From Bloomberg:

"There's a dollar shortage globally,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Demand for liquidity trumps the fundamentals. Fundamentally, the U.S. is awful, and Europe is awful. Fundamentals are irrelevant today.''


May you live

Inconvenient Truth

Haven’t you heard? The United States dollar is toast. That sucker is going DOWN.

Short interest rates are incredibly low and no rational person thinks longer-term U.S. interest rates are headed anywhere but lower, given a looming, if not already-loomed recession. The American government is planning to borrow 5% of GDP on a single bailout package and that’s just one program added to an orgy of spending. The amount of dollar credit flowing out of central banks into the system worldwide is unprecedented. Gold is through the roof and the U.S. trade balance? Forget about it. It’s huge.

And we have been doing all this incredible stuff for at least a year now. So naturally, unquestionably, the U.S. dollar is finished - D to the O to the A. Cataclysmic inflation is moments away. Ron Paul’s face will be the only one we see on currency commonly used inside our borders within months. So long Kingsford, hickory chips and clean-burning propane. Hello dead, smoldering Presidents. Next summer, it’s “Grillin’ With Greenbacks”. Welcome to Weimar America. Enjoy the tangy, smoky, Fiat Flavor.

If you follow the financial pages, you have read this a minimum of a hundred times already, so surely you should have gotten the message by now. Everybody knows it.

Except, of course, that with all this unprecedented madness the dollar index is flat on the year, up 7% off its July lows.

But don’t get me wrong, here. Other than that one little inconvenient truth, the theory is ironclad. I mean it is bedrock solid. After all, the euro – the world’s next great reserve currency – okay the euro is down 8% off its highs but that’s not important. The point is that ours is now a multipolar world. Earth, she is a BRIC house. Mohamed El-Erian says it and he works for PIMCO.

PIMCO.

‘Nuff said.

And, again, other than the fact that three of the four BRIC currencies have fallen off the table (those being the ones that are actually traded in the marketplace), the theory is as beautiful as the Taj Mahal, as strong as a Russian oligarch and arguments against as scant as a Brazilian bikini.

It’s all about industrial production, you see. Note that the Japanese yen is up against the dollar about 4% this year. That may not seem like much, given the trade deficit between the two countries, and it is also 6-7% down from the highs,…making it seem like even less, come to think of it. But the point is that the yen has been the strong currency of a massive industrial powerhouse for decades and in that time the people of the world have been using it…okay, mainly to buy investments denominated in other currencies, but that is not germane because of...um…hang on, I’ll get it…

China! That’s it! The dollar is down decidedly against the Chinese yuan, no counter-trend, end of story. We all know it. China will dominate the world and soon we will all be using Chinese yuan to buy everything from alphabet soup to bicycles to…well…china. Of course because of currency and capital controls, we will not only have to use our yuan to buy from China but also in China, since that’s the only place on the globe you can actually spend Chinese yuan.

Wow, the lines are going to be murder.

But the important thing, Ron Paul reminds us, is that saving in a strong currency protects the value of your assets from inflation. Now, it’s true that Chinese wholesale inflation is at ten percent, but I’m sure that’s an anomaly. And by “anomaly” obviously I mean: “decade-long, upward trend.” But Chinese consumer inflation is at 5% and the Chinese Communist Party would never manipulate consumer prices to keep the Chinese people from getting upset or intervene in the stock market or anything like that. And by “would never” obviously I mean, “definitely would,” but...

Gold! Today’s gold coins come in convenient denominations between $900 and $900 and are accepted at all Sharia-compliant financial institutions, third-world bazaars and survivalist training camps. Gold has been money for 5000 years. Yes, the trend has been towards the acceptance of book-entry debits and credits over the last 700 of those years, but why be trendy?

The point is that the U.S. dollar is finished. You can read it in all the papers.

May you live in interesting times

Citizen Cramer

I’m watching the debates, listening to two smart guys try to pretend that a $700 billion intervention in the financial markets and a coming economic crisis doesn’t make all talk of “spending cuts” into a lot of hooey.

“Will somebody come on TV and tell the truth about how bad it is?” - Jim Cramer famously asked this about the fixed-income market crisis on August 6, 2007. If the Feds had listened - at least about the severity of the crisis - hundreds of billions could have been saved.

Since then, Cramer’s been stunningly right. But he started out stunningly wrong. And lately Cramer has been saying that there’s no time for hearings on the Paulson Plan.

Hmm.

Fortunately, in a surprise (imaginary) move, Congress has unanimously appointed me Chairman of the Joint Committee to Fix This Crazy Mess. Here’s a transcript of today’s proceedings, so tap the gavel and steamroll the witnesses along with me, won’t you?:

begin transcript

Chairman Bailey (I - WA) : The committee will come to order…(taps gavel)…order please…thank you…will someone get my good friend from the state of Washington, Mr. McDermott an oxygen mask or something? Calm down, Jim. Thank you.

I want to thank my good friends for reaching across the aisle and between the houses of the Congress and making it possible to convene this hearing in a spirit of bipartisanship and service to the nation. I am honored and even a little surprised to be your Chairman here today.

I want to thank the witnesses for coming on such short notice.

One scheduling note: the presentation by Representative Ron Paul, the Goldkopf Group and the Supreme Islamic Juridical Council of the Ulema on “Why Gold is God’s Chosen Currency and All Fiat Money is ‘Haraam’” has been moved to tomorrow. “Haraam” – did I pronounce that right Congressman Paul? Good. I’m sure it will be a fascinating.

With us now, we are honored to have our first witnesses, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke. Thank you, gentlemen, for coming.

P & B: (inaudible)

Chairman Bailey: Be sure and move the microphones quite close to you, gentlemen.

I want to thank the Secretary and the Chairman for their opening statements and in the interest of time I move that these be submitted into the record so that we can proceed with questions.

Without objection?...so ordered.

Mr. Secretary, if I may start with you, it is the committee’s understanding that you are coming to the Congress of the United States, telling us you need seven hundred billion dollars to save the financial system. I assume you would prefer that in cash?

Paulson: (laughs) Um, well…-

Chairman Bailey: “Um, well,” what?

Paulson: (uncomfortable pause) …Well, Mr. Chairman -

Chairman Bailey: Your opening statement and previous testimony also indicate that you purport to require these moneys by….let’s see here…the end of the month. Is that right?

Paulson: The situation is-

Chairman Bailey: Secretary Paulson, approximately what percentage of the President’s fiscal 2007 budget would $700 billion represent – ex supplementals?

Paulson: Um, I guess…*shuffles papers** that would be about 25%.

Chairman Bailey: 25%, that’s right. And Mr. Secretary what percentage of the gross domestic product of the United States of America does $700 billion represent – in round figures?

Paulson: I think it would be about 5%, Mr. Chairman.

Chairman Bailey: Indeed it would. So is it fair to say, then, that you have come to the Congress of the United States telling us that you need an amount equal to 25% of the President’s official FY 2007 budget and FIVE PERCENT OF GDP, so that you, Henry Paulson, can personally save the financial system? Do I have those figures right?

Paulson: Well, the numbers…I mean, our staff will determine-

Chairman Bailey: -Get out.

Paulson: I beg your pardon, Mr. Chairman, I -

Chairman Bailey: Thank you for your testimony, Mr. Secretary. You’ve certainly given us a sense of the magnitude of this problem. Now you may leave.

Paulson: Um-

Chairman Bailey: Busy day, Mr. Secretary, let’s go. The door is over there. Don’t let it hit you on the way out….you lunatic.

