Rules of Engagement

I had a set of late meetings at work and thus I am short on time. I would never dream of cutting short entertainment night so a few thoughts and then on with the show!

Bazooka Bluffs Revisited
In this post from last Thursday I had a section titled "Your Bazooka Bluff has Been Called". My main point (there is one sometimes!) was:

Well that game is now up. The players behind the money want a plan for an explicit backstop for Greece and some plan for Spain as well. The CDS costs will force the hand of the Eurozone here. In this day and age of government intervention in everything and anything this was inevitable. Why risk money on a wink and a smile when you can get a government guarantee on the whole thing up front? Why indeed. Anyone remember all those fire side chats about moral hazard I tried to have all the time? Maybe now you can see why.

Of course this is not quite one in a million thinking but I thought it set up this week well.

I was happy to see some writing on the same topic making the rounds:
Mish
EU tries Paulson's Bazooka Ploy; Bazooka Theory vs. Historical Results

Zero Hedge
The Bazooka Jams As Propaganda, Pardon, Media Always Gets It Right... Eventually

Maybe we all like the word "bazooka" or something!

Huge Gold Article
The following article looks at gold every which way you can and is very thorough:
Gold: The Big Picture
Plenty to review, enjoy!

More? Ok, I like gold here because people in major power positions say stuff like this:

Nobody knows the cost of inflation – between 2 per cent and 4 per cent – so I think people could get used to 4 per cent and the distortions could be small,” said Mr Blanchard.

Article by Mish here.

Rules of Engagement
There was plenty of rumors today about a possible ban of credit default swap (CDS) trading. Of course this makes sense because the tide is going against the wants of the establishment. Where were the bans on going long Nasdaq 4500 in the year 2000? Of course there was no such thing. Short selling bans, uptick rules, and CDS bans are fast becoming the preferred method to deal with unwanted information.

Which brings me to the following thought experiment:

If on Tuesday morning February 16, 2010 suppose that the Government entities of the US instituted the following:
-The DOW cannot trade under 10,000
-The S&P 500 cannot trade under 1000
-The Nasdaq cannot trade under 2000
-Home sales cannot be executed at prices under their 2006 appraisal values
-etc you get the idea

Would the market reaction be:
A) panic as the establishment of a true banana republic forces everyone to flee a false market
B) the biggest one day gain in market history

I think the best answer says so much about where we are and is worth some serious discussion so have at it and please pass this around.

Friday Night Entertainment
We are close to turning the corner on Winter here, so let us welcome the chance to start ushering out the winter:

Just remember in the winter
Far beneath the bitter snow
Lies the seed
That with the sun's love, in the spring
Becomes the rose

"The Rose"

Sports That are Not Football
Aside from the New England Patriots making Julius Peppers their number one target for the offseason, sports are thin for me right now. Sunday is the Daytona 500 but my man in the #29, Kevin Harvick has been on a cold snap for over two years (though he has had a good week so far!). Let's loom back at two moments that were thrilling from NASCAR history for me.

Dale Earnhardt, a personal hero (he reminds of my dad very, very much), and the winningest driver at Daytona Speedway, FINALLY wins the Daytona 500 in his 20th try. Skip ahead to the 2:00 minute mark for the drama. After his win every pit crew from pit lane came out to congratulate him and I remember welling up for the man:

Love it!

Of course the tragic death of Dale was a serious blow to any racing fan (and very serious to me). Dale had hand picked Kevin Harvick as his replacement (he was going to retire soon) and Harvick was rushed into the car to race during the 2001 season (now #29 and white, the #3 will never be used IMO). In his third start and on the day before my birthday Harvick wins at Atlanta Speedway in one of the most exciting finishes ever in racing and I was a mess after the race. It was maybe the best birthday gift I ever received (skip to 1:45 mark, and watch until end if you have a spare moment):

Still makes me shake!

Alternate Transportation
Now I would like this as my daily commuter; mean and coll all in one:

Triceratops Helicopter!!!!!!!!!!!!!!!
more here.

