FIRE Economy D-Day

[EJ]

FIRE Economy D-Day: Greenspan's Black Swan

Here we are. The day we have been warning you about since we re-opened iTulip April 2006 at the "peak of complacency" has arrived.

The circuit breakers installed after the 1987 crash will prevent a repeat. Don't worry about that. Maybe the DOW goes down 300 to 600 points today but not lower than 800.

Yet the comfortable fiction that governments – represented by global central banks – control markets will be put to the test. In truth, governments merely influence markets. At times that influence is effectual and at others not.

Today, not.

A quick review of how we got here and where we're going.

Where we've been

Turbulence in markets unnerves Bank and Fed officials
June 13, 2006 (Times Online)

CONCERN is growing over the present instability of financial markets among senior officials at the Bank of England and the US Federal Reserve.

Giant Margin Call on Real Estate Begins
July 30, 2006 (iTulip)

What's the federal government going to give us this time? More tax cuts? More deficit spending? Seems like those bullets have been spent. What happens when you cut interest rates when oil is trading at $75 versus $20 as in 2001? Fasten your seat belts. It's going to be a weird ride.

A Financial Market Crash is a Process, Not an Event
Aug. 16, 2007 (iTulip)

A financial crash is not sudden, singular event. The way the Crash of 1929 is commonly misunderstood, the market crashed on Monday, October 31, 1929 and soup lines formed Tuesday. Not so. A financial crash is a process lasting as long as a year, punctuated by a few notable grip-and-grin market events that make it into the history books. Underlying the process is the dissolution of a fallacious belief system that developed over a period of many years. Fallacies floated on an ocean of cheap credit. As the credit dries up, facts are revealed under the harsh light of reality.

Collapsing Global Credit Bubble Churns up Financial "Whales"
Sept. 17, 2007 (iTulip)

As the Whales Hit the Beach, Don't Forget Where they Came From

Mortgage Market Off the Rails, Economy to Follow
Dec. 8, 2007 (iTulip)

Whip Asset Price Deflation Now?

Dehydrated Banks: Just Add Water
Feb, 22, 2008 (iTulip)

Can insolvent lenders be floated by the U.S. government? Should they?

The American Bond Crisis
March 10, 2008 (iTulip)

The credit crisis that started June 2007 with obscure financially engineered debt products such as CDOs has now evolved to include bonds presumably backed by the US government. Guess what’s next after Agency debt? You guessed it!

Debt Deflation, American Style: Yamaichi Securities Company 1997 vs Bear Stearns 2008
March 18, 2008 (iTulip)

In the summer 2007, nearly 20 years after Japan's post credit bubble collapse and debt deflation began, the US started its own journey down credit crunch and bankruptcy lane. The demise in 1997 of Yamaichi Securities Company, the fourth largest brokerage firm in Japan, and the intervention by the Bank of Japan (BoJ) has eerie parallels to the Bear Stearns collapse and Fed intervention more than ten years later. But the differences between the two events are even more telling.

Buy Financials! Catch a falling knife!
June 6, 2008 (iTulip)

Don't buy financial stocks.

That dreaded phrase: ''The system is fundamentally sound'
July 20, 2008 (iTulip)

The system is fundamentally unsound.

Where we're going

To put today's events in perspective we have to go all the way back to November 1998 when iTulip was first launched and we first made the case that we have stuck to consistently ever since, while always looking for evidence to contradict it:

The lesson of the 1920s may be that markets grow to outstrip the capacity of central banks and other institutions to manage them, that markets naturally evolve to operate outside the control of monetary authorities. As a result, these institutions are always fighting the last war.

Perhaps the crash of 1987 and the correction of 1998, which did not have a serious impact on the real economy thanks to quick Fed intervention, represent a phase in a longer term dynamic. Maybe these corrections and the subsequent post Fed bailouts set the stage for a bigger and less manageable market event in the future.

The second thesis relates to the medium term outcome of a crash should the Fed be not much better at mitigating the effects of the collapse of this bubble better than in the 1930s, or at least no better than the Japanese have been in the past ten years since their market bubble collapsed in 1989.

More than 40% of the sovereign debt of the US is held outside the US. History is completely consistent on this: in the event of a sustained drop in liquidity and economic growth of an indebted nation, foreigner borrowers demand to be repaid before other creditors. The dollar is likely to fall like a rock as foreign held US paper is sold. The domestic impact is inflationary. So unlike the US in the 1930s or Japan in the 1990s where deflation accompanied a period of economic contraction, the US is likely to experience a period of inflation in addition to recession.

