips for the same reason.

Fed attempts to bail out bankrupt Wall Street speculators; Cheney demands staged terror attacks, war with Iran -- part 2 (http://http://onlinejournal.com/artman/publish/article_2310.shtml)


In Surviving the Cataclysm, my 1999 study of the world financial crisis, I developed the distinction between collapse and disintegration. A collapse can be very serious, like the Wall Street crash of 1929. Prices plummet, but the exchange still remains open for business. Disintegration is much more serious, like the British default of September 1931 that swept away the only monetary system the world had in those days, or the German hyperinflation of 1923, which wiped out the entire German middle class.

The US crash of 1987 was a classic collapse, and it was followed by a short recovery of sorts. What is happening today looks much more like disintegration, meaning that credit markets, including bond and junk bond markets, have partly ceased to function as far as non-government securities are concerned.
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Not just one bankrupt hedge fund, but two dozen -- for starters

Back in September 1998, at the time of the Russian state bankruptcy around bonds called GKOs, Long Term Capital Management (LTCM), a Connecticut hedge fund, went bankrupt, blowing a hole of several hundred billion dollars in the world banking system. LTCM used high leverage and the Black-Scholes model to place gigantic bets on currency movements. If Greenspan had not rushed in with billions of Fed money to carry out a backdoor crony bailout, the interbank clearing systems of the US, UK, and perhaps Japan -- known as CHIPS, CHAPS, and BoJ Net -- would have jammed up, and the hearts of the financier universe would have ceased to beat, leading swiftly to world economic chaos and depression.

But this time it is not one LTCM, but two dozen highly-leveraged hedge funds which have blown up or are about to. Prominent among them are the so-called quant funds, which bet $10 billion and up on financial fluctuations using computerized predictive models. Prominent among these is Renaissance. The quants complain that their models, which are supposed to incorporate 45 years of market history and experience, are now failing to forecast what will happen next, and losses are mounting. The reason is that we have now encountered a cataclysmic singularity which has not been seen in more than half a century -- the beginning of the end of the US dollar. To find a financial earthquake comparable to the present one touching the leading currency of the world, we must in fact go back to the disintegration of the British pound in September 1931.

In recent days, reality has filtered through, even on CNBC. Commentators have warned of “systemic risk if a big bank blows,” “the end of the world,” “depression,” “Armageddon,” “panic,” “the Hindenburg” (the dirigible, not the signal), “a return to 1990” (when Citibank was bankrupt and secretly seized by the Controller of the Currency), the crash of 1987, the hedge fund crisis of 1998, and a “credit crunch.” “Bond traders are afraid.” “Wall Street is afraid.” Led by Jim Cramer with his celebrated on-air psychotic episode on the afternoon of Friday, August 3, Wall Street has been heaping insults on Helicopter Ben and demanding that he open the cash spigots, cut the fed funds and discount rates drastically and quickly, and reassure the stockjobbers that backdoor crony bailouts will be available for all, starting with the too big to fail, like JP Morgan Chase and Citibank.

The tip of the iceberg: Financial institutions in trouble

3 Bear Stearns hedge funds

3 BNP Parisbas funds

3 Goldman Sachs funds: Global Alpha, North American Equity Opportunities, North American Equity Opportunities

Sowood hedge fund -- absorbed by Citadel to mask impact

Bowa Commercial Bank, Taiwan -- seized by regulators

Renaissance (quant)

Luminent

Westdeutsche Landesbank hedge fund

IKB Industriebank, Germany

Deutsche Bank ABS hedge fund

AQR Capital Management (quant)

Washington Mutual

Countrywide

American Home Mortgage

Basis Capital

Absolute Capital

Macquarie Bank of Australia

Homebanc

Man Group (UK)

Andreuccio
08-16-07, 12:13 PM
Right now the dollar is gaining against assets, but losing against other currencies. The article you link to argues that hyperinflation is near. It suggests that perhaps Bernanke will lower interest rates early next week, setting off a dive in the dollar. EJ has argued that the likelyhood of being able to time the switch from Ka to Poom is dubious. It occurs to me that perhaps the best way to ride this out is to buy yen, hold it until the dollar starts to crash, and then convert it into gold. Any thoughts?

Rajiv
08-16-07, 12:50 PM
I have tried to minimize my exposure to the US$ -- partly in a diversification of non US$ assets. But of course with the US as being the primary source of income, that can be hard.

Andreuccio
08-16-07, 01:02 PM
In my Roth, I was able to buy Yen this morning. I'm stuck in my 403b, where most of my money is. There are plenty of international stock funds, including two that focus on Japan, but with those markets dropping too, it's not much of a hedge. Also, trades in that account are only executed at the end of the day, which limits flexiblility. The only currency I can really invest in is dollars in the form of various MM accounts.

Jim Nickerson
08-16-07, 01:13 PM
In my Roth, I was able to buy Yen this morning. I'm stuck in my 403b, where most of my money is. There are plenty of international stock funds, including two that focus on Japan, but with those markets dropping too, it's not much of a hedge. Also, trades in that account are only executed at the end of the day, which limits flexiblility. The only currency I can really invest in is dollars in the form of various MM accounts.

