Eternal Happiness Guaranteed!

Tonight's post will be a bit short on deep thought as the parade of trick or treaters has been pretty solid. Having never had a house of my own, it is kind of nice to see the neighbors and their children come to the door all dressed up. It is the little things that make you smile sometime. Now if my Pug Dog would stop going berserk every single time the doorbell rings.......

I Will Believe it When I see It
One of the plethora of issues facing the markets is that there is zero transparency in regards to what kind of toxic crap banks may or may not hold. Throw in derivatives and CDS obligations and there is no way to get a read on anyone's bottom line. The banks like it like this.

So imagine my surprise when I saw this headline story this evening on Yahoo Finance:
CNBC
Regulators to Approve Derivatives Clearinghouse
Friday October 31, 2:27 pm ET

Regulators are expected to approve a clearing house for credit derivative swaps in the next several weeks, CNBC has learned.
Regulators and industry participants have voiced concern that the private nature of the $55 trillion market for credit default swaps poses systemic risks because no one knows the size of a counterparty's derivative portfolio, and the failure of a large counterparty can create massive losses globally.
Creating a clearing house would remove the risk posed by a counterparty failure, provide price transparency and offer simpler, more standardized settlement of contracts when an issuer defaults, proponents argue.

This idea makes sense and is a strong positive for the system going forward. Are you stunned? Are you shocked? I am. But allow me to offer two observations that should temper any wild enthusiasm:
1.)The chance this thing gets off the ground is pretty small I believe
2.)This may be another bullshit play. By this I mean the kinds of swaps and derivatives listed will only be the best looking, most positive of the lot. the exchange will then function as a fake "price discovery" mechanism to allow crazy valuations of more mark to myth items.

Between number 1 and number 2 I would say number 2 seems the most reasonable. Another sick move by the banking industry with the full backing of the government. Cue the tears.

Eternal Happiness Guaranteed!
With the FED/Treasury (which will now be referred to as the Feasury to save typing on my behalf!)in the process of putting guarantees behind, well, everything, what else can we add to the list? I mean the commercial paper market? Check. Fannie and Freddie bogus debt? Check. Bank deposits? Check. What else can the Feasury do to make life even more awesome than it has been? Here is a top ten list:

Top Ten Guarantees the Feasury Should Provide
1. Fresh Young Turkey guarantee for all Americans in November
2. A Super Bowl title for every states NFL team (rotating basis)
3. Pocket Aces dealt at least once every ten hands in a poker game
4. Have said aces hold up and win the hand
5. Guarantee that your fries will be "in the bag" when you get home from the drive thru; you know that is annoying!
6. Provide a guarantee that we will always have one more roll of toilet paper left no matter what (the dollar backing is akin to the toilet paper gurantee, I know!)
7. A ban on hangovers on Sunday morning, effective immediately
8. A guarantee that Rap Music will cease to exist in 2009
9. Hank Paulson will grow a mullet; Business up front, party in the back!
10. No headaches, no tiredness, and no excuses by the wife for Saturday night action!

Leave your own list ideas in the comments section.

Friday Night Entertainment
We can have a bit of fun on Halloween, yes? Fun is still allowed.

Nightmare on Elm Street Poker Hand
My poker reference in the top ten list got me thinking about my poker days. I used to play online, before the so called "Port Security Bill" got US players banned from most of the top sites. The idea was that online poker sites skirted the tax laws because they were an online franchise and the government hated that.

Anyways, I used to do pretty well. Poker, just like life is filled with mostly dumb people and all you have to do is take advantage of their mistakes. I was in a large tournament of Texas Hold Em poker which started off with about 3000 people. You bought into the tourney for $5, and if you made the top ten you could make some serious cash. Online poker moves very fast and a game like this usually takes about 6 hours to complete.

I was dealt pocket Kings (K-K)fairly late in the tournament (about 400 players left), and an aggressive player 2 seats before me lead out the betting pretty hard. I figured him for some kind of an ace, so I would be in great shape if no ace was on the flop. The player right before me went "All-In"! Now there was a raise, and then a re-raise of all in. Looking at K-K, that is a tough call. But I knew, just KNEW the second raiser had an ace as well, probably A-Q or something. I called the all in, and then TWO MORE players behind me called as well! I was excited because if I won this hand I would have had enough chips to coast to the final 10 and win some good money.

Well, everyone's cards were flipped, and here is where I stood:
Me: K-K
player one: A-10
player two: A-J
player three: A-Q
player four: A-8 (not uncommon online, people play CRAZY!)

I was in amazing shape. There was No ace in the deck to help these guys, and they were a long shot on the hand.

The flop came down: 2-4-K
I had triple Kings (called a set), but I already had a terrible feeling in my stomach. That 2-4 was just scaring me to death.

The turn card was, of course, a 5.
Now I was very scared. I was looking at 2-4-5 and all four guys had an ace. If one of the four threes fell on the turn, all my chips would be split between these bums and I would be out.

I am sure you know how this ends, with the 3 falling on the river, completing the A-2-3-4-5 straight for the four donkeys. I only was out $5, but I missed out on a shot at at least $1000. Oh well, where is the Feasury when you need them!

Rock and Roll Ain't Noise Pollution
A little music to get the weekend started, yes?

One of my favorite Iron Maiden songs is the tune called "Running Free"; the song just pumps me up and is a true pure rock experience. Take a listen:


Full disclosure: I am an Ozzy worshipper. His early solo albums were pure magic, and the Randy Rhoades live "Tribute" album is the single greatest music piece in existence. I know you agree! Ozzy's later albums were not as powerful, but there were some standout songs. "See You On The Other Side" is a very strong song, and so I offer it here:


The wife's favorite band is Depeche Mode. I like a bit of their stuff, and the great guitar work in "Personal Jesus" is worth a listen:


I am not a fan of David Lee Roth as a solo artist, but I thought the video for "California Girls" may be eye candy, we all deserve candy on Halloween, yes?:


Have a good night.

ZIRP is Not Just a State of Mind

I am real short on time this evening, so just a few quick words.

Only 1% Left Until ZIRP is Reached
Boom Boom Bernanke and pals delivered the goods and cut rate by 50bps to 1%. This matches the cryptic 1% that ignited the credit bubble that is now the credit bust. Will doing what caused the problem fix the problem? Only time will tell but I think that is a stacked deck against!

With only 1% left to before we are in the Japanesque Zero Interest Rate Policy stage, what other tricks can the FED/Treasury pull out? Already there is some baloney plan of guaranteeing 3 million mortgages providing the "owners" can pay any amount at all on a mortgage. Great stuff.

New Addition to Blogroll
There are simply so many blogs out there nobody has the time to pour over all the material out there. In the blogroll to the left I try to list the sites that I check every single day on multiple occasions to get the best and most thorough analysis. All the sites listed offer the very best in thought and value for your time spent. Tonight I am adding another.

I have been stopping by the site called "Jesse's Café Américain" quite a bit, and now it has become a daily read. No nonsense, by the numbers insight along with macro forecasting that I feel has been very good. Website is at:
http://jessescrossroadscafe.blogspot.com/

Or use the blogroll. One recent post hit upon something related to my recent rants about the Treasury issuing massive amounts of debt as if there is no upper limit. Jesse takes this on in the following post:
http://jessescrossroadscafe.blogspot.com/2008/10/in-2009-us-may-be-forced-to-selectively.html

Key Excerpt:

"We have seen estimates that next year the US will have to finance a $2 Trillion annual deficit. They may be able to push it further into the next Administration than that by the forbearance of the world, but not by much. We'd expect a significant drop in Treasuries by 2011 at the latest.

It should be obvious to anyone that we are approaching the apogee of the Treasury bubble, with the credit bubble having broken already.