- iTulip, Nov. 1998

Following this economic and financial market crisis, the cycle of global recession will not have the same impact on the US in 2008 as it did in the previous case in 1930. The US in 1930 was a net creditor but is today a net debtor, with its dual trade and fiscal deficits funded by massive daily capital flows from foreign private investors and central banks – mostly the latter.

Historical Precedent

The precedent is not US 1930 or Japan 1990. Both countries were net creditors with large pools of national savings and industrial capacity to tap to use to develop export trade to earn their way back out of an economic hole. A closer analogy is 1930 Germany.

The sequence of Germany's pre-WWII economic crisis is commonly misremembered as follows:

1. Hyperinflation
2. Depression
3. Hitler elected by angry masses
4. WWII

Not so. Here's what really happened.

1.

1921 to 1923: German hyperinflation

1924: Dawes Plan to restructure debt, Rentenmark replaces the Papiermark

1924: Rentenmark backed by land and industrial goods, hyperinflation ends

1924 to 1929: US and British financing pours into Germany, economy recovers

1925: Germany joins the League of Nations

1929: US market crash (FIRE Economy V1.0), US and British investment in Germany ends

1930: German economy collapses

Then:

2. Depression
3. Hitler
4. War

So far US creditors have held their ground, but as the US recession and financial crisis deepen and the US transmits demand destruction to its creditors, that ground may give way. After the crash of FIRE Economy V2.0 in 2008 China, Japan, and the BRIC lenders may have to cut off funds to the US just as the US and the UK cut off funding to Germany in 1930 following the crash of FIRE Economy V1.0.

China Cuts 1-Year Lending Rate; Reduces Lending Curb
Sept. 15, 2008 (Bloomberg)

China cut interest rates for the first time in six years and reduced the amount of cash that some banks are required to set aside after economic growth slowed and amid tumult on Wall Street.

The People's Bank of China cut the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio by 1 percentage point at some banks. The changes were in a statement on the central bank's Web site today.

Watch for signs of recession among major US trade partners. When they are no longer able to ship their so-called "excess savings" to the US to fund America's twin deficits, the FIRE Economy will be no more, and the US will have to find a way to run its economy the old fashion way – by working, saving, and investing.

See also:

Fed Funds spread signals crash
Sept. 15, 2008 (iTulip)

The last time the Fed Funds target rate got this out of line with the effective rate was in 1987, and from a base of over 6% not 2%. On a percentage basis, at three times the target rate the spread is unprecedented. It happened today. more...

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[icm63]

So why did the game change.

From march 2008 all money managers felt that any bank that got into trouble could use the fed or treasury to bail them out, so there was no financial earth quake risk, the CBOE option put/call ratio confirms this.

You know "Too big to fail !"

Then after Paulson gets his own people to review FNM/FRE books he must have had an 'O my god' moment, as the next week he says no more money for LEH bailout.

MrMortgage believes FNM/FRE losses could reach $450 BN. Then I read a bunch of banks are putting $70 BN together for any future troubles, so that must mean the FED/Treasury are out of the bail out game.

I believe this LEH is not enough to rock the world, Citigroup may do it !

Is this about right !

Link : http://mrmortgage.ml-implode.com/200...aud-breakdown/

The GSE’s have a total combined $1.2 TRILLION in Subprime and Alt-A exposure that they have told us about. But, we know now that they covered up many other things so exposure is likely greater. On top of this, they likely have several hundred billion in higher grade guarantees that will act much closer to Subprime and Alt-A in the future. This is due to their faulty automated underwriting systems, DU and LP respectively, set to ‘way too easy’ mode during the bubble years.

Lets pretend they have $2.25 trillion in ‘at-risk’ mortgage exposure. If 33% lose thier home (less than private lebal final estimates) at a 50%-60% loss, which is about typical now but should increase in the future, then we are talking about $450 billion in losses. Those of you who tell me ‘it won’t be that high’ obviously did not watch underwriters put the exact same loan through DU or LP 25 times until they got the approval results and conditions they wanted. Or, watch all appraisers find the most expensive comparable vs the ‘closest comparable properties’.

[tree]

Here we are. The day we have been warning you about since we re-opened iTulip April 2006 at the "peak of complacency" has arrived.


Given the picture, I'd call it the "beak of complacency."

[GRG55]

Here we are. The day we have been warning you about since we re-opened iTulip April 2006 at the "peak of complacency" has arrived.


Given the picture, I'd call it the "beak of complacency."

What? You think we iTulip subscribers are being "henpecked"...:p

[FRED]

What? You think we iTulip subscribers are being "henpecked"...:p

Greenspan's black swan walks into a drug store and asks for chap stick.