The bonar ain't bad right now, it buys a whole lot more of market things that it did a month ago.

Personally, taking history as guide, brokerage money market funds have for the 30 years of which I have been aware of them have almost always maintained their 1 bonar nominal value. Of all the things I can worry about, my MM fund is way down on the list.

Andreuccio
08-16-07, 01:30 PM
I'm not so much worried about it not maintaining it's nominal value. After the MM discussion here, I switched to a fund that invests mostly in 3 mo treasuries, so I don't think it's going anywhere. Even the one I was in previously is probably pretty safe. And you're right: at this moment the dollar is doing fine.

I am, on the other hand, worried about real value. How fast will the switch from Ka to Poom happen? Will it be a slow process, unfolding over days or weeks, or will it be more sudden? Will I be able to react quickly enough to buy gold or some other hedge once the switch happens, or will my dollars drop by 30% or more before I can react.

There are big limitations on trading in my 403b, not the least of which is what I mentioned before: trades only execute at the close of the day. Also, I'll be on vacation all next week, in a place where I probably wont have internet access. I'm a bit worried.

BiscayneSunrise
08-17-07, 10:07 AM
It's times like this you wish for the proverbial one handed economist. EJ has said the Ka happens too quickly to trade. Others say there is no rush to enter long on Poom trades.:confused:

I have been long all the Poom trades (PM's & base metals) since before the summer. I thought I was smart enough to be well positioned for the coming market crash. Little did I suspect that the very thing I thought would be a safe haven turned out to be one of the first things overleveraged hedge funds would sell to raise cash. That's the Ka, I get it. Now just waiting for the poom!

Rajiv
08-18-07, 01:07 AM
Fed attempts to bail out bankrupt Wall Street speculators Part 3 of a 3-part series (http://onlinejournal.com/artman/publish/article_2316.shtml)


Contraction in real economic activity in the USA

Thirty-six years ago this week, on August 15, 1971, President Nixon ended gold settlement among nations and fixed currency parities, and thus pulled the plug on the Bretton Woods world monetary system, the most successful world currency arrangement that the world has ever known.

Nixon was responding to British demands for gold payment. Among many crimes, this was Nixon’s greatest. Since then, world economic growth has gone negative, into reverse, with net world deindustrialization in the US, the former USSR, eastern Europe, the UK, the EU, and elsewhere. (Only China, partially outside the system, represents a consistent exception.)

During all these years, the London-New York financiers have been concerned to keep political power in their own hands by engineering a gradual decline or “soft landing,” treating the US population like the frog in the pot of water which is slowly brought to a boil. The key to this has been the looting of underdeveloped countries to keep the homeland stupefied and inert. In all these years, the big question has been about The Contraction -- that is to say, about the moment when events like the 1987 stock market and dollar crash, the 1990 banking crisis, or the 1998 hedge fund debacle would begin to translate into mass layoffs, business shutdowns, economic disruptions, Hoovervilles, and bread lines inside the US itself. This is what happened over 1930, as the US descended into the Great Depression. It appears to be happening right now.

Harbingers: Freight car loadings down 4.2 percent; truckload volume down 5 percent

It would appear that the point of Contraction has been reached in the first months of 2007, and that the real or physically productive economy has been in marked decline for some time. This is also the opinion of Richard C. Cook. It is hopeless to rely on the cooked figures of the Bush administration, the most notorious liars of the age. Private associations may well be more accurate.

One obvious data series for measuring real economic activity is freight car loadings and trucking ton-miles, which few hedge fund operators have ever heard of. But these real-world physical units are a useful way of estimating overall levels of real economic activity, as distinct from total derivatives held by banks and other measures based on toxic paper.

According to the American Trucking Associations, “the truckload industry started 2007 poorly as seasonally adjusted (SA) volumes plummeted 5.0 percent from December. This was the largest monthly decrease since a 6.5 percent drop in February 2000. . . . Compared to January 2006, the total SA loads index was off 2.3 percent, which was the first year over year contraction since July 2006.” (American Trucking Associations, Trucking Activity Report, 15:3 (March 2007). The same tendency was confirmed several months later by the Association of American Railroads, which announced that for the week ending April 28, weekly rail car loadings were down 1.7 percent and intermodal units were down 5.6 percent, both compared to the same week a year before. For the first 17 weeks of 2007, rail car loadings were down a cumulative 4.2 percent, while intermodal trailers were down 11.5 percent (Dow Jones, May 3, 2007) These are only fragmentary snapshots, but they do provide more than a strong hint that the Contraction is indeed upon us. Are there any economists left who still look at the real, physical economy?

zoog
08-18-07, 02:23 AM
One obvious data series for measuring real economic activity is freight car loadings and trucking ton-miles, which few hedge fund operators have ever heard of.

Sort of like a domestic Baltic Dry Index. My commute and other frequent intercity trips take me by the BNSF and UP rail yards and lines. I haven't noticed any particular decline in the frequency or length of trains... but I imagine the decline is yet too subtle for a casual drive-by observer.