When the Treasury says they are facing unprecedented challenges in financing the US public debt next year that is an understatement.

Once the deleveraging of the markets subsides, the dollar and Treasuries will drop, perhaps with some momentum, as the rest of the world realizes that the US has no choice but to default. This can be resolved in several ways, including continued subsidies from foreign sources in the form of virtual debt forgiveness, devaluation of the dollar, raising of taxes, and higher interest rates on debt.

The problem now is that the US has breached the point where it can service its debt out of real cash flows, and turning this around will require a severe devaluation of the US dollar.

Devaluation and selective default are the only foreseeable systemic alternatives. There are other exogenous paths of a more political nature such as consolidation and war that may color the default a slightly different color, but a selective default it remains.

This is the fundamental situation. Everything else is speculation and commentary."

Great Stuff!

Have a good night.

Government Bemused by Lack of Lending

I saw the Tennessee Titans play for the first time last night. They moved to a record of 7-0 after beating the Indianapolis Colts. The Titans have an amazing defense, and a solid offense. They look pretty good to me. The Colts lost back to back games for the first time in a while, and they now play my New England Patriots next Sunday night. I do not think the Colts have ever lost 3 games in a row with Peyton Manning, so I guess that is a bad omen!

Government Bemused by Lack of Lending
It seems the White House and others in the government are puzzled by the fact that all the cash that has been handed out to the banks so far is still sitting there. What happened to all that credit and lending we were promised? What about the golden new era of bank lending the bailouts were supposed to provide? We were assured that a simple lack of liquidity was the culprit, and a money tsunami was just the fix! What happened? Here is the headline form Yahoo Finance (no not from the comedy site "The Onion":
AP
White House to banks: Start lending now
Tuesday October 28, 5:44 pm ET
By Jennifer Loven, AP White House Correspondent
White House tells banks getting federal aid to quit hoarding money and start lending it
"Hoping to thaw the credit freeze that has chilled the economy, the Bush administration sent banks an unmistakable message to put aside fears and open up loan windows for cash-starved businesses and consumers who have pulled back on spending.
"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.
"They (regulators) will be watching very closely, and they're working with the banks," Perino said."

Soon this administration will be gone and while I am sure the next one coming in will be no better on things economic, at least we might get statements that make sense! I mean reread this one and see if you can spot the problem:
"the Bush administration sent banks an unmistakable message to put aside fears and open up loan windows for cash-starved businesses and consumers who have pulled back on spending."

So which is it? Are people cash starved and in dire need of credit, or are they pulling back on their spending? I guess the idea is to "take a loan, it is patriotic!" or something.

What is escaping the powers that be and the smart guys running the Treasury and the FED is that we need a clearly defined and tangible bubble to put any new credit to work on. Houses are dead money for a while. The stock market is too jumpy. Commodities are busted. Bonds seem too weak. What is needed is a clear national goal of a new bubble. Maybe antique cars will do? That way GM and Ford may get a boost as well! Beanie babies? Cabbage Patch Kids? What will do the trick?

I have repeated my question about all of this bailout cash, so i guess one more time will do:
To whom and for what will all this money be lent out to?

I still hear crickets.

Opposing Headlines
While finding totally opposing statements in the text of an article is great fun, sometimes you can do it with just the headlines. Consider these two headlines on the main Yahoo Finance page:
"Dow jumps nearly 900 points as bargain hunters grab stocks in anticipation of a Fed rate cut"
and
"Treasury official says rescue operation will generate unprecedented borrowing needs"

So we have a big rate cut in the works for tomorrow, but the US government will need to borrow massive amounts of money going forward. See the issue? I thought that when you need to borrow big money, the rate on that stuff goes up, not down. So the FED is on their way to a FED rate of 0% (hello Japan!) while at the same time getting ready to sell treasuries by the cargo load. I am so sure that is going to go well and work out.

Maybe the banks can lend the US government money right back to them! Now there is an idea that Paulson needs to look at. Can the US take taxpayer money and debt, loan it to the banks, and have the banks loan it to the US in a closed loop? Maybe I should get a Nobel Prize with this kind of powerful insight.

Market Rally Banana Republic Style
Look, one cannot deny that solid, efficient markets just do not gyrate to the tune of 10% and and down on a daily basis. That kind of volatility means only bad things. Things like market participants have zero idea what is going on. Things like government intervention makes panic moves happen almost daily. Things like no underlying fundamentals to support a move up or down. Those kind of things.

A rate cut tomorrow is viewed as a positive, but the FED may have only 1 or at most 2 moves left after tomorrow. All the rate cuts to this point have done nothing, so maybe this one does the trick? Whatever. Almost all the action has been happening in the last 30 minutes of the day, and that means something. What I do not know, but I imagine it will be interesting to find out.

Good Financial Poem
James over at Bubblemeter had a great original poem up yesterday. Check it out:
Real estate was
The way to get rich.
Just buy a home
And give it a flip.

If you bought more house
Than you can afford,
Helicopter Ben
Will dump cash your door.

He's Helicopter, Helicopter,
Helicopter Ben,
The money-throwing man
Who works at the Fed.

Money from the clouds,
Money from the sky,
Manna from heaven,
Thank that helicopter guy.

Full post:
http://bubblemeter.blogspot.com/2008/10/helicopter-ben-makes-good-on-nickname.html


Have a good night.

We Had a "Market Crash" Party but Nobody Showed Up!

As if the wild turns of the financial world were not painful enough, when I was lifting the top section of the new coffee table out of the box my right shoulder made a bad sound and really hurt last night! I have full range of motion, but the shoulder is very sore. This whole getting older thing is starting to be a real drag.

Treasury To Stake Insurers at the Texas Hold Em Tournament
Last night I asked if we could go even one day without a new bailout plan, and today it seems to be answered. While this move falls under the TARP, there was never a discussion about plowing cash into insurance firms, so this counts as a new plan to me!

Mr. Paulson now sees the "systemic risk" posed by all kinds of insurance companies the world over and has decided that direct cash injections are just the thing. Maybe they could even lend it out to banks overnight! Then Paulson could say "While the banks are not lending to each other in this credit crunch, the insurers stand ready to fill the void! HOO RA!"

Now reasonable people thinking clearly may wonder why it seems a good idea to push money into the insurers right now. With CDS blowups, currency meltdowns, and various other calamities making forecasting losses by the insurers impossible, the Treasury thinks putting money into the game blindly is a good idea. Hard to argue with that logic.

The Treasury has now become in fact a deep pocketed poker player stake holder. Taxpayer money is being given to many firms to keep playing is the World Series of Poker Tournament. I can attest that there is nothing like playing No Limit Texas Hold Em with the house's money. You have this great feeling of aggression because you have nothing to lose. I think this is all going to end up good, don't you?

We Had a "Market Crash" Party but Nobody Showed Up!
I got up this morning at 5am, got some coffee, fed the dog, and sat on the couch. I turned on the TV to the local news for the weather report. I then flipped to CNBC to check the futures, and holy moly! DOW futures at 5:15am were "lock limit" down 550 points! I was sure my tired eyes had not seen the right numbers, but the shrill sounds coming from the CNBC host made me confident they were correct.

In the car I checked a few radio stations, and things were looking pretty bad. As bad as that Friday from a few weeks back at least. On the way to work I was wondering if this was the big one. Lots of blogs were calling for the end of the world. People on TV seemed scared. Everything looked like an Icelandic moment for the US. The pressure was on, and I waited for the market open.

And then nothing happened. Do not get me wrong, the DOW shed over 500 points at the open, but a huge spike up came right behind it. There was no panic. There was no capitulation. There was never any danger of the markets being shut down or "circuit breakers" being tripped. It was just another in a long line of down days. Nothing more, nothing less.