"Cash?" asks the pharmacist.

"No, just put it on my bill."

[marvenger]

That's it, humans are lemmings i've decided. How the hell can the richest country end up borrowing so much and from poorer countries this time to cause so much shit again. Complete farce. I reckon this is due to people having such low expectations. They want prosaic, corporate, partyline lives, and the popularity contest winners are more than happy to give it to them. The bankers of the world are then happy to take full advantage of their easily led flock.

There are honest people with integrity such as Ron Paul or Jesse Ventura, you may not like their personal styles or all their views but at least you can tell that they're honest, trying to be heard and to debate the superficial, plasticized short term view drivel we're constantly being fed by elected officials; but the people choose to ignore them! They want their entertainment and cheap, repetitive, reassuring pea brain concepts and they're sure as hell going to get them. I think people would rather be led over a cliff with certainty believing they could do nothing to stop it than to try to stop falling off the cliff themselves and risk failing. Hence people end up just being led by the ones with the greater ego and sense of entitlement who couldn't give two shits about the job they're doing as long as it's one with lots of power and short term goals and views are the game, often not even understanding what they’re doing. And then I guess people see this as the formula to success and then try to emulate their esteemed leaders and bosses and the circle of an institutionalized bland and chronically stupid existence continues.

It seems if you express a view at odds with a corporate/institutional/partyline view, you get treated like you've got a personality disorder.... hmmm i'd say psychiatry like economics has a large political public control element to it as well rather than some objective scientific pursuit of truth. just bloody say what you think and say it with pride people. History shows that the majority view sure as hell isn't always the most sane, so take a risk.

Most people on this site are pretty good at taking risks actually, so I'm mainly just venting rage at people who aren't going to read this.

[kingcopper]

America, home of the broke and the used to be brave?

[don]

Greenspan's black swan walks into a drug store and asks for chap stick.

"Cash?" asks the pharmacist.

"No, just put it on my bill."

Tangential: I frequently see guys charging their deli sandwiches to their credit cards. Greenspan's pigeons?

[sn1p3r]

...home of the slave

[ASH]

America, home of the broke and the used to be brave?

Oh, we're still brave... it's just that bravery is no substitute for brains. (In my view, both are essential.)

[LargoWinch]

Oh, we're still brave... it's just that bravery is no substitute for brains. (In my view, both are essential.)

This tragedy or may I say insanity of the FIRE economy is truly global.

We all know that Spain, UK, Australia have a bumpy road ahead as well. Maybe it will be the turn of Macquarie and Babcock & Brown to fail soon?

For example; when I look at Vancouver's RE, I hope there are brave souls there as well...

[RebbePete]

Here we are. The day we have been warning you about since we re-opened iTulip April 2006 at the "peak of complacency" has arrived.


Given the picture, I'd call it the "beak of complacency."

I think Greenspan was confused. He just yelled "Duck!" :rolleyes:

[ASH]

Here we are. The day we have been warning you about since we re-opened iTulip April 2006 at the "peak of complacency" has arrived.

Thanks for the warning, by the way.

You foretold the nature of these events, but I was of the impression that the precise degree of their severity was somewhat subject to chance. For instance, if the federal officials had chosen to bail out each and every failing financial institution, then we might never have learned what happens when there's a major default that stresses the CDS tangle. In such a proactive case, perhaps the final ka would have been blunted a bit and the final poom accelerated. With the failure of Lehman Brothers and its likely knock-on effects, it seems like we'll experience a bit more of the ka than otherwise, even though the policy actions leading to poom are already in full swing.

Is my understanding correct? Are events proceeding along one of the more severe trajectories you had envisioned, or am I over-reacting?

[jk]

1921 to 1923: German hyperinflation

1924: Dawes Plan to restructure debt, Rentenmark replaces the Papiermark

1924: Rentenmark backed by land and industrial goods, hyperinflation ends

1924 to 1929: US and British financing pours into Germany, economy recovers

1925: Germany joins the League of Nations

1929: US market crash (FIRE Economy V1.0), US and British investment in Germany ends

1930: German economy collapses

Then:

2. Depression
3. Hitler
4. War

seems like we've had the inflation, albeit not hyper-. we've certainly had the foreign financing pour in. [too bad we didn't do anything useful with it.] if our creditors stop sending money, then we'll have severe inflation and severe recession. let's hope we can avoid the political outcomes of your model, although i am worried by the rise of right-wing populism.

[olivegreen]

I have nothing intelligent to add to this conversation but just a thanks to EJ for this explanation. Despite the implications, there is an odd comfort in knowing what's happening while it is happening.