Rajiv
08-18-07, 11:07 AM
Sort of like a domestic Baltic Dry Index (http://en.wikipedia.org/wiki/Baltic_Dry_Index).


The Baltic Dry Index is an index covering dry bulk shipping rates and managed by the Baltic Exchange in London. According to Baltic Exchange, the index provides:


an assessment of the price of moving the major raw materials by sea. Taking in 40 shipping routes measured on a timecharter and voyage basis, the index covers supramax, panamax and capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.

The Baltic Dry Index (http://investmenttools.com/futures/bdi_baltic_dry_index.htm) appears to be at an all time high


http://investmenttools.com/images/wfut/crb/bdi.gif

This appears to imply a coming period of high inflation.

Rajiv
08-20-07, 08:22 PM
Also, in a similar vein is this article by Stuart Staniford - "US Peak Oil Adaptation: Prognosis in a Credit Crunch" (http://www.theoildrum.com/node/2896)


It's convenient to separate road transport usage of oil into two factors: the total vehicle miles traveled (VMT), and the efficiency with which the vehicle fleet currently uses oil. The recent trends in vehicle miles traveled I've studied in detail in the past, but here's an update:

http://www.theoildrum.com/files/vmt_monthly_1992_may07_2.png

Monthly vehicle miles traveled in the United States, Jan 1992 - May 2007, together with a twelve month trailing average and a linear fit to the average. Graph is not zero scaled to better show changes. Click to enlarge. Source: FHWA Travel Volume Trends.

Basically, increases in VMT were fairly steady over the last 15 years until late 2005, when VMT flattened out and began to decline slightly (broadly coincident with the plateauing of global oil supply). This isn't altogether good news. Historically, there's a decent correlation between changes in US miles travelled and overall economic growth:

http://www.theoildrum.com/uploads/YoY_monthly_gdp_changes_aug05.gif

Year on Year change in US GDP (chained 2000 dollars) and US VMT. Click to enlarge. Source: FHWA Blue Book and FHWA Travel Volume Trends for VMT data, Bureau of Economic Affairs for GDP.

On this basis, I suggested in 2005 that the (then) drop in VMT growth would presage a drop in economic growth, and refined this at the start of 2006 to a prediction that the US economy would enter recession in 2007 (a prediction based on my perceptions of the bursting of the housing market bubble also). I may have gotten the timing at bit wrong, but basically that still looks close, and we may get there by the end of 2007.
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Clearly, we have a situation in which financial system players have started to lose confidence in each other. The public has not lost confidence in financial institutions, but they are losing confidence in each other. They are probably better informed than we are, suggesting that as the chain of bad debt and overpriced assets continues to unwind, we could see more institutional failures, and more public loss of confidence in the financial system.

The last financial panic of major significance in the US was was the Great Depression, which was essentially the result of a large debt fueled bubble that crashed in 1929. This led to a series of bank failures and panics and large-scale public loss of confidence in the financial system. That in turn led to a major contraction in the amount of money in circulation (since so many banks disappeared), and a drop in the velocity of money as people and institutions tried to improve their balance sheets and hold more cash. This didn't happen all at once, but as a rolling collapse over a period of four years. The Fed did more or less what you would expect (drop interest rates fairly rapidly beginning in 1929), which didn't really work. Then they were obliged to raise them again to counteract a run on Federal gold reserves by foreign governments, which greatly exacerbated the domestic difficulties. Prices dropped dramatically, as did real output. The data are chilling:

http://www.theoildrum.com/files/depression_gnp.png

US GNP by use of product, 1929-1946. Source U.S. National Income and Product Statistics: Born of the Great Depression and World War II, Feb 2007 Bureau of Economic Analysis Article.

Now, this is probably a worst case for what we might face in the next few years, and there are some reasons to think things will be much milder. But let's just explore it as a worst case. There are two points I want to draw from it. One is obviously to note the sharp contraction in GNP generally from 1929 to 1933. It almost halved in nominal terms, and even in real terms, it dropped by a third. A contraction in GDP of that order of magnitude today would likely produce a very dramatic drop in oil usage (recall the correlation between GDP and VMT growth), which would without doubt collapse energy prices to pre-peak levels for a number of years. In the great depression, the unemployment rate rose from 3% to over 20%. With no income, and likely very restricted ability to borrow, that's a lot of people who wouldn't be doing too much driving.

Furthermore, consider the "Gross Private Capital Formation" element of GNP. That is private investment, and it dropped to almost nothing in 1932 or 1933. Now private investment today includes things like research and development in alternative technologies, venture capital funding of clean-tech startups, installation of wind power or solar power sites, laying down of new railroads, new nuclear power plants, coal-to-liquids plants, development of new oilfields, etc. Recall also the correlation I pointed out between fuel economy changes and economic growth - in a depression, it's a safe bet that average fuel economy of the fleet would simply degrade as few people bought cars and the existing fleet got older and less efficient. In short, whatever your preferred method of mitigating or adapting to peak oil, you can pretty much kiss it goodbye during a major meltdown of the financial system.