So what happened? The same thing that always happens in bear markets. I have seen this phenomena during the Tech bust, so I remember it well. What happened is that too many people are so conditioned to buy "at the bottom" that buy orders were cascading into the system almost non stop. It can be termed "panic buying" and what that means is that more people are worried about missing "the bottom" than they are of missing their last chance to sell. On cue at about 11am all the rage was the "successful test" of the lows. I saw many calls of a reinforced "W" triple bottom or other such nonsense.

Today was no bottom. The bottom comes when nobody even asks what the averages did. The bottom comes when after a week of solid gains, people want to sell the next Monday because they think the market cannot hold the gains. A bottom comes when ALL the dirty laundry is on the table and any not scared away are all that is left to rebuild. Today was not that day. Today was yet another large scale entry by institutions, mutual funds, and others chasing their losses down. As the title of the Led Zeppelin song says, "The Song Remains the Same".

The same pattern is now at work across the US financial system. Instead of opening the books and figuring out which banks are finished and which can go on the FED/Treasury buys them time with taxpayer money. Instead of a market wash out we see many trying to play the next bailout or interest rate cut for a leg up. The entire system is doggy paddling in the middle of the ocean and wasting both every one's time and all of our money.

Until after the elections and probably not until early 2009, I think the "Song Remains the Same". I would prefer we get to the root of this mess. Faster Please!

Friday Night Entertainment
No comments for anything in particular, so I guess it is all my choice!

Book Passage

"The Kurgan liked modern cities. They were seething with violence, always ready to explode. He liked the fever of the streets, especially in New York. Everything was close to the surface. If you stopped to listen, you could hear the city screaming, in a thousand different ways, through a thousand separate mouths. You could feel the tension in the air. You could sense it was ready to snap. There was always a climate of despair hanging over the false gaiety. Drunks had sudden insights into the deeper layers of the city, and tried to warn others, but people took no notice. People thought they had control. Then, occasionally, something happened-like a series of decapitations-which showed them they did not, and the normal quiet panic moved into the hysteria zone."

from the novel "The Highlander" by Garry Kilworth

Film Clip
A true modern comedy classic was the film "Old School". If you have not seen this film, you simply must! Too many laughs to even count, but here is a scene which should show why drinking too much at a wild party usually ends up bad:


Music for the Masses
I broke down and bought an Ipod. In the process of transferring my music to the computer, it was nice to come across tunes I had not heard in a long time. I had a Bette Midler album and I was like "What the heck??" The album is from the soundtrack to the film titled "The Rose" which was a loosely based Janis Joplin biopic. I then remembered the title track named "The Rose" and listened to it. I can say the song really hit me hard. Rarely will you hear a song that can elicit such emotion as this one. If this song does not truly move you you must be dead, or British. Enjoy "The Rose":


Ok, now enough sappy stuff! Never let it be said that Economic Disconnect is heartless!

When KISS reunited and came out with anew album in 1998, I figured it would suck. Luckily one of may favorite KISS tunes came from that album. Take the great song "Psycho Circus" out for a spin (complete with 3-D video to boot!):


For one of the sickest opening riffs of all time, get excited with Jimi Hendrix and "Voodoo Chile":


Have a good night.

Can One Day Go by Without Another Bailout Plan?

It was about 33 degrees this morning when I embarked on my trek to work at 6am. I know I live in New England and I should just shut my mouth, but that first cold snap really takes something out of me. My long lost ancestors had to be from a warmer climate, I am just not made out for the cold! A little short on time and way too long on material tonight, so I will have a bit of links with commentary. Should have a full post tomorrow night complete with all the entertainment, so leave suggestions in the comments.

World Getting Wise to the Crap we Sell Them?
The following article could just be an outlier, but if it is a sign of things to come, the US is in for a world of hurt.
from the AsianInvestor:

Taiwan insurers ordered out of US agency MBS
By Liz Mak | 23 October 2008
The FSC has not only limited insurance company exposure to Fannie, Freddie and Ginnie bonds and mortgage-backed securities, but has decided that existing credit ratings are meaningless.

Full article here:
http://www.asianinvestor.net/article.aspx?CIaNID=87297

It seems that the Taiwanese have come to the conclusion that the rating agencies here have no idea what they are doing. If they watched the testimony today of a bunch of industry insiders, they found no solace. The US main export is crafty debt packages and now those very instruments have been deemed "public enemy number one" by Taiwan. If others follow suit, things are going to get bad. Very bad. Without constant inflows of cash the US is a dead duck. See what happens when fools run wild?

Cheaper For Ships to Sit Than Deliver Cargo
The Baltic Dry Index is a item I have just recently been watching. The action has been, well lets just say, vicious to the down side. The Baltic Dry Index is known as a proxy for international shipping and international manufacturing, as it captures shipping lease rates for all kinds of goods worldwide. The excellent blog Naked Capitalism has some rough data tonight, full link here:
http://www.nakedcapitalism.com/2008/10/baltic-dry-index-continues-to-fall-now.html

What the article recounts is that the index is 90% below its peak in early May. Key excerpt:

"Dry bulk shippers are going the way of the global economy: under water. Among the shippers, DryShips and Excel Maritime Carriers have been hit particularly hard because of their large debtloads and significant spot market exposure. For the 13th straight day, the Baltic Dry Index, which measures dry bulk shipping rates on 40 routes across the world, tumbled Wednesday, falling 71 points to 1,221.
The BDI began its slide over the summer, and it has been taking shipping stocks down with it...
“Day rates have fallen below costs for some ship owners,” Landsberg said. “Rather than take inadequate fixtures, they are anchoring their vessels and letting them sit idle.”

No money to made by shipping goods, and letters of credit are not being honored by many shippers. Keep in mind that the US is always about 3 meals away from a crisis if shipping breaks down and we have yet another ominous blinking light.

Can One Day Go by Without Another Bailout Plan?
Today the FDIC chair Sheila Blair was blabbing about some stupid plan to get modifications on home loans so you the taxpayer can pay for the poor choices of others in the spirit of "it will hurt you worse if you do not." It seems every single day there is a TARP, TLSF, PCP, LSD, plan being rolled out to calm markets and promise salvation for debt. It put me in mind of the film "The Godfather: Part III"

In the film the Godfather Michael Corleone hatches a plan to take over Società Generale Immobiliare, the Vatican controlled mega conglomerate that holds various real estate and debt instruments. It is implied in the film that Immobiliare can forgive debt through Vatican influence, hence the interest by the Godfather.

My plan for the US financial system is to ask the Vatican to forgive all the debt of our homeowners, all the crap paper we sold all over the world. In addition I would implore the Vatican to guarantee all the money market funds, all the commercial paper, all overnight bank lending, all modified mortgages, all 401k's, and all stock market losses going back to last August. This plan is called "God Ordains No Eventual Responsibility" or G.O.N.E.R for short.

I am not poking fun at religion here, but I am trying to make a point. The lengthy laundry list of bailouts and wild guarantees above are in fact being attempted by our bankrupt government. Another day, another acronym. If total absolution seems silly to you, then why does false guarantees by a broken government make any more sense?

Couple this concept with the two prior items, and it is not a pretty picture. Let us all hope the game can go on, at least until it does not matter to me!

Have a good night.

Debt Chandrasekhar Limit Further Explored

The local weatherman says that higher elevations may see some light snow overnight. Light snow. Tonight. Snow. It is October. Enough said.

Hank Paulson - Rock Star
I was home today as the new couch was being delivered. I had CNBC on most of the day. What I saw today was an obscenity. It seems that Hank Paulson had some free time and decided to take a walk along the main trading floor of the NYSE. While I can imagine that the Treasury head should have better things to do with his time, it is a free country.