(turns to staff)

Guy comes in here, with a straight face: “Can I have 5% of GDP please?” Oh, sure. Maybe you’d like an aircraft carrier with that? Would gray be okay?

Paulson: Ahem -

Chairman Bailey: Can't find the door, or just having trouble fitting your colossal nerve through it? There ya go, Mr. Secretary. Buh-bye.

[Paulson exits]

Now, Chairman Bernanke?

Bernanke: Yes, Mr. Chairman?

Chairman Bailey: Chairman Bernanke, can you draw up a list of the firms that claim to be threatened with bankruptcy unless we give Henry Paulson 5% of our nation’s gross domestic product?

Bernanke: Well, the situation is-

Chairman Bailey: I didn’t ask you about the situation. I asked you about a list. Can you draw up a list of these institutions – the ones that trouble you most?

Bernanke: Yes, I think I can put together-

Chairman Bailey: -Good. Now call those firms and tell them that I want their Chief Financial Officers in my office at nine o’clock Monday morning or they get nothing.

Bernanke: Monday, but these are busy people, and…

Chairman Bailey: -And we’re the American people. Monday at nine. Buh-bye.

(taps gavel)

The committee will stand in recess for thirty minutes.

(taps gavel again, 30 minutes later)

Chairman Bailey: The committee will come to order. Thank you.

I would like to thank our next witness, Mr. James Cramer.

Cramer: THANK YOU MR.-

Chairman Bailey: Whoa! Easy there, tiger. In your case, I think we want to push the microphone a bit farther away. Mr. Cramer, I’m going to ask that your opening statement also be added to the record.

Without objection?...so ordered.

Now Mr. Cramer. You have been very clever and very right about this financial crisis from the time of your – shall we say “passionate exhortation”, of August 6, 2007.

(all laugh)

Cramer: Thank you Mr. Chairman.

Chairman Bailey: But my staff has brought to my attention a broadcast of July 16th that same year – a webcast. In it you said and I quote “if every loan in 2006 that was subprime blew up - $500 billion - if they all blew up – you would still not notice…it has no relevance whatsoever…the tranching is the reason why there’s no impact….this is an issue that people want to really, really, really make a just a gigantic hill out of a molehill.”

Is it fair to say, Mr. Cramer, that you changed your mind about that?

Cramer: (laughs) Yes, Mr. Chairman. Very much so.

Chairman Bailey: In that July broadcast, you mentioned documents pertaining to the Accredited Home Lenders takeover. Do you remember doing that? Short answers here, Mr. Cramer.

Cramer: Yes I do.

Chairman Bailey: As I understand it, you used Accredited Home Lenders as an example of why the subprime issue was NOT going to be a huge problem. You suggested that one of the worst lenders in the country had a single-digit default rate and had issued a fairly small amount of debt relative to the marketplace. Is that a fair restatement?

Cramer: Of my words in July? Yes, Mr. Chairman.

Chairman Bailey: Now in your more famous August 6, 2007 broadcast you mentioned that Accredited Home Lenders document again, did you not?

Cramer: In terms of Fed President Poole, Mr. Chairman?

Chairman Bailey: Exactly, in terms of Fed President Poole. Only three weeks later, talking about the same documents you suggested – very loudly – that Mr. Poole should have more knowledge about this crisis - that he was “a shame” and “shameful” and that “he ought to go and read the Accredited Home Lenders document, at least I read the darn thing!”. I’m sure you remember that. So is it fair to say that in July of 2007 you had one attitude about the facts and figures revealed in the Accredited Home Lenders document and in August of 2007 you had another attitude about these same facts and figures?

Cramer: Well, yes the market-

Chairman Bailey: Did you say “yes”? Your attitude did change? You learned new information that changed your attitude?

Cramer: Yes, the Bear Stearns-

Chairman Bailey: So the answer is “yes”.

Now we are going to look at what changed your attitude, because what you have demonstrated, Mr. Cramer, has not only been rising concern, but an increasing disgust with the conduct of America’s financial community. I feel certain this may have some direct bearing on what kind of bailout will work and what won’t.

Mr. Cramer, in an article appearing on your web site July 29th of this year - again referring to Accredited Home Lenders as well as AIG and others - you wrote:

“The amazing thing about these CDOs is how different they are from the actual mortgage market.…These pieces of paper were simply set up to have tremendous losses if we get even 20% to 30% defaults….ultimately for the worst 2006 vintages, we could reach that because of the massive fraud and overvaluation that took place.”


In that same article, you wrote about: “bogus insurance” and you also wrote:

“Who the heck created stuff that could lose that much on mortgages that aren't defaulting anywhere near that?

The creators are a disgrace.

And they are probably making millions, because Wall Street can be an abject cesspool of ridiculously overpaid talent that has destroyed billions.”


Now you’ve been supportive of Mr. Paulson’s plan, Mr. Cramer. You have disparaged the need for hearings. But Mr. Cramer, when you write about a “disgrace”,
an “abject cesspool” producing “massive fraud,” “overvaluation,” and “bogus insurance,” that suggests to me there is something very rotten at the heart of this financial mess – something we need to have out if we are going to fix this - and that you, Mr. Cramer, have a pretty good idea what that something is.

Mr. Cramer, here is how nations solve these problems: somebody stops trying to be smarter than everyone else; stops worrying about reputation; stops doing his job, playing his role, acting out his part and starts being a citizen. Somebody just tells the truth about how bad it is out there.

Mr. Cramer in July of 1973 a smart lawyer kind of like you appeared before a committee kind of like this and started telling the truth about one of our nation’s greatest national crises. I am going to ask you a question kind of like the one he was famously asked:

Mr. Cramer, what do you know and when did you know it?

Cramer: (inaudible)

end transcript

May you live in interesting times

Why The Paulson Plan Won't Work

Make no mistake, something must be done quickly. WaMu, for example, may be just days away from bankruptcy. The Paulson Plan might possibly succeed in saving WaMu for another couple months. But I believe it will fail to save the financial system. I have been in favor of all the bailout efforts up until now, but the plan put forward by Secretary Paulson might be the worst approach possible. I can actually explain why with a single Wikipedia page. Honestly.

As you may know, the largest financial market in the world has crashed. No, you didn't read it in a headline when it happened. No, nobody in the government told you that it happened. The level of denial and disbelief has been astounding. But I am telling you, that it is 1929 and the market has already crashed. Forget the stock market, we're talking here about a market that is deeper in the heart of our financial system. You can see the crash start August 9th, 2007 in a chart of the LIBOR interest rate many know all too well:

The market was the market for American mortgages, mortgage-backed securities and contracts derivative of this market. Contrary to the irresponsible reporting that prevails in all but the financial press, selling mortgages is NOT a new practice, of course. It is many decades old. It helped get us out of the Depression. It is completely essential to our financial system. But right now, banks cannot sell their mortgages into a crashed market.

Thus the Paulson Plan's simple premise is for the government to start buying these mortgages, putting - they hope - a rational price on them when a crashed market has failed to. It seems reasonable. It would even work and I would support it wholeheartedly and shout down the critics if the problem in the secondary mortgage market was simply a lack of "liquidity" or money. But I fear the problem is different and must be addressed with different means.

As for Secretary Paulson himself, a cynical person might suggest that investment banker Henry Paulson, was previously treating America as his client - getting us equity when we extended credit - but is now treating the banks as his client and America as a "customer" - the lowest form of life for an investment banker. A cynical person might suggest that Paulson is simply "jamming bonds" down our throats. Actually a non-cynical person might suggest that also, because it's true. But let's get to the real problem.