Thanks again.
OG

[Lukester]

seems like we've had the inflation.

JK - we have had no real inflation yet to speak of. To call the rise in the cost of living in the US in the past eight years a "significant inflation" relative to the historic inflations logged elsewhere in the world would be a considerable misnomer. You've spoken out about US-centric notions around here in the past. The notion "we've had the inflation" in reference to the past decade's real CPI move in the US is in fact highly US-centric. We've had milquetoast for inflation compared to how it's developed in the real instances elsewhere. This datum is not merely a rhetorical argument - it is highly substantive in terms of understanding where we actually are yet on the inflation time-line.

Respectfully.

[metalman]

called '300 - 600' points down before the market opened. closed down 504.

gave yourself a lot of wiggle room but... not bad.

oh, and gold's back over 780

[jtabeb]

EJ, Forward looking question here:

can I use my PMs (non-paper kind) as collateral to secure the start-up funds for the bio fuel company I want to start. Would a bank do that, will they possibly do that in the future?

I would love to be self-funded, but EVEN I don't think gold will get high enough for that.

Thoughts?

Thanks.

[D-Mack]

Historical Precedent

The precedent is not US 1930 or Japan 1990. Both countries were net creditors with large pools of national savings and industrial capacity to tap to use to develop export trade to earn their way back out of an economic hole. A closer analogy is 1930 Germany.

The sequence of Germany's pre-WWII economic crisis is commonly misremembered as follows:[INDENT] 1. Hyperinflation
2. Depression
3. Hitler elected by angry masses
4. WWII

Not so. Here's what really happened.

1.

1921 to 1923: German hyperinflation

1924: Dawes Plan to restructure debt, Rentenmark replaces the Papiermark

1924: Rentenmark backed by land and industrial goods, hyperinflation ends

1924 to 1929: US and British financing pours into Germany, economy recovers

1925: Germany joins the League of Nations

1929: US market crash (FIRE Economy V1.0), US and British investment in Germany ends

1930: German economy collapses

Then:

2. Depression
3. Hitler
4. War

Also in 1923 (Nov 8-9) Hitler tried to get to power, failed and went to jail

http://en.wikipedia.org/wiki/Beer_Hall_Putsch

On 15 November 1923, a new currency, the Rentenmark, was introduced at the rate of 1 trillion (1,000,000,000,000) Papiermark for 1 Rentenmark. At that time, 1 U.S. dollar was equal to 4.2 Rentenmark. Reparation payments resumed, and the Ruhr was returned to Germany under the Locarno Pact, which defined a border between Germany, France and Belgium.

Further pressure from the right came in 1923 with the Beer Hall Putsch, also called the Munich Putsch, staged by Adolf Hitler in Munich. In 1920, the German Workers' Party had become the National Socialist German Workers' Party (NSDAP), nicknamed the Nazi Party, and would become a driving force in the collapse of Weimar.
Hitler was named chairman of the party in July 1921. On November 8, 1923, the Kampfbund, in a pact with Erich Ludendorff, took over a meeting by Bavarian prime minister Gustav von Kahr at a beer hall in Munich.
http://en.wikipedia.org/wiki/Weimar_Republic

I've read and heard that Montague Norman gave the first credit to Hitler after he came to power, although I'm not able to find a newspaper article or something

Norman put his personal prestige on the line in September, 1933 to support the Hitler regime in its first attempt to float a loan in London. The Bank of England's consent was at that time indispensable for floating a foreign bond issue, and Norman made sure that the "Hitler bonds" were warmly recommended in the City.
http://www.tarpley.net/29crash.htm

And there is always the alternative history floating around of Britain financing Hitler against Russia.

Though Lamont did not subscribe to Norman’s argument that Hitler
and Schacht were ‘the bulwarks of civilization in Germany’ and the only forces
restraining the triumph of Bolshevism in Germany, he did venture the belief that
perhaps Germany would alter slowly. Lamont believed that gradual change under a
Hitler–Schacht tandem, presumably into a more benign, familiar authoritarian state,
was possible, though precisely what Lamont envisaged was not articulated

http://journals.cambridge.org/produc...ltextid=353710

[Charles Mackay]

Yet the comfortable fiction that governments – represented by global central banks – control markets will be put to the test. In truth, governments merely influence markets. At times that influence is effectual and at others not.

I have not seen anyone putting that argument forward on iTulip... although I could have missed it. Just so people who have been following this debate on the "selling" thread aren't misled by definitions, Manipulation and control are not the same thing. If they had "control" then gold would still be $250. They don't. They DO manipulate, they DON'T control!