The response on the floor was silly. Traders were trying to shake Paulson's hand. Many were high fiving each other. Paulson muttered something to a trader about "doing whatever is necessary". Doing whatever to accomplish just what was not covered. CNBC reporter Bob Pisani was almost moved to tears of joy as Hanky made the rounds. Disgusting stuff. The Treasury head is viewed by Wall Street as to be looking out for them, while his real responsibility is to look out for the taxpayer. Once again we see how our tax money will be spent on bailouts: More cash for the traders at the NYSE to waste and lose, all at our expense. It is obvious that Pauslon is viewed as a buddy by traders, and that is very dangerous.

Debt Chandrasekhar Limit Further Explored
Last Friday night I asked if the US has a debt Chandrasekhar Limit, meaning is there a point at which the US will incur so much debt that it will go supernova and explode. This question was attacked at another angle by Mike "Mish" Shedlock in a post tonight:
http://globaleconomicanalysis.blogspot.com/2008/10/something-for-nothing-vs-paradox-of.html

Mish goes into great detail about the problems with Keynesian economic philosophy. He also goes after Krugman, Roubini, et all with their call for never ending spending binges. The piece is a must read, as Mish's attention to detail and thorough analysis is far superior to anything I can do. I think his piece is a good companion for mine.

In looking at what Bernanke and other economists are saying about the current debacle, I cannot help but think they are making a serious logical thinking error. They are viewing the financial system as a sort of mathematical equation instead of a living, breathing animal.

By this I mean that one cannot view the debt destruction and consumer spending pull back as if it exists in an alternate dimension where everything is great except for a little credit hiccup. I am sure there is some fancy algorithm that can model a "credit crunch". I am sure that this equation is telling Bernanke and crew that they must flood the system with money to make things the way they want it. This is exactly the kind of academic solution that has no mooring in the real world.

Any model that ignores the reality of the overstretched American consumer, disregards the reality of a housing bubble, excludes the total lack of real savings in the US, and cannot calculate the effect of the shadow banking system is by definition useless. One cannot assume facts not in evidence about the economy when applying their models. What may be a textbook fix for the current credit mess only applies if the parameters you are basing the comparison on are good. They are not.

There seems to be a real sense out there that things are getting better. Many bearish types are making turns to a more bullish bent. All the talk today was about the "thawing of the credit markets". I will end asking the same question I always ask:
To whom and for what will the banks be lending money to going forward?

I have yet to get a reasonable answer.

Have a good night.

Saturday Odds and Ends

It seems like this weekend may be devoid of the usual fireworks that have been the norm for about a month. I mean the Yahoo Finance lead story was about President Bush promises the country everything will be OK, eventually. Hard to argue with that. Eventually the Moon will spin away from Earth, as it moves away 30 millimeters or so a year. Eventually is a relative term.

Question About Newspapers
I do get a physical newspaper and have not for about 5 years. I remember when I was younger that my Mom was always waiting to get the paper in the evening and especially on Sunday. I was wondering how many of the readers here get an actual paper? Or do you rely on the Web alone to read news items? Just curious, so leave your response in the comments section.

Interesting Tidbit
You can learn something new every day! Today I ran across the book "Moby Dick" by Herman Melville. I Wiki'd the book and I was amazed that an actual ship was sunk by an angry sperm whale. This event inspired Melville to write the story.

The ship that was rammed by the whale was called the Essex and it was based out of Nantucket. If you have some time you should read about the entire episode as it entails shipwreck, remote island life, cannibalism, and other drama. Who knew?http://en.wikipedia.org/wiki/Essex_(whaleship)

Cool Old Money Site
I was searching around trying to find out some information on a weird $10 dollar bill my wife had last week. A clerk at a gas station gave as change to my a wife a 1934 Ten Dollar Bill! The bill was very different than any money I had ever seen. It turns out the bill is of some value (not alot, do not get excited!) so it was a neat find.

During my research I came across a totally awesome site that specializes in old money, banknotes, bonds, and other financial paper from all across the US over time. I seriously spend hours looking at all kinds of things on this site. I am going to buy a few things for myself when I figure out what I want the most. You can see what the guy is selling here:

http://www.donckelly.com/forsale.html

Some examples of things I find very cool:

I know it is hard to believe, but the US money supply was once backed up by solid gold! Amazing. There were things called Gold Certificates that you could actually redeem for gold. The bills have, of course, gold colored accents. The bills are very nice (clicking on picture will give you a bigger version):
Front Side


Backside:


How about Confederate money from the Civil War?:


The site even has regional money printed by local banks. You can search out old bank notes from your hometown perhaps. Here is an old bill from 1882 issued by the bank of Gloucester here in Massachusetts:


I am in no way associated with that site, I just came across it yesterday so my mention of it here is out of my own interest, not an endorsement! I really do like the old money though.

That is about it. Quiet Saturday night and I had some time to post.

Have a good night.

Does the United States Have a Debt Chandrasekhar Limit?

The comments section was very active on the last post. I really like it when readers leave ideas and comments, it is one of the best things about doing this blog. I hate to bring it up, but it is already 40 degrees tonight and falling. I do not think I have ever told you readers that I HATE THE COLD. I really mean it.

Real American, True Patriot, Father of the New Revolution
This story is going to be all over the world by tonight, but I was so pumped by it I had to include it here as well!

It seems there was a Hedge Fund manager that had the insight, balls, and cash to make huge bets against the entire mortgage industry. Of course the fund did spectacular, returning 866%. Yes, you read that right. This man named Andrew Lahde is now my hero. It is not because he made big bucks on the mortgage fiasco, it is for two other reasons:
1. Mr. Lahde is hanging it up after his windfall to pursue more meaningful things in life, I wish him all the best.
2. He wrote the single best letter to his investors ever written!

The Farewell letter is so amazing, so precise, so cutting that you simply must read the entire piece. I saw it on the Big Picture blog first, so I will link to that page:
http://bigpicture.typepad.com/comments/2008/10/andrew-lahde-go.html#more

Scathing excerpt:

"Dear Investor:
Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are."

Many things that I think and see are fully reflected in this letter. In the Biotech field there are plenty of people that think an education at some big time school makes them better at science. That is not the case. There are so many foolish people in government and positions of power in the financial world that are no smarter than you or I, and often much less so. The evidence speaks for itself; an economy built on selling houses at ever higher prices was deemed a swell idea by those "in the know". There can be no other explanation than pure ignorance. Economic Disconnect salutes Andrew Lahde!

Does the United States Have a Debt Chandrasekhar Limit?
The entire financial mess that has engulfed the world is really quite easy to fix. I have seen many economists, bloggers, and others make the same argument over the past week that seems to be universal in its appeal. From Paul Krugman, to Nouriel Roubini and even the clearest heads at Minyanville all seem to have arrived at the same solution. Here it is in one sentence:

Have the US Treasury spend whatever it has to to fix the entire world.

Now some have various wrinkles to this plan, but they all boil down to the same thing. There is a growing consensus as bailout after bailout falls flat and a TARP Plan cannot even begin to cover the problem that wild spending is both desireable and harmless. Krugman himself penned an article today for the Times that says "Do not worry about budget deficits!" Give that man another Nobel Prize! Brilliant!

Now as I am one of the sorry uneducated masses, my question for Roubini, Krugman, et al is simple:
Does the United States Have a Debt Chandrasekhar Limit?

The Chandrasekhar Limit is defined as:
"For main-sequence stars with a mass below approximately 8 solar masses, the mass of this core will remain below the Chandrasekhar limit, and they will eventually lose mass (as planetary nebulae) until only the core, which becomes a white dwarf, remains. Stars with higher mass will develop a degenerate core whose mass will grow until it exceeds the limit. At this point the star will explode in a core-collapse supernova, leaving behind either a neutron star or a black hole.".