The the real problem in the mortgage market is this guy:

Banks were inviting people into their used car lot of mortgages and saying things like:

"This one? Oh, this one's a beauty. It's a $500K mortgage on a house assessed at $510K, which we made to a guy with a 700 FICO score who makes $125K a year . Oh, and I will throw in an insurance policy on it that's worth $400K. Wanna buy it?"

And people bought.

But it turned out that the loan above was actually a $500K mortgage on a (then) $400K house with its assessment inflated by $110K made to a guy whose credit score had been inflated and who made...well, we really have no idea what he makes, but it's probably more like $45K. And that insurance policy? Yeah, turns out that was actually worth $0K - nothing. Hence, we the citizens now own 80% of AIG. Oh, and that house isn't even worth $400K any more, it's worth more like $300K and dropping.

So the market for these loans quite naturally dried up.

The banks were selling were Lemon Loans. And if you don't think "Lemon Loan" is strong enough and think something like "felony fraud" would be more appropriate, so do I. However, I choose "Lemon Loan" because of a theory for which some guys got the 2001 Nobel prize in economics, but about which Henry Paulson seems to have forgotten.

The Nobel-prize-winning theory is called "The Market For Lemons" and if you follow the link to that single Wikipedia page I promised you, you will see that the Nobel was for a paper which revealed why markets crash when they become filled with bad merchandise passed off as good merchandise. Of course we all know this through common sense, but you don't get Nobel prizes for common sense.

For comparison, let's use another little no-regulation nightmare and yet another market predictably destroyed by fraud: How many of you would buy powdered milk from China right now?

I'm sure China produces many tons of perfectly good powdered milk that would be healthful for anyone to drink. However, it has been revealed in the last few months that they have also been producing fraudulent powdered milk that has proven toxic to some children who drank it. If you are in the market for powdered milk you are not, I predict, going to spend the valuable money in your wallet on something with very uncertain value - Chinese powdered milk - something that might even be toxic. Likewise, America produces and can produce trillions of dollars in sound mortgages that would be wise investments for anyone to buy and own. However, it has been revealed in the last few months that we have also been producing fraudulent mortgages that have proven toxic to the balance sheets of some institutions who bought them.

Would you buy Chinese powdered milk simply because you read that Chinese government had started to buy it? I think not. Therefore, it is my belief that people in the secondary mortgage market are probably not going to start buying American mortgages simply because the American government is buying them. I think people are going to wait for proof that these mortgages are not toxic to their balance sheets before they put down cold cash. If we give buyers good information and sound guarantees, they may come back and buy. If we don't, I fear they will not.

To be technical for a moment, I think the information in the market for American mortgages became too "asymmetric" and thus the market reached a "no-trade equilibrium." This has caused a glut in the supply of high-risk assets so huge that portfolios simply cannot absorb them and maintain a normal risk-weight, let alone the more-conservative risk-weight they desire right now. I think this is also affecting other liquid, high-beta equities and credits. Here's the MSCI Emerging Markets ETF:

By the technical talk I mean that nobody will buy our mortgages until we turn ourselves from this guy:

into this guy:

I believe that the world desperately wants and needs safe American investments. If we are straight and honest with the world; if we reassure them with a next-generation financial information system; if we give them quality government guarantees; they will buy our bonds and mortgages. It will take a huge effort. Ultimately we may have to tell the truth about, and guarantee to the maximum extent possible, every non-fraudulent home mortgage in America. It sounds daunting, but only is such a project possible, it would bring monetizable value and innovation to our economy. It would allow us to survive a disaster which might otherwise destroy whole communities.

To those who would say "let the destruction happen" - you're simply being childish and foolish. We can't afford to lose an entire market every time some fraudsters get together and try to cheat people. We can't let the sleaziest capitalists in our system define the value of our markets. That's not a free market. That's anarchy ruled by villains.

If we the citizens act to bring honesty, information and government-guaranteed quality to our financial system, we can survive this. The choice is ours.

May you live in interesting times

Tidy Anti-Bubbles All Broken?

A trillion or so dollars in dollar-based credit = some promised, some delivered - will do that.

Ah well, back to fundamentals and maybe some brand-new bubbles. Nobody ever said this would be easy. Needless to say, the dollar short-term dollar shortage has been ameliorated.

Wow.

Long-term.

Doubt it.

But because the anti-bubble trends are threatened, while I still believe in the dollar-led deflation scenario, obviously it's a wait-and-see thing. Dollar index has been hit, through the 50-day MA, but still above the 100-day and nowhere near even July levels.



So maybe everything is still in place - except gold - but it's a shame. The trends were so nice and neat.


May you live in interesting times

Why I Got Gold Wrong

There should now be no question that America is in a deflationary crisis. Therefore, holding gold - a commodity - is fundamental financial insanity. And yet gold is skyrocketing. I missed the fact that, psychologically, people have little choice.

One always needs to look at one's ideas from different perspectives, especially when one feels surest about them and certainly when developments call them into question. So, I know a guy who does branding and I thought about it from his perspective.

I went through the asset classes, thinking in terms of a simple phrase that might characterize people's opinion of them:

Commodities: See "deflation" above.

Real estate/REITs: Are you kidding?

Mortgage-Backed Securities: Full of Lemon Loans, the whole problem. Next.

Corporate Bonds: Spreads too high, too much risk.

Municipal Bonds: No bond insurance, hurt by falling tax revenues.

Treasury Bonds: Yields INCREDIBLY low.

Foreign bonds: Nobody even knows how to buy them.

American Stocks: Cramer says "1987".

Emerging market stocks: 1987 or 1929, take your pick.

Even Money Market accounts are in trouble as the Reserve Fund "broke the buck".

That doesn't leave much. I come up with MAYBE European/Japanese stocks...and gold.

Gold is the only asset with - if you'll allow me - an untarnished brand.

Therefore, tragically, gold will go up and fast as people lose faith in other assets. It will also go up on the false, chimerical belief that somehow gold is money.

Here's how wrong is the idea that gold is money: Islamic law more-or-less mandates that gold be used as money and yet Islamic states issue fiat currency.

In the modern world, gold operates as a vehicle for currency arbitrage - a place to temporarily park your assets until you decide what currency you want them in. But it is a creature OF the currency system, not a backing for it and certainly not a substitute. For this reason the dollar index - despite unprecedented turmoil and low short-term rates - does little:



Once people decide they need that currency - to buy things - they sell their gold. And that's what people will do - en masse - when they start to need the money they have "saved" by buying gold.

In the meantime, goldbugs, have fun and, as ever...


May you live in interesting times

Here's A Headline You Don't See Every Day

Treasury 3-Month Bill Rates Drop to Lowest Since World War II

U.S. Treasury three-month bill rates dropped to the lowest since World War II as a loss of confidence in credit markets worldwide prompted investors to abandon higher-yielding assets for the safety of the shortest- term government securities.

Investors pushed down the rate to 0.0203 percent on concern that credit market losses will widen after the bankruptcy of Lehman Brothers Holdings Inc. and the federal takeover of American International Group Inc. In a sign of banks' reluctance to lend, the rates charged for short-term loans relative to U.S. bill rates rose to the highest on record.

Short-term rates basically MAKE the value of money in the foreign exchange markets. And yet with short-term rates at almost ZERO, here's the effect on the dollar:



Yes, it is back to the Monday morning opening price.

Lowest short-term rates since WW2, and the value of the dollar goes down to where it was all of Monday morning.