What I am asking is whether there is a limit on the amount of debt the US can generate before a total implosion occurs (the end result of a supernova). Is there a limit? It seems Iceland could not print or generate enough debt to save itself. Zimbabwe has the market cornered in the 10 Billion dollar note market as they print away. How come the US can make all the money they want?

I realize I am being a bit sarcastic here, but the question is a serious one. At present the US has around 3 Trillion dollars committed to this "rescue" effort. Is 6 trillion too much? 9 Trillion? 30 Trillion? At what point will the system break down and go supernova? Like the FED thinks they know what interest rates have to be in exact percentage points, do economists know how far we can push the debt envelope? I invite any and all to leave their answer in the comments section, or to vote in the new poll question along these lines.

If the US can just make all the money they need, why not make every US citizen a Billionaire? How about making the illegal immigrants millionaires? Why not? It is semantics to say the US can take on another 3-6 Trillion in deficit that will never be paid back but not 30 Trillion as that would be too much. It is not an intellectually honest argument. We will wait for an answer. It may be a while.

Friday Night Entertainment
After a weeks hiatus, the good old fun blog is back on the attack.

Book Excerpt
Tonights book passage comes from a great Star Wars novel that I really love.

"Peace is a lie. There is only passion.
Through passion, I gain strength.
Through strength, I gain power.
Through power, I gain victory.
Through victory my chains are broken."

The Sith Code from "Darth Bane: Path of Destruction" by Drew Karpyshyn

Film Clip
This clip is from a TV series actually. "The Highlander" series was the best television show ever made, I know you all agree. One of the best sword fights was the final conflict between the lead character Duncan McCloud and his arch nemesis Kalas. They fight their final fight atop the Eiffel Tower, and it is a real battle (from season 3, tiled "Finale"):


Musical Interlude
Some tunes to start your weekend off right.

By popular request, as well as my own favorite Filter song, take a listen to "Hey, Man Nice Shot":


Full disclosure; I wanted to marry Stevie Nicks for most of my life so I am biased! Take a listen to "Stand Back":


Want to get rocking? Want to get rolling? Get jacked up with Motley Crue and "Kickstart My Heart":


You may or may not have ever seen the classic film "Flash Gordon", well I liked it. Queen did the entire soundtrack and the music was great. Here is the theme song:


Have a good night.

An Oldie But Goodie

Hello out there! I am so sorry for the lack of posting this week. Things have been hectic as I have been finishing the living room. With work, dinner, and projects it is hard to put something together, especially with how wild things have been. Tonight I am pointing you towards and old post of mine (from October 25th, 2007 almost a year ago today) as I think it holds some useful forward thinking. Also I asking for ideas on a perplexing situation that I have no idea about.

Spot Price of Metals vs. Delivery Price
There is something strange going on with the price of many precious metals based on lease rates and other metrics. The spot prices are depressed, but try and get physical delivery anywhere near that price and there is a serious disconnect. Tim Iacono over at The Mess That Greenspan Made, a far, far smarter voice on these matters than I, seems confused as well. Here is his take on the weird action in Silver:
http://themessthatgreenspanmade.blogspot.com/2008/10/silver-prices-are-now-getting.html
Anyone have any ideas? I have seen plenty of thoughts out there saying that the paper market is on the verge of collapse. I am not so well schooled on futures and delivery contracts to know what that means exactly. Perhaps someone that reads here can shed some light? Have at it!

An Oldie But Goodie
Last year at about this time I had penned an article about what would have to happen to have a consumer led recession. Here is the link:
http://economicdisconnect.blogspot.com/2007/10/for-consumer-led-recession-consumer-has.html
It was my argument that credit would have to be absolutely kept away from the consumer before any spending cuts would be seen. I figured that a credit crunch fueled by massive bank losses may do just that as easy credit for poor borrowers may come to an end. I must be Nostradamus!

Seriously, what I mean by bringing up this old piece is that even I could see the storm clouds coming. Hank Pauslon could not. Ben Bernanke could not. Bill Gross could not. There are many other experts that could not. I could. If you are reading this blog, you probably did as well. What does that mean for the proposed solutions by people that never saw any of this coming? I leave that to you the reader to figure out.

I can guarantee a rock blog tomorrow night and I have bought insurance from AIG to make sure I am covered. Wait, uh oh......

No, I will be posting tomorrow no matter what. Leave film, book, or music ideas in the comments.

Have a good night.

Volatility - Hallowed be Thy Name

I was attending a birthday event for my niece this evening and thus am unable to put together a full post due to time constraints. I am aiming for a Saturday wrap up and entertainment post instead. With everything going on, a little reading and thinking is in order anyway before writing a post.

My Apologies to the Gold Market
The author of Economic Disconnect would like to extend his heartfelt apologies to any and all in the gold market. It was my entering this morning that single handedly crashed the spot price for gold. While I know I usually have this effect, I was hoping that I would go unnoticed with all the drama happening. I am sorry and hope we can still be friends, or at least that you will not burn my house down. SORRY!

Seriously, the action in gold today made no sense. Luckily for me my small order was lost for most of the day and was not filled until after lunchtime. I got a nice 6% loss in one day, but it could have been much worse (about 18% from the open!). Small miracles!

Volatility - Hallowed be Thy Name
Everyone in my office area was running around this morning talking about the Nikkei crashing and a possible "circuit breaker" day here in the USA. While I would expect that from people that read this blog, this was coming from people I have never even heard speak about the markets! Wild Stuff. Suddenly everyone is watching. After a crash of 10% on the DOW at the open, the markets rallied harsh and were up on the day at one point. Stocks closed slightly down.

With the Lehman CDS auction all the rage, maybe that was the catalyst. Maybe a big hedge fund blew up. Maybe lots of things happened. We might know tomorrow or we may never know or there is nothing material to know. Who knows, you know?

Market Ticker has some sharp comments today, and you should take a look:
http://market-ticker.denninger.net/archives/604-POTENTIAL-ECONOMIC-SEIZURE-DEAD-AHEAD.html

Key excerpt:
"Open Market Operations) at The Fed. Read this report carefully. Note that there are no Agencies and no Treasuries left on The Fed's balance sheet. All gone. All that is left is $80 billion of crappy MBS. Bluntly, without printing raw money, The Fed is out of Treasuries with which to lend into the market, and thus cannot perform OMO any more; they must do "other things" (like print money.) We are now officially into the twilight zone and Fed Solvency is an issue on the table. President Bush spoke again but none one word about forcing transparency among financial institutions. Raise cash now and be prepared for potential essential good and service disruptions as the supply pipelines could begin to go dry on these as soon as early next week."

I had come to similar idea on FED printing and that is why I got into gold (sorry again guys!). With a G7 meeting which I am sure is going to involve money creation the world has never seen, something has to give. As far as supply disruptions and the like, I wish I could say that was impossible. But it is not.

Have a good night.

My Problems With Technical Analysis

Another bleeder of a day. All seemed "contained" until exactly 3pm when all hell broke loose. I am still trying to get the license plate of that truck that blasted through at 2:59pm! Any guesses out there as to the catalyst or was this just more of the same long term trend? Leave ideas in the comments section.

Going In to This Market
Once again I offer my usual disclaimer about anything you read here NOT BEING INVESTMENT ADVICE. Blogs are wonderful, and I allow any and all to see inside my head with my posts. What I say or do is for me alone, you must make up your own mind. There will be no bailout if you get an idea from me and lose money, I am sure we are too small to bail!

That said, I reviewed some info, looked at some charts, and followed a gut feeling. I went into this market buying some gold shares of two miners I like. The particular ones are not that important. I did this because I think the dollar rally is not a long term thing with the piles of debt we keep adding. Even if the dollar rallies more because of the whole "safe haven" mantra (which is pure comedy) I still think gold does well as a better safe haven. In a deflationary environment, gold can do well. It can also get it's A$s handed to it. I admit I am putting money at risk in a wild market. I can also guarantee that as I enter the gold miners they will probably collapse! I am doing this with an amount I can lose. I am just offering this to let you know that this is what I am seeing right now. Sound off in the comments section.

My Problems With Technical Analysis
I mentioned above that I looked at some charts which I used to help me make a stock buying decision. I look at everything when I buy stocks. It always cracks me up when somebody says "Next stop for the XYZ is the technical resistance price of XXX" or something to that effect. As if the entire market would stop and all traders everywhere would take a minute and think about point XXX before continuing the day. My favorite is the old "oversold/overbought" oscillator types which are useless and silly.

I know many market folks make their living on this kind of stuff. I also understand that there is a certain science to the chart reading. I think it has some value in stable, normal markets. Where technical analysis breaks down is at inflection points.

I remember Cisco Systems during the tech bust being wildly "oversold" all the way down to a 90% decline. Before that I remember Red Hat being "overbought" as it climbed higher by 300% after that. Right now the "bottom is in" technical crowd at 8700 or so on the DOW are getting excited, but as I looked at the chart I saw no resistance line until 8200 myself. Who is right? Probably neither of us!

I only offer that technical alone is not good at inflection points. Fundamental analysis also has it problems with inflection. Momentum is useless as inflection points are violent with volatility. I think you get the idea.

Right now things are a bit unhinged. It could be the bottom, or it could be a bottom, or it could be just the start down. Only time will tell. What I am saying is that if you are going to be in this market you need to be careful and know what you are trying to do. You must also be ready to be wrong (very wrong) and not get all upset. As they say at Minyanville "return OF capital is more important than return ON capital" at a time like this.

Have a good night.

John McCain's Open Invitation to Default

Wow, you know things are bad when the debates between George Bush and John Kerry in 2004 had more substance and were more entertaining than last nights stinker! Strange times indeed.

Paulson Pick for TARP Head as Good as the rest of His Decisions
Let's play a game. Suppose you had an imploding economy that is saddled with so much debt it is going to be near impossible to bailout. Imagine that an economic slowdown that threatens to morph into something more sinister is at hand. Try to envision how complicated the TARP will be to implement. Got all that? Now who would you put in charge of this plan? Who would inspire confidence that this will work out?

It does not matter who you picked. Hank Paulson has hand selected Neel Kashkari for the job. Besides having a name that lends itself to funny word play (Cash n Carry?) this guy is all of 35 years old!

You read that right. 35 years old. Now understand I am not an age discriminator, but I am 32 myself. The last real recession in 1991 I was in High School and so was Mr. Kashhari (or he was just entering college). During the tech bust I had been at my first professional job for just 2 years. Mr. Kashkari obviously must be super talented. I am sure he is very smart (well as smart as the folks that brought this mess anyway). It just seems to me a little more experience may have been prudent. While Paulson plans to nominate a permanent position holder, this selection seems very strange. Not exactly confidence inspiring.

John McCain's Open Invitation to Default
The only fireworks from last nights snoozer of a debate came right at the open when John McCain stated his plan to fix the economy. His idea will "fix" things alright!

McCain said that he would order his Secretary of the Treasury to buy up bad mortgages and then issue new ones to troubled home occupants. The new mortgages would reflect the new lower home value of course. And the taxpayer would eat the difference. Great stuff indeed. And McCain is the Republican nominee!

Let us take at look at this for a moment.
-Mortgage is for $200k, occupant unable (unwilling?) to pay
-Buy mortgage for $200k, issue new mortgage for $150k at low rate
-Transfer loss of $50k to taxpayer

Sounds great, Yes? Well there is a few problems. For arguments sake we will leave out the whole securitization thing as this calls into question whether pooled mortgages can actually be spliced back this way. Do you see any problems? Never mind the whole transfer to taxpayer the losses thing, that is old news and we are moving on. What happens when this occupants neighbor gets wind of this deal? If the next door resident is in the same position, he now has a major incentive to default on his own mortgage to get the better deal. It just makes business sense.

The logic is iron clad. You are underwater on your mortgage. The next door neighbor stopped paying his for 6 months and got a sweet heart deal out of it. You are paying for your neighbor's bad decision through higher taxes and a weaker dollar (eventually; current dollar rally is fake) and you are paying your mortgage as well. It just makes business sense to take 6 months off, save the cash and wait for the new deal to come in.

McCain's proposal is an open invitation to default on a mortgage. Besides being totally unfair (we are over that as well) the idea itself would cause a cascade of deadbeats looking for a better deal. While I am a fan of do overs, this one would be expensive beyond all reckoning.

That McCain thought it was a good idea is bad. That his advisers thought putting this out there was smart is bad. That as a country we are at a spot where burdening the whole to save a few is the most wanted solution makes me very uneasy.

Wake up folks. This is dangerous stuff being thrown around that will impede your progress for years to come. While McCain's idea is ridiculous, I have yet to hear anything from Mr. Obama that resembles a coherent plan. In the film "Brewster's Millions" the great Richard Pryor ran for Mayor of New York in an effort to spend a ton of money. He wanted people to vote for "None of the Above" instead of any of the candidates. A brilliant idea for this election as there is simply no choice worth selecting.

Try to remember as we hurtle towards socialism on a grand scale:
Socialism breeds decay and lack of effort. With no incentive to try, as there is no way to get anywhere, people just give up and accept whatever they are given. While this may seem nice in a pinch, it sucks hardcore as a national goal. If you think people do not care now and that most folks are lacking in drive, just you wait.

Have a good night.

Bottomless FED Toolkit

Another day another drama. Daytime soaps cannot match the gut wrenching activity of our economic system. A bit short on time tonight, so just a few quick hits.

Must Read Articles; No Really You MUST Read Them!
While I take in tons of stories and information on most days sometimes you come across a piece that captures something fundamental and important. Today's "Five Things You Need to Know" over at Minyanville is one such work of art. This article is required reading for any serious mind, and should be required reading for Mr. Bernanke and pals. Take a look:

http://www.minyanville.com/articles/sox-bks-spx-hgx-indices-fed/index/a/19378

Key excerpt:
"Think about it this way; it is not "normal" to be able to walk into virtually any retail store in the country and within 10 minutes be able to access $2,000 in credit by simply showing a drivers' license. It is not "normal" to buy a home with zero money down. This is not "normal" behavior. Adjusting to the new reality of normalcy will be a painful process.

On the one hand, Federal Reserve officials, Federal Government officials, many Wall Street executives and salespeople, believe it is "necessary for our economic security" to return to that place of easy credit. I disagree with that. I believe the American people disagree with that. And so the disagreement over the Bailout Bill, though pegged in the Mainstream Media as a war between battling economic classes, might really be a much deeper and more significant faceoff; a battle for the economic soul of this country."

As always, very strong stuff.

If you are of the persuasion that Gold is money, and will always be that way then Shedlock has an excellent article about Gold in the current environment. Mish also shows that Gold is decoupling from silver and what that means for silver:

http://globaleconomicanalysis.blogspot.com/2008/10/real-price-of-gold-soars.html

Key point:
"Fundamentally, silver is more of an industrial commodity than it is a currency. It is not holding up as well as gold in recent selloffs. There is a very real possibility that silver falls back to the 2004 high around $8. Those who pay attention to moving averages will note that $8 happens to be the 200 EMA as well.

In contrast, gold has almost no industrial use worth mentioning. The demand for gold is the same as it has been throughout history, as money."

Great charts as well.