That's basically BANKERS saying: "we are so scared right now that we will give you all the dollars you want as long as you simply promise to pay us back what we gave you - no interest."

That is a statement that right now the ONLY thing serious people trust in the developed world is the United States Treasury bond.

I was so cheerful this morning. With AIG was bailed out and I thought maybe crisis was averted. I want change in this country and the world. I KNOW the changes we need and, interestingly, we are heading there - fast.

But I never expected - or wanted - for it to happen like this.

I think we cannot but surmise that The Crash has already happened and we are just sitting here, waiting for the tsunami.

May you live in times of great interest - or at least more than 0.3%

GOLDEN MADNESS!!!!!

GOOOOOOOOOOOLLLLLLDDD!!!

Okay, when I said trends would "pause" here, I might have thought a little deeper about gold, but then again I wasn't really expecting the existential threat to Western finance to come, you know, yesterday. That was a little sudden.

And although I had read the lunacy , that was starting go come out of the gold-crazy goldbugs, I didn't count on panic buying of gold to strike quite so hard.

Here is the chart of value of the dollar in that past couple days, showing DOLLAR SHORTAGE maintaining the price even in the face of total turmoil in the American financial system, and some Treasury bonds at rates not seen since World War 2:

: And here is the gold chart over the same period showing the GOLDEN MADNESS striking the markets today.

And here is the sequence as it is now becoming clear:

1) Lehman Brothers cracked open the stinking crypt of its books over the weekend and a horde of financial zombies leapt out and ATE WALL STREET'S BRAINS:

2) The WORLD saw that the Western Capital Markets were held in place by a rotten spiderweb called AIG and that AIG was failing.


3) They panic and Money-Market Rates Double Amid Global Credit Seizure (Bloomberg):

"I have never seen anything remotely like this. The money market was typically the one thing that always worked,'' said Luca Jellinek, head of interest-rate strategy in London at Royal Bank of Scotland Group Plc. ``It's the cardiovascular system of the financial body. When this happens, it's like a heart attack.''

4) AIG was rescued by the US government, giving markets a reprieve...aahhhh. Note the cool, refresing dollar-green of this text.

5) Banks, particularly in Europe looked at their books and realized that their very solvency was now - in a very real and immediate way - under the control of the BUSH ADMINISTRATION...(note here the alarming redness signifying possible shortage of dollars at the hands of laissez-faire idiots).

6) People went insane with panic and started to buy gold. [text color self-explanatory]

7) Goldbugs (and the venal, fiat-money-loving commodity traders who prey on their ignorance) went insane with happiness because it was the end of the world they had been predicting for so long had finally come and decided to buy, buy, buy.

I'm not a trader, but my thesis on these pages relies on their psychology. They will never try to "fight the tape" when it comes to madness like this - for good reason. If gold breaks out of the anti-bubble that major traded futures are in versus the dollar - or indeed any major commodities do - there is just as much of a possibility of another bubble as anything else. I doubt that it's happened yet, but it's possible.

If I sound dubious of my own words, see my post "It Begins" as an insight to bubble-market psychology. Bubble markets are an incredibly persuasive force, by definition. It's amazing. I know what I believe and yet the power of all this social energy works on my mind just as it works on everyone involved - although I'm not really involved.

May you live in interesting times

Gold Vs. Fiat Money - The Battle Begins

I had another one of those restless nights. I knew something was wrong, but I didn't know what. It was Gold. Of course it has always followed commodities. It's a commodity. In fact, it is the historical "master commodity". So my prediction that gold should go down was completely reasonable. But it troubled me.

Today, I turned on the computer and I saw it: GOLDEN MADNESS.

I was glib the other day when crossing foils with some goldbugs and I didn't feel good about it afterwards. I knew my thesis was holding up - better than ever - but there was something in their weird, anti-intellectual conspiiracy-theory enthusiasm that got to me. Something in their lunacy was echoing something sensible - however far away from their madness it might be. Even in lunatic conspiracy theory and nuttiness there is often value. The article is a weird, entertaining conspiracy theory about U.S. banks and commodities, but it had something in it that I noted with interest:

In July, India bought 22 tonnes of gold. In August, according to Reuters, India increased its gold purchases by more than 350%, buying more than 100 tonnes of gold.

This figure also represented a 56% increase in purchases when compared to purchases during the same month from a year prior. In Dubai, demand surged as well.

“We are definitely witnessing a surge in demand for gold in Dubai and physical shortages have been reported by many dealers,” said Ian MacDonald, the Dubai Multi Commodity Center’s executive director for gold and precious metals. “We are also seeing demand being driven by currency concerns in the region as many investors perceive the precious metal as one of the few strong currencies.”

Gold jewelry sales in Abu Dhabi soared 300 percent in volume and almost 250 percent in value in August from a year earlier after the metal dropped to nine-month lows, the emirate’s industry group said on Monday.

“It was the best month the market has seen in almost 30 years and it compensated for any drops we have seen earlier this year,” Abu Dhabi Gold and Jewelry Group Chairman Tushar Patni told Reuters.

There are big holes even in this data, but it reminds us of something very disturbing.

But first, a definition: Goldbug : A "goldbug" is a person who not only believes that gold is a good buy for market reasons, but believes that gold not only plays a huge part in the world financial system, but should and will inevitably play a larger part.

In the 1970's America on other developed countries cut any formal relationship between their currencies and gold in an agreement called "Bretton Woods". You'll find "Bretton Woods" listed under "Global Conspiracies To Undermine Rightness and Freedom" in the goldbug/loony-right-wing dictionary.

Ron Paul is the present day's most famous goldbug.

Karl Marx was a great goldbug of the past. Quoth Comrade Karl:

"Only in so far as paper money represents gold, which like all other commodities has value, is it a symbol of value."

Modern capitalist society is based on fiat money, so goldbugs are, naturally, those who do not believe that modern capitalism can survive. They inhabit a surprisingly big portion of the Right wing - all the way from Survivalists through Millenialists to serving Congressman and Presidential Candidate Ron Paul. On the Left, there is a very small fringe of anarchists and Old-Time Leninist/Maoist/Marxists.

I'm sure the Ron Paul fans and the Hard-Line Marxists and Anarchists would get on famously if we put them all in the same room. Let's try that someday.

But what does this gold madness mean?

It means that the situation is far worse than I thought. The disturbing thing we have to remember is that while in the developed world currency crises can cause a lot of displacement, in the developing world people die from them. I'm sure people in India and even Abu Dhabi have a cultural memory of times when the value of the little boxes of notes and coins representing people's life savings evaporated, the next harvest went bad, and they simply died.

Hence, the invention of the credit system, in about the 15th century.

In the modern credit system, even in the face of the kind of financial turmoil that comes once in a century and the prospect of future U.S. government borrowing the like of which we can't even imagine (especially if McCain somehow gets elected), the U.S. dollar is holding steady or going up. The euro is spiking up, the yen is spiking down, so there is no persuasive major-currency trend away from the dollar.

Gold, however, is going mental.

When reason leaves us and no answers come, all we have is fear. This is why we have to fix and EXPAND the modern fiat money system as fast as possible. People cannot be dependent on the value of notes and coins in a little jar. The metal they are made of doesn't matter.

Think of it this way: gold is very pretty and even useful sometimes, but it's also very weak. You can't build anything out of it.

What holds the world together is the labor and trust of people - human beings - Homo sapiens - US.

May you live in goldenly interesting times, goldbugs

Oh, THANK Goodness!!!

Jim Cramer made this shocking point today about and existential threat to the "world capital markets" if AIG was allowed to fail.



Amazingly, against all their principles and in a singularly-rare show of rationality by this Administration, the Feds saw the light!!!

Federal takeover of AIG planned

Federal officials reportedly may take 80% stake in the nation's largest insurer in an $85 billion rescue plan to prevent financial chaos worldwide.

NEW YORK (CNNMoney.com) -- The federal government is reportedly on the verge of taking over crumbling insurer American International Group in an $85 billion deal that could leave the company in the Federal Reserve's hands.

Probably up to a trillion dollars of AIG's obligations will be backed up by the American government and the world's financial system can go on another day.

Thank goodness!!!

May you LIVE in interesting times

You Stupid Bastards

How could you let this happen?

All night a question kept eating at me: "Why are these mortgage-backed securities and derivatives not worth more?"

There are real HOUSES underneath them, right?

I couldn't figure it out.

I couldn't make the numbers work.

They HAD to be worth more than the mark-down price. It just made no sense. The securities are trading for less than the underlying collateral. They had to be worth more.

Had to.

And then it hit me.

Folks, it's not that we should be anticipating The Crash, our worry should be that The Crash Has Already Happened.

After the crash of '29, people had the same question: "Why aren't these stocks worth more?" And the answer was that they were, in fact, trading well below their "intrinsic" value, but there was nobody there to buy them. The modern stock market was a relatively new institution. People simply lost faith in it.

While the more-or-less modern market for mortgage securities is at least 40 years old, most people don't understand it - just like stocks in '29. While the 20's roared for the smart set, most people lived out in the countryside. By the time they heard about the stock market, it was crashing or just about to. I daresay there are a great many VERY smart and well-informed people who cannot tell you what MBS, RMBS, CMBS, CDO, CMO and CDS mean, although these terms are not even thought to be exotic any more. Relative to these huge, modern, international mortgage securities' market, most people just plain live out in the countryside.

The market for American mortgage-backed securities WAS the most-liquid market in the world - even more liquid than treasury bonds. But most people - even very smart people - poo-poo this "securitization" as something new and somehow false. It's not. We all depend on it, actually. We have big government agencies that make sure that at least half of it is guaranteed and keeps running - Fannie and Freddie.

But I really am beginning to come to the conclusion that the private side of the mortgage-backed securities market has crashed completely. By that I mean, it is in a deflationary spiral where nobody will buy, even though there is "intrinsic" worth there. Why do I keep putting "intrinsic" in quotes? Because something is only worth something if somebody is there to buy it. The assumption is that because these securities represent real flows of cash payments, of course people will buy them. But those cash payments have to flow through financial institutions and those institutions over-leveraged themselves and now.....?

Well, you can think of it this way:

Banks must loan money to keep functioning, ideally safe loans.

At today's cut-rate prices, mortgage-backed securities should be, in effect, among the safest possible loans there are.

So what does it mean when banks WON'T make even the safest possible loans?

It means they must be, in effect, out of money.

And that's really bad.

And these stupid bastards have a small window left to save it - and I'll just bet you they won't because they have this weird belief that an "Invisible Hand" is going to fix it all for them.

May you live in SIGNIFICANTLY less interesting times than these

The Data Points Are Coming In Too Fast, But...

...these are my impressions so far:

When the Fed took its extraordinary action to rescue Bear Stearns (and I want to assure younger viewers that it was, at one time considered extraordinary for the Federal Reserve to recue financial institutions), "free-market" commentators like Jim Rogers were saying that it was "not the end of the world" if an investment bank like Bear Stearns went bust.

Meanwhile, in the real world, the people who were involved in the Bear negotiations were dealing with the fact that if Bear was not rescued, Lehman Brothers would be next - within a week - and Merrill would be next. So although these people (and I know some of them) believe the same way Jim Rogers does, they did the extraordinary thing - against their beliefs - and rescued Bear Stearns.

But the problem has been that every extraordinary move by the Fed and Treasury have been too little, too late. Their actions SEEM to be "all they can do" and "more than we would have expected". The actions are more than we would have expected, but only because these people are laissez-faire radicals. Clearly, each individual action has not been "all they can do" because they have then gone on to do even more - each time.

This is absolutely the worst possible thing to do - possibly even worse than doing nothing at all. If they had done nothing, then the election in November would be little more than a formality. It wouldn't be a question of whether the Republicans would lose, so much as whether there would even be a Republican party going forwards (even now, here in Washington state, the Republicans have taken to calling themselves the "GOP Party," avoiding the world "Republican" as much as possible). There would have been a panic, and disaster, but at least it would have happened so suddenly and early enough that the whole government would have been forced to act.

Instead, the laissez-faire radicals have compromised their "standards" just enough to put a patch on things for a few months at a time. Their credibility in the markets is starting to fall and they are beginning to inject not moral hazard but dangerous complacency into the financial system. The Administration was only able to rescue one out of the four this time as big buyers could not be induced to save the system (and themselves, ultimately, but they don't see that). Merrill is now part of Bank of America, but Lehman is bankrupt, AIG needs to raise an incredible $40 billion in order to stave off disaster, and we are not even hearing about Washington Mutual.

For the Federal Reserve bank to lend an insurance company this badly run $40 billion would be insane. They need to take the assets into conservatorship. The Fed is already becoming reckless, now apparently accepting any crap security out there for "collateral" on the loans it is extending to keep these firms afloat. Even the deal that "saved" Merrill Lynch is deceptive in that it was simply a matter of Bank of America giving Merrill Lynch shareholders stock and then receiving exceptional new credit facilities from the Fed. The underlying assets are no better than they were Friday. Bank of America has simply weakened its capital position.

As for WaMu, I think that they are just talking to their regulator and the FDIC - and probably stalling. These idiots think they can ride this all out. And more fundamentally, they don't care. Why should they? They're rich. It's not going to hurt them. It's just a game.

Meanwhile, gallingly, other stock markets will crash worse than the ones in the U.S., because even though this crisis is happening at the very heart of the American financial empire, it is the extremities who will feel the lack of blood first.

May you live in interesting times

Calls.

In a thing like this, you have to make your calls and stick by them, although this is just for credibility's sake. I have no financial positions whatsoever.

Once again, I think that all the trends I've identified pause here then accelerate. I see no systemic intervention to save the day.

Therefore:

Oil is headed down fast (easy, it already started).

Gold, which will follow oil, is a great short here - or scale in if you think it you can go short at $800.

[Oooh, that one is a little embarrassing now. Ah well. I'll have to invoke that old Wall Street crutch that "in the medium-term" I think gold is a massive short - but what will be the peak of panic buying? Who knows.]

The euro is up, will be up again and then has to crack. Once again, I am not making a call on the fundamentals because I don't think the fundamentals are the major influence here, but I do think the fear of a Fed easing will put the euro to back on the anti-bubble rollercoaster sooner than later.

The Japanese yen has not strengthened here as much as it should have - I think. Maybe there is more bubble/anti-bubble action here than I thought.

This would be a great time to go long the dollar index, which is UP today if only because the basket of currencies against which it trades is such a basket-case.

China and India are really worrisome. Big crashes in equity markets, inflation, the whole works.

So the financial turmoil really only adds to the thesis, I'm afraid.

I think the government is acting with surprising creativity, but we have to wonder if it's too late.

This is just a greater blow than anyone could have imagined and it's a truly terrible sign that we see bidders stepping away from these distress situations in financial stocks. I'm sure they are all telling themselves that the stocks don't matter and it's all about the bonds now, but that is a thin reed.

I've never been more confident in my thesis, and sadder for my country.