Bottomless FED Toolkit
This morning the FED decided to step into the world of commercial paper. I have to admit that my grasp of this section of finance is limited, so I cannot offer too deep a commentary. What I will state is the the FED is no becoming an unsecured lender. The FED is supposed to loan money only to member banks, but now will dive right into the messy world of loaning to more general companies as well. As this is all new, we of course can have no way of knowing how this will work out.

The FED seems bent on trying something new every day until they see some kind of response. I never recommend doing the same things over and over again and expecting different results. What else will the FED pull out of its toolkit? We will probably see something else by weeks end.

The problem is still the same problem as it relates to lending: There are no credit worthy borrowers that want to borrow, and the banks cannot lend like the good old days of subprime mania any more. With the FED supplying endless cash, no bank is going to lend to another in this environment if the FED will do it instead. Why Bernanke and pals cannot see any of this is lost on me.

With daily intervention from all sides of the government is makes sense to me that the markets are struggling. Why take on a position or try an investment idea if the rules are going to change overnight? If you have a solid macro view and would like to put some money to work you cannot because the very fabric of your thinking may be voided by an activist FED and/or Treasury.

Things are a mess and instead of thinking and coming up with a coping mechanism for the debt unwind, the FED and Treasury are heel bent on using old tricks for a new problem. Good luck with that.

Have a good night.

One Question Has All the Answers

Things are starting to feel very dangerous out there. Worldwide there was action aplenty. I guess it will be some solace that the entire world is going down the crapper all together. Brotherhood at last!

World Markets Break Down
While it may come as some surprise to anyone that only watches US mainstream media, there are indeed banks and stock exchanges in other countries too! Some countries even have indoor plumbing to boot! How did things go today all around the globe? (hat tip to Watchtower for the alert in the comments section):

Panic as Russian stock market falls by almost 20%
MOSCOW, October 6 (RIA Novosti) - The Russian stock market gave in to panic on Monday with the MICEX dropping 18.6% to 752 points and the RTS falling by 19.1% to 866.39 points - the worst losses since the 1998 crash.

Brazil Markets Look Dead
Things are so bleak for Brazil that I could not even find a story to copy! The index for Brazil (IBOV:IND) was at 73522 just last May, and closed today at 42038! That is a whopper move down!

The story is much the same for all markets the world over. See Iceland's current all out collapse and the picture is grim.

The talking heads would have you believe that the USA can stay isolated from all these events, but that is foolish. It is in no small part the export of toxic paper worldwide that has led to this crisis. Who says the US does not export goods anymore? I would say we manufacture the best worthless paper ever made!

Interest Rate Cuts To Save the Day
The chant has now become loud for an immediate interest rate cut. Bill Gross (who has yet to take me up on my steel cage challenge) would like a cut to 1% (from 2%) as well as the US government buying up basically all troubled assets everywhere, but especially those held by Mr. Gross's firm PIMCO no doubt.

Low rates brought this mess on, so of course low rates will take us out. I fail to see how a reduction in rates from 2% to 1% is really going to make any difference, but then I am not paid to think up wastes of time like the pros.

One Question Has All the Answers
While governments worldwide scramble to stop a panic, it may be useful to ask one simple question. The answer to this question is complex and multi layered, but it would go a long way towards explaining the issue facing us today. Maybe the next time Ben Bernanke or Hank Paulson are on the hill our congress can try to get an answer, but do not hold your breathe. The answer to this question I feel is powerful enough to end the financial world as we know it.

So what is this question? What could be so powerful? What central understanding could cause a panic that would make the Great Depression seem like the good old times? Here is it:

How can the default of only 5% of all existing mortgages cause so much damage?

Simple. Elegant. Concise. Scary.

If you lost 5% of your net worth tomorrow, what would happen? For many, not much at all. In fact you have probably lost more than that over the past 2 weeks! So why then with 95% of all mortgages being paid on time is the US financial system on the verge of collapse?

I could flesh out a long winded answer. Think leverage. Think fractional reserve banking. You can find the answers all over the web. My point here is that to an average person the 5% loss number does not make sense and seems very confusing. Most people have no idea that their money is not at the bank. Their life savings are leveraged up and lent out many times over. Even small losses mean your money is not where you think it is. The FDIC made the move to insure deposits up to $250k, and there is a mad scramble all over Europe (Ireland, Germany, etc) to guarantee deposits. This is being done to suppress fear. If my question was answered in a forum where many could see it, fear and panic would not be "contained".

I am not trying to start a debate about fractional reserve lending, or argue for one form of banking or another. I am just trying to point out that through wild speculation and credit extension the banking system has become insolvent. The FED was a willing accomplice during Alan Greenspan's tenure, and it seems many banking systems all over the world followed suit.

The fundamental issue confronting the banking world right now is that the money that was "created" simply does not exist. At some point this fact will have to be addressed. What happens when maybe half of the mythical money out there ceases to exist? I do not know, but I cannot think it is going to be a good thing.

Distraction
Instead of using money and credit to make sure people making $20,000 a year had granite counter tops and a new Hummer, that kind of capital could have been put to use elsewhere. The Mars Phoenix Lander has been a major success. NASA has released a composite video of a Martian sunrise as viewed from near the north pole of Mars. I have been watching this video and some other ones of this event all day. I mean, to be watching the Sun rise up on another planet gives me goosebumps. What man can accomplish amazes me, both the great things like the lander and the ridiculous like mortgage backed securities. Anyways, enjoy:


Have a good night.

Rescued Bailout Plan to Save the World

Another week, another saga unfolds. I can only speak for myself but I am a strange mix of anger, frustration, confusion, and some other stuff all mixed into one. I will try to put some ideas down, and then off to the entertainment as it is indeed Friday.

All That Stands in the Way of The Mother of All Bailouts II is the November Election
I had mused last night that almost as soon as the ink was dry on the bailout bill, the theme would then focus onto the "We must do more" theme. I surmised that by late next week some new kind of giveaway would start making the rounds. I was glad to see this idea make the rounds today across many writing media (Krugman calls it Bailout 2.0, very nice!). On cue as the markets gave back all the day's gains and then some the good old folks at CNBC have begun cheer leading for more money. This weekend will see this amplified, and so on.

Folks, we were screwed royally on this past bill. Every single poll, every single person I talked to was firmly against this action. FIRMLY. The Congress decided they knew so much more than their constituents. Maybe they do and most likely they do not but the point is if you are going to ignore 70% of the voters and do whatever you want, we might as well move to Iran or something. I mean, why continue the charade of democracy if wooden arrow shafts and other pork make a dead bill on Monday become awesome on Friday? Why indeed.

In between the current fleecing operation and the next one is one important little event: The November Elections. I have already seen a few starter plans out there to rally support for opponents of anyone that voted for this bill. This is a good start. Special attention should be paid to the cowardly vote changers that changed their minds when presented with cash handouts. In the next few days I am sure a solid, well organized plan will take shape and I will be donating money towards this goal. I strongly suggest you do as well.

We must do this, and more. What's more is that a message must be sent here. No more bailouts. No more mismanagement of the economy and national finances. No more giving the voters the middle finger with no accountability. NO MORE.

If you are reading this blog and others like it I feel safe in assuming you have a good head on your shoulders. I will further state that I think most, if not all, are solid citizens just trying to do their best. Whatever your political leanings I would think you have strong principals and you do not like to compromise them. I understand this and I respect that immensely.

I am going to ask you to compromise it nonetheless.

What I want you to do is to identify all incumbents that are on your ballot for November. Then I want you to vote against every single one.(You may elect to keep any official that voted NO to the bailout.)