But, again, REALLY GOOD developments can come of this if we pursue the right policies.


May you live in slightly less interesting times than these

The Shotgun Blast Heard 'Round The World.

It Is Not Just Lehman Brothers - or Lehman and WaMu.

Apparently, bankers involved in the enormous talks to save Lehman Brothers are saying that the internal work of at least one firm indicates a non-zero probability that Washington Mutual, AIG Insurance and Merrill Lynch could fold WITHIN THE WEEK - individually or separately. As for the dependability of this work, I can only say that the same firm, analyzing the effect of Bear Stearns, reportedly concluded that if that investment bank had not been rescued, Lehman Brothers would follow Bear into bankruptcy within a short time, followed by Merrill. This was considered too dour a forecast by many at the time. Apparently it wasn't gloomy enough.

The problem with going further into a story like this is that - for the moment - the internal finances of these institutions and the operations of the markets in which their assets are valued are too murky to make analyses - unless you have proprietary knowledge, which I sure don't.

As for my own little thesis, this is probably going to be a negative both for oil and the dollar, but it's not good for the euro or yen in the long term, either, I think. But certainly in the short-term the euro is soaring. I expected it, see my previous post "It Begins".

And that bubble full of dollars is sure emptying out pretty fast. I think all trends pause and then accelerate.

On a positive note, I just want to say that this is a very predictable result of laissez-faire policies, but it CAN BE REVERSED.

First, the U.S. government has enormous power to re-capitalize markets because the government's capital efficiency is so strong.

While under-regulation in trading markets always - ALWAYS - leads to collapse [start with this mess, then go backwards in time through Enron, LTCM, Asian Bubble, etc., etc. - you'll see what I mean], those markets usually get properly regulated and start to function again - with some significant help.

As a citizen, you just need to support policies that put money out to more regular people in a well-organized, well-regulated way with the most democratic input.

Anyway, Jim Cramer may get the answer to the question he poses here:

The Face of a New Monetarism???

I was talking on the phone with a Republican friend of mine - we've been arguing for about 20 years, often every day - and he suddenly stopped me and said:

"Pal, a tear just came to my eye."

"Huh?" I said, "What the hell are you talking about?"

"I just realized it.....you're an inflation hawk. I've never been so proud."

I denied it of course because, well, he's a Republican. That's not my friend, there, at right, that's Indian Central Bank Governor Duvvuri Subbarao. But he looks like a nice fellow.

But, you know, I am an inflation hawk - of a sort. And you know what else? This is even worse, but the IMF was kinda right - well at least half-right. Developing economies really do have to focus on currency stability. And some of them have, but maybe not in the way people think. That's not me, at left, that's my Republican friend.

Okay, it's Karl Marx. But something old Karl would take note of these days is the growth in global dollar reserves - by which I mean the insanely large amount of dollars and dollar-denominated credit flowing from the U.S. to the rest of the world. It's immense. This guy Brad Setser from the Council on Foreign Relations wrote an important paper on it - got him onto CNBC. He seems like a nice fellow, too.




Woops! Sorry, that was rockabilly guitar genius Brian Setzer, not Geo-Economics Genius Brad Setser. Brad Setser's video may be have a smaller picture, but it has a hot woman and hotter economics in it. See below.


Foreign Funds

The video is an interesting debate. I find it a well-traveled path, but I would travel any path with her... Anyway...the point is that the numbers are enormous. Here is a nice highlight from Setser's paper that's getting him such press(.pdf):

"As Figure 7 demonstrates, the financing that emerging economy
governments have provided to the United States dwarfs the emergency
financing that the IMF provided to the emerging world in the
1990s.

Indeed, in 2007 alone, the estimated increase in the dollar reserves
of emerging economies was roughly thirty times larger than the financing
that the IMF provided to the emerging world in 1997–98.14
Table 1 illustrates this astonishing imbalance in a slightly different
way: The $30 billion in new capital that U.S. banks and broker-dealers
raised from sovereign funds in China, Singapore, and the Gulf states in
December 2007 and January 2008 is equal to the largest loan the IMF
extended to any emerging economy."

It's excellent, readable and informative stuff and I recommend it highly

Still this is the Internet, and here we quibble. It's just what we do. Note the implicit assumption of "outgunned". The idea is that not only have emerging markets done without IMF financing (net), but that these much-poorer countries have actually financed the United States to the tune of 30 times such financing. I'll spare you the table and give you the highlight that the emerging economies put more money into the Citigroup refinancing alone ($17.5 billion) than the nation of Turkey got from the IMF in the three years of its inflationary/financial crisis 1999-2001

So here's the question to Mr. Setser and to all of you: Does it really make sense that the emerging economies can spare 30x the the financing the IMF offers? Could these fast-growing, but poor, countries possibly afford to, in effect, give the United States of America more than $1.6 TRILLION dollars in financing out of the goodness of their hearts?

I believe their hearts are good, but India alone has accumulated over $300 billion in dollar reserves. Indians are generous people and some are quite ascetic and frugal, but that is just a lotta money.

Or did India - and these other countries - get something in return for their apparent largesse? From Reuters India:

India cbank sold $9.9 bln in currency market in July

Fri Sep 12, 2008 6:19pm IST

MUMBAI, Sept 12 (Reuters India) - India's central bank sold a gross $9.9 billion in currency market intervention in July, the highest on record, in a volatile month when the rupee hit a 15-month low but then later rose 1.1 percent on the dollar.

The central bank's monthly bulletin showed on Friday the monetary authority sold $6.32 billion on a net basis in July, trimming its net dollar purchases in 2008 to $13.24 billion.

The $9.9 billion gross is the most sold in a month by the Reserve Bank of India (RBI) since it began publishing its currency intervention figures in April 1995. It surpasses record dollar sales of almost $7 billion gross in June.

The rupee fell 7.4 percent in the first seven months of 2008, ending July at 42.57/58 per dollar , in a reversal of its fortunes in 2007 when strong foreign investment inflows drove it to 39.16, its highest in nearly a decade.

This year's fall accelerated sharply in July as crude touched a record above $147 a barrel, the trade deficit widened, and investment outflows weighed.

Traders say that in recent months and days the central bank has continued to support the rupee, which is now at its lowest in two years, has shed nearly 4 percent this month alone and lost 13.9 percent this year.

(Reporting by Anurag Joshi; Editing by Charlotte Cooper)

What this suggests about the relationship between the dollar and the rupee (or any emerging-markets currency) is not Gresham's Law: "bad coin drives out good" or the reverse (as is perhaps more often observed) but a situation where the "good coin" of the dollar and...if you'll excuse me...the "bad coin" of the rupee are made to be one in the same. With a positive flow of dollars behind it, the rupees is as good a coin as any. Everyone wants to be part of that unique dollar situation if they can be. Everyone wants the liquidity that comes from adding that unquestionable "goodness" to their currency.

Do government's decide this consciously? I don't think so. It's simply an evolutionary process. The world needs a standard of credit which is "risk free" and in buying what they perceive to be the closest thing to the thing they want, they make it so.

A virtuous cycle, but as we see with India, the dollars are now flowing out - quickly - and Gresham's Law may be reasserting itself to the disadvantage of the people of India. The learned at Harvard and The Economist proposed all sorts of wonderful solutions Indian inflation in April and I'm sure the large amount of empirical wrongness contained in their proposals will not dissuade them from making them again. But India needs better answers.

We may yet have to dig up Mr. Gresham and get him sorted.

May you live in interesting times

It Begins.

In July of 2003, Didier Sornette wrote this:

A very interesting additional information point is provided by the behavior of the main currencies against the US dollar. We have found unmistakable LPPL signatures of a speculative bubble which is presently developing on the Euro. Specifically, Specifically, the Euro in US$ exhibits a typical accelerating LPPL bubble pattern, which is suggestive of a speculative herding buying of Euros using US$. Similarly, the Euro in Yen also exhibits a typical accelerating LPPL bubble pattern, leading to a similar conclusion. In contrast, the Yen in US$ does not have any acceleration (nor has the US$ in Yen), even if a marginally significant log-periodicity may be observed. These three analyses provide a remarkable message: the depreciation of the US$ is not just the undirected flight-for- safety of a herd fleeing from a looming catastrophe; it seems to be associated with a speculative bubble directed to what is felt (at least on the short- and medium-term) to be the new haven currency, the Euro.

Here's the bubble he's talking about, which is the Euro versus the dollar:

And here's the reverse of that bubble, that I've been talking about, which is the Dollar versus everything:

The euro is a part of that "everything" but there are other big parts - like the Japanse yen and thereupon hangs a tale. This gets a little tricky, but follow me here, because the most-fascinating thing about an LPPL bubble is that you can actually watch people's thinking change as they go through the phases of the bubble.

So back in March, you can see that the dollar was about to make a turnaround. Of wise and prescient Japanese, the Financial Times wrote this:

Japanese savers convert yen into dollars

By Lindsay Whipp in Tokyo

Published: March 18 2008 20:13 | Last updated: March 18 2008 20:13

Not everybody is shunning the dollar, it seems. Since the US currency started its descent against the yen last summer, some Japanese people have been trying to gauge when the currency is cheap enough to start buying back.

During the past few months Japanese banks have seen an increase in the value of deposits in dollars in foreign currency deposit accounts.

At some banks an increasing number of customers have opened such accounts in anticipation of buying dollars at what they consider to be the right time

Wow, were those Japanese ever right on the money!...here's the yen versus the dollar:

By June, the huge bubble of dollars (more dollars = lower price, so it's sort of a "down bubble") had popped. The price of the greenback was roaring back to life, so the Financial Times wrote this:

Risk-hungry investors shun a weakening yen

By Peter Garnham in London and Andrew Wood in Hong Kong

Published: June 16 2008 18:37 | Last updated: June 16 2008 18:37

The yen has weakened 10 per cent to the dollar in the past three months as improving risk appetite and a widening yield disadvantage have led investors to abandon the Japanese currency.

The yen appreciated rapidly in the first quarter of the year as the US Federal Reserve slashed interest rates and the financial crisis intensified.

Here's that Yen again:

Once again, the yen - although it went up really fast - was not *in* a bubble itself when it made that big spike on the left of the chart. But it was *part of* the bubble of everything versus the dollar. Therefore that slope down you see on the right was not an anti-bubble in the yen, but it represents the yen being caught up as a large element of an anti-bubble.

One of the amazing things about anti-bubbles is the predictable, roller-coaster oscillations they go through. We're starting to go through an oscillation in the price of the dollar, and it's starting with the yen. So now - referring to that little upwards hook on the far right of the chart - the Financial Times writes this:

Reversal of carry trade makes a star of the yen

Published: September 12 2008 17:19 | Last updated: September 12 2008 17:19

The yen has been the star performer on the currency markets over the past month as investors have sought refuge from the recent upheaval.

Japan’s economic fundamentals have not changed. Indeed, the authorities are warning of a recession and there is little prospect of the Bank of Japan raising interest rates, which currently stand at just 0.5 per cent.

However, it was the low-yielding yen’s part in feeding the rise in asset prices – which have reversed so dramatically recently – that has boosted the currency.

Carry trade investors sold the yen heavily to fund the purchase of riskier, higher-yielding assets elsewhere.

Now those positions are being reversed as investments are liquidated across a range of asset classes and regions across the globe.

This article represents something so interesting: the kind of argument traders will use to justify their bubble/anti-bubble psychology in "truth" and "objectivity". It's not that these things may not be true, it's just that they don't matter right now. What matters is the psychology of the traders. Right now, the trade of buying the dollar and selling everything else has become too easy. The market was moving too fast. Suddenly the conviction is gone. We have that moment of rest in the roller-coaster the train goes up. There's a break from fear and you can catch your breath. People like this break from fear so the "dollar-down, everything-else-up" psychology will get stronger. Remember, the traders are people who only months ago believed that the dollar would go down forever. The yen will be one of the "explanations" for things "getting back to normal". You can also see it starting in the euro. I don't know what the "explanation" for strength in the euro will be yet, but it doesn't matter. The important thing is that it's coming.

The bewildered panic will reverse for a while. Oil, gold, everything will eventually go up at least a little and the dollar will go down. Everyone will feel comfortable for a moment......

..... and just when they do: whoosh, hands up in the air and everybody yell!

May you live in interesting times

JP Morgan To Buy WaMu???

Thanks to PVD, for this. That was really nice.

Now is JP Morgan being nice - or naughty?

If true, it's great news. We're still on the road, but it won't be quite so bumpy.

From American Banker

JPMorgan Chase in Advanced Talks to Buy Wamu: Sources
American Banker | Friday, September 12, 2008

By Cheyenne Hopkins and Joe Adler

WASHINGTON - JPMorgan Chase & Co. is in advanced discussions to buy
Washington Mutual, sources said Friday.

While a deal has not been struck, and could fall apart, sources said
negotiations are ongoing at the highest levels of both companies,
including James Dimon, the chairman and chief executive of JPMorgan, and
Alan Fishman, the newly-installed CEO of Wamu.

A spokesman for JPMorgan Chase declined to comment. A spokesman for Wamu
was not immediately available for comment.

If a deal is struck, it would remove a potentially huge problem facing
the government. Regulators have already intervened to save Fannie Mae,
Freddie Mac, and Bear Stearns Cos., and are reportedly aiding the sale
of Lehman Brothers Holdings Inc.

The talks between JPMorgan Chase and Wamu do not involve the government,
sources said. Observers had said earlier this week that a
government-assisted transaction may be necessary if Wamu did not recover
or find a buyer soon.

Sources cautioned the situation remains in flux and other bidders for
the Seattle-based thrift company could emerge. But knowledgeable sources
were optimistic the deal would come together.

"It's quite plausible," said one source. "It's a possibility this
weekend."

JPMorgan Chase pursued a deal with Wamu in March, but talks fell apart
after the thrift received a $7 billion capital infusion from TPG Inc. in
April. Sources said JPMorgan Chase has remained interested in buying
Wamu since that time.

Wamu holds $309 billion in assets, and roughly $190 billion in deposits.
A collapse of the thrift company would have a severe impact on the
Deposit Insurance Fund.

May you live in interesting times, WaMu

Why Peak Oil Didn't Really Happen This Summer.

Cramer gets it:


Well, he's almost there. He doesn't acknowledge that there was a bubble, but he'll come around. It's too obvious. From the blog "Bubble Hunter":

Oil Bubble:





But people should watch and read Cramer. Yeah, you have to take him with a grain of salt, but he's a trader. He's a manic nut but he is as smart as they come. The great thing about him is that he reads and reads and reads and reads and reads and then for relaxation he looks at charts. He's also extremely intellectually flexible and nimble. He has to be. He is constantly analyzing markets made up of billions of irrational humans.

As I wrote before, we saw peak $70 oil, and a peak oil price, certainly, but not peak petroleum.