Now I understand that for many the thought of voting for a republican makes you ill. You may think Roe vs. Wade will be overturned the first morning of the new congress or that we will invade Canada or whatever. Get over it. You can always vote the next time for a democrat. This issue is the most important thing and all that other stuff can wait.

I get it that the thought of voting for a Democrat may make you want to take a shower. You may think the gestapo will be at your door the first morning of the new congress to take your guns and your gold. You might think that we will be forced to marry a gay person even if we are not gay or whatever. Get over it. You can always vote for a republican the next time.

I can guarantee that if a boatload of incumbent get sent down the river, the new congress is going to be especially keen on listening to their voters. Very keen. You may even find that with a new attention to the voices of regular people, the differences between the right and the left for ordinary folks may not be so large. I think it is worth a try, though in the immortal words of Grandmaster Jedi Yoda: "Do or do not. There is no try." Use the comments section to let me know what you are thinking.

Rescued Bailout Plan to Save the World
Despite the steep sell off of the markets (short sellers? Oops, guess not!) we have been assured that this mega money giveaway will cue what ails the US economy. President Bush said so, though he did caution that it may take "some time" to see results. Gee, maybe that info would have been good to know before the hurried vote. All across Europe they are drinking coca cola and wearing blue jeans to celebrate what I have dubbed the Yucca Mountain Toxic Paper Depository. It must be a good thing, right?

Will this really work? On a fundamental level, it simply cannot. There are much sharper minds out there than mine that have elucidated the details of why this bill accomplishes basically nothing, so I will not rehash that here. I only offer that fundamentals are useless in a market like this. Well reasoned analysis has no place in this show. Can the bill work? It might. You have to understand that a system based on terms like "perception", "confidence", "momentum", and "unicorns" does not require fundamentals to work. This bill just might allow the mythical "mark to model" mindset to return and things could improve. I do not think that will happen, but you must always consider both sides. I am of the firm belief that this will have limited effect, and thus we will see another money grab soon as I have detailed. You know what to do. Work on your friends and family. Show them this post and just ask for a favor. Bribe them if possible.

Friday Night Entertainment
After this week we need some fun and games, yes?

Hilarious Picture
Caught this one at Minyanville today. This is a protest sign in front of a big Wall Street bank. Likening the collapse to the great crash that kicked off the depression, this protester would like the bankers to jump out the windows just like on Black Monday (Sorry for the language!):


Absolute Must See
I was convinced that this video was fake, but after exhaustive research I can vouch for it. Check out this little Japanese kid playing the immortal tune "Crazy Train" (My all time favorite from the Tribute album) complete with a Randy Rhoades flying V guitar that is bigger than he is:


Book Passage
Tonight I have a classic work to share:
"The reaches of space-time cannot be numbered by man's familiar integers. They cannot even be honestly counted by orders of magnitude. To feel this fact, recapitulate:
"Leonora Christine spent most of a year getting within 1 percent of light velocity. The time aboard was about the same, because the value of tau only began to drop sharply when she was quite near c. During that initial period, he covered half a light-year of space, approximately five trillion kilometers.
Thereafter the decrease became constantly more swift. Aided by the higher acceleration now possible, she required somewhat under 2 more years, in her own measure, to get about ten light-years from Earth. That was where she me her grief."-From the novel "Tau Zero" by Poul Anderson.

Rock Blogging
Some good selections for the comments section. New commentor Norcalboon left a great live Megadeth video. Watchtower left a request for this song by Hank Williams Jr that seems to fit today's news. Check out "Country Boy Can Survive". And I know what a trotline is, heck I even know what "noodling" is!:


Try out a little The Who with Baba O'Riley, which I always thought was called "Teenage Wasteland"!:


To match the jungle like crazy world we are in right now, rock out with the classic Guns and Roses tune "Welcome to the Jungle":


Have a good night.

Mother of All Bailouts II?

Just a few quick hits tonight. Remember to leave Friday night entertainment ideas in the comments section. Film clips, books, music, or pictures (PG rated at most!) are all open for suggestion.

Sinister Side to the Bailout Hysteria
It has been well documented by Mish and Market Ticker (who has a great video up tonight; it is a must see) that the darkside to this money grab may have more to do with foreign creditors than is being spoken about. China, Japan, Saudi Arabia and many others were duped into buying tons of the mortgage backed AAA rated toxic paper, and they are not amused. Faced with enormous dollar holdings that have been cut about 30% in value over the past few years, looking at diminished stock returns, and now saddled with worthless paper the foreign powers seem to have had enough.

The strong language that allows foreign trash to come back to the treasury was such a sticking point to any plan that a veto was threatened if this provision was taken out. This is sinister stuff. The US, being the pillar of strength that it is, depends totally on massive inflows of capital to fund day to day operations. The providers of this cash may have just said the price for continued support would be to take back all this worthless stuff or else. This explains the mad dash to get a bill done as well as the absolute refusal by any official anywhere to really tell the public what the "abyss" is. As Americans, our instinct would be to tell the foreign countries to get stuffed. Unfortunately, we are in no position to really do that. I wonder if the powers that be realise that the foreign countries are in no position to do anything either. Call it the beauty of Mutually Assured Destruction, only in a financial sense. Fun, huh?

Mother of All Bailouts II?
Let us take an inventory of all the tricks the FED/Treasury have employed to halt a downdraft in the markets:
-Ban Short Selling; Check
-Loan money by the Billions through alphabet programs; Check
-Guarantee Money Markets; Check
-On the cusp of passing a revolving bailout bill to the tune of 1 trillion plus; Check
-Coordinated cash injections all over the banking world; Check

Yet the markets are still screwed! What can one do in this case? If you are the USA you start laying the groundwork for the next bailout bill of course! You couldn't guess?

Headlines are already morphing from "passage of rescue bill will save markets" to "rescue plan may not go far enough". CNBC was chief of staff today as they were setting the stage for the Mother of All Bailouts II. All the talk centers on how the government will have to go even farther than the current bill to "calm the markets". Why can't the markets take a Valium like the rest of us?

I imagine somewhere by the end of next week a new "stimulus" package will be in the works along with some other plan to free up more money for the markets. At what point will someone, anyone come to grips with the fact that we are going to have some pain. Stay tuned for the next money trap which should be unveiled late next week.

Have a good night.

Giving up on Any Chance for Prudence

Short post tonight as I am both short on time and shorty going to be throwing up if I listen to any more US senators speak about the bailout bill.

"We Must Do This Right"-What is "This" Exactly?
I have heard no less than 6 senators give as their main reason for backing the revised bailout bill that "We must do this right". What the hell does that mean? Do what? Pass a crazy expensive bill that has no oversight and no end as the deal itself is a revolving door for losing money? Helping out FICO score 500 deadbeats get more loans for more used cars they will default on? What? Crickets. Not one senator has so far explained why they themselves are backing this plan as a way to help the economy. All platitudes and cliches. Sick. Sad. Should be criminal.

Giving up on Any Chance for Prudence
I have seen many quotes from house republicans tonight that the "major" changes to the bill would likely change their vote to yes. I mean, can they even be serious? FDIC limits raised to $250k is nice I guess, but I bet you do not know even one person that was worried about losing their deposits over $100k! How about that major game changes of placing a tax on laminated arrows so that practice wooden arrows can remain competitive in the archery world? That clinches it for me, I would vote yes on the power of that change alone.

I had some hopes that the house vote on Monday was for real, but now it looks like it was a big mistake by the house by accident. This bill is going through. All that remains is to remove those that vote yes from office.

New poll question up tonight. Have at this one:

Now that the bailout bill will be passed, what response best capture Wall Street's reaction?

A. "Now we will be able to supply much needed credit to our fellow Americans and keep this economy going."

B. "WOW! They bought that whole Main Street will suffer bit, business as usual boys!"

Have a good night. After you puke.