Diesel, as Cramer points out, is a problem and will remain so - or at least fall slower than other distillates. I like using words like "distillates". "Distillates" is a great-sounding word. Say it with me, won't you?

Distillates.

If all these changes seem stymieing and unlikely to you, you're not alone. I saw celebrated economist Nouriel Roubini on the "Charlie Rose" program slipping into talk about $120 oil and the falling dollar.

Apparently he doesn't get out much.

It's a confusing time for everyone. I just happen to like times like these.

May you live in interesting times, Cramer

Extrapreneurialism

On Sunday, my good friend suggested that I should explain what I mean by "extrapreneurialism." Because it's something that hasn't happened yet, I only have technical definitions about where it comes from and why, so it was a difficult task to complete. Fortunately, Treasury Secretary Henry Paulson announced that he had taken Congressman Barney Frank's advice and started an experiment in one form of "extrapreneurialism".

On the face of it, the bailout or nationalization or "Treasurization" of Fannie Mae and Freddie Mac seems simple enough, although enormous. The government has done things like this before, if not on this mind-boggling scale of notional value of the assets involved. But we all know the financial world has changed radically - even if we don't understand all the ways it has. The world's financial markets are connected as never before and the pace of innovation is dizzying. Therefore, we can safely assume that THIS nationalization will be handled as differently from previous ones as a Credit Default Swap is different from a simple loan. The two start from the same concept, but one is a meta-meta-market and the other is the thing meta-meta-traded in that market.

"Extrapreneurialism" comes when familiar, capitalist entrepreneurialism is moved into a different, more social context. But why should this happen? Well, there are technical answers, but there are also simple ones. Look at this quote from, of all places, the Ultra-Conservative, Republican blog "Redstate" (no, I won't put a link):

"Fannie and Freddie have issued $1.6 trillion in assets on top of $70 billion in shareholder equity. That's a rate of capital efficiency that's simply untouchable in the private world, and that's why mortgage interest rates have been so low (and home ownership rates so high) for so many years in the US.

If you were to fully open the mortgage market to private competition today, (which you simply can't because Fannie and Freddie already own or guarantee half of it, and it would take ten years for that to run off), retail mortgage rates would probably nearly DOUBLE, and housing values would plunge.

And what would happen then? That's right: Republicans and Democrats alike would be howling for a New New Deal."

This is an incredible admission that laissez-faire is both inferior and undesirable - although I doubt the author would admit it, so let's move on.

Because what the author is right and clever to point out is the tremendous capital efficiency of Fannie Mae and Freddie Mac. Even if Fannie and Freddie had been forced to hold more capital - as they should have been - the capital efficiency would still be incredible - as the author notes: "untouchable in the private world". That is power any real entrepreneur could only conclude must be harnessed and used for change and opportunity.

Had FNM and FRE been limited to their original mission, not bought mortgages for their own account and not allowed themselves to be fooled by banks they trusted into buying loans below their standards they would be the last ones left standing in the mortgage world. WHEN they go back to their mission - they will be a main support beam for the world's financial system.

No, they are not going to get smaller. That's ridiculous. They are going to get larger in the near term and any promises about reducing their size in the out years are silly and should be disregarded.

What will happen instead - extrapreneurialism predicts - is that the GSE model will expand and become more sophisticated. Smart, non-ideological people will look at that incredible capital efficiency and their eyes will light up. Their minds will be filled with ideas about how that incredible financial power might be applied. It will not bother them that capital efficiency like that "is untouchable in the private world." The fact that government will be involved will not deter them. They will not be blinded to opportunity by ideology and the models of the past.

THAT is extrapreneurialism - throwing off ideological blindness, embracing opportunity and bringing the entrepreneurial mindset to the new realities of "World Finance 3.0".

May you live in interesting times

So How Do I Know???

So how do I know it's a bubble?

When I look around at blogs, I see a lot of people either making sweeping statements in the style of their favorite pundit - which is fun.

I also see people saying a lot of personal things. I've been told that's important because it shows you have a stake in what you're writing. I can definitely see the validity of that, but I just wasn't brought up that way. I'm not ready for that yet, but I'll try. I see people putting out a lot of charts and graphs - which are cool ways to visualize ideas and I'll do more of that. I also see people who are link-happy, which can be very useful - but so few people are saying anything like what I'm saying. And occasionally I see people trying to use a lot of extraneous detail - dates, names - to make themselves appear credible - which is lame.

I want to do all the stuff that's useful to people, but I also feel it's an unusual time where some strong statements are warranted and some explanations are really simple. And, again, it's fun.

Here's how I know that there is a huge global financial bubble: almost every major U.S.-dollar-traded commodity and currency future is down huge and at the same time. Everything from Australian dollar to Zinc - is down enormously.

The notion that nickel...



...and oats...





...could have the same economics is silly, and yet they are falling down together. Why? Because of course in a very real sense they do have the same economics, as the whole world does: The U.S. dollar binds them together.

This is the overwhelming argument for the bubble: When markets that are supposed to be unrelated move together, something is moving them together. That thing - in my view - is the U.S. dollar. The conclusion we have to reach is that through speculation and bubble finance, a huge number of dollars were created and made a bubble. The bubble popped and now those dollars are disappearing, with predictable results.

The evidence is now massive and undeniable, although it is still regularly denied in the financial pages. I started to come to the conclusion a few months ago. On a whim, I wrote a note to Dr. Didier Sornette, out of the blue, asking him about the trend in the euro currency versus the dollar. I was just so curious what he thought I couldn't resist. He more than surprised me by not only replying but kind giving me a look at an analysis he'd done. Long-short, he saw a mathematical signal which *could* be associated with a bubble and concluded that a "change of regime" was coming soon, based on a preliminary look. That was in May and that piece of analysis - preliminary as it was - led me to believe I really was looking at the huge change I suspected.

Professor Sornette has created a theory of bubbles - what they are and how one might distinguish a bubble from a fast or strong rise in price related to chance or fundamentals. This theory is nothing like the magic formulas on stock sites. It uses very complex math to peer into the new field of behavioral economics. Personally, I think it re-connect economics to common sense, but I am definitely extrapolating from Dr. Sornette's writings and my opinions should not be ascribed to him in any way.

The "common sense," unsophisticated , conclusion I take from Dr. Sornette's work is that bubbles happen when, through a natural, evolutionary sort of process, market participants start to entrain each other to respond to themselves rather than outside data. The process reinforces itself until the system acts very much like a natural system headed towards a critical failure - like a volcano on the way towards eruption. It's not that fundamentals aren't still at work, it's that traders are giving each other the ability to ignore them for a period of time.

This is not "technical analysis" - the things "chartists" typically do - at least not when Dr. Sornette does it. Dr. Sornette uses the math that now helps scientists predict critical failures in natural systems - like volcanoes - and has written that in special situations only he feels he can use this method of analysis to find the mathematical "signature" of a financial bubble and give a rough estimate of when it will burst and what will happen after it does.

Dr. Sornette's ideas are precise and scientific, but they also inspire intuitive searching, like all good ideas. So when I read his take on the euro, I started to look around. I saw chart after chart that looked so similar I was stunned. I did *not* do a mathematical analysis on them, but when I searched and searched and could find no cause for the synchronization, I had to make the conclusion that it was a bubble - traders were making the economics, rather than economics guiding the trades.

Now we have come to a place where the synchrony is so large, so universal, that even if there isn't a chart for it that Dr. Sornette can tell us fits his rigorous standards, we know that something is going on that ties these markets together.

Flip over all the charts and what do you get a chart of? The U.S. dollar versus....well, everything.




May you live in interesting times