Funny Pictures
The purrfect Valentines Day date?:

see more Lolcats and funny pictures
Sure WINNER!

Please make sure you practice Valentines day around children better than this:

see more Epic Fails
Lock the door!

Film Clip
From Watchtower, who requested a favorite clip from one of my favorite films "Glory":
http://www.youtube.com/watch?v=Z2c_BvVBd-Q&feature=related

Great stuff!

Rock Blogging
Some requests, some editors choice, some music magic!

Reader Gawains requests and dug up a clip I have been wanting to post for some time! Start the weekend off with this clip from "Walk the Line" and Joaquin Phoenix playing Johnny Cash with "Cocaine Blues":
http://www.youtube.com/watch?v=xRZwlh1Iry0

Very Nice!

Reader C-T would like to see Green Day and "American Idiot" and all I can hope is she does not mean me!:
http://www.youtube.com/watch?v=Wti4SA0YZ90

Very Punk!

I just finished the Ozzy Osbourne autobiography "I am Ozzy" and it was at times hilarious, sad, scary, and always revealing. That said, how can I not do an Ozzy tune? Try out "You Can't Kill Rock and Roll" with Randy Rhoades doing his magic:
http://www.youtube.com/watch?v=Ac9qOu2ITH0

Greatest guitar player ever, IMO.

A lady I used to "date" in college (Ah, the days!) loved this song and so I send it out to her! This is Tonic with "If You Could Only See":
http://www.youtube.com/watch?v=igYSL5osIZM

Very nice and it had serious effects on her if you know......

Last Call!! Time to close the show, but you all know the show never ends!

My Dad's birthday is today and I hate to bring personal stuff into the blog, but this was his favorite song and the last song I heard him play before he died in 1996 was his home state song "West Virginia"
http://www.youtube.com/watch?v=pfi3SSJPG9Y:

It's better on a 12 string guitar, but good anyway!

Have a good night.

Whole Lotta Shaking Going On!

Well never say we live in boring times! An explosion of stories today with plenty for everyone!

Get your requests in as well, I should be good to go for a post as tomorrow is a night off from the training regime (thank goodness!!).

A Requested Retraction
One of my favorite bloggers is Jesse of the Americain Cafe. Tonight I cannot hold my tongue and must ask for a retraction of a visual aid he uses as it is insulting to a high degree.

In this post the author uses a picture of Tim Geithner and the subtitle reads;
"Apprentice to the Sith Lords"
Now we of the order of the Sith demand the retraction of this picture or change the subtitle to read:
"Dumb Jedi Padawan"
The Sith do not tolerate weakness nor stupidity and thus Timmy G could never make it. Thanks for your understanding.

Peas in a Pod
Sometimes things just fall into place and make sense. Take these two back to back headlines over at Calculated Risk:
Citis Deed in Lieu Program
Citi has a new (really?) 6 months rent free gift for deadbeats to be foreclosed on. How about a 6 month mortgage free program for all who have paid in full for over 3 years? I know, stupid.

About 2 hours later we get:
Fed MBS Purchase Program 95% Complete
Now I am sure these having nothing to do with one another, like filling the gap between MBS purchase program 2.0 start up, no way no how.

Gold Related
In a story that will have Stagflationary Mark chomping at the bit, the CME is raising margin requirements for gold, silver and palladium:
CME Increases Gold, Silver, Palladium Margins
Higher margin requirements will usually chase out marginal players. This is the second time margin has been raised, December 17th had one as well:
COMEX Gold And Silver Margin Requirements Raised
To be honest I have to digest this a bit. First reaction is some kind of drop on the way but the force out of marginal buyers is a long term good thing.

Of course this brings the day ever closer where paper gold/silver finally decouple from physical and things get interesting.

Oh yeah, Vietnam made their DONG weaker by 3% in a devaluation move yet again:
Vietnam devalues dong again, this time by over 3 pct
Key point: Vietnam is buying gold on the black market in large amounts because currency devaluation is not fun no matter what leading economists would have you think.

Max Debt Research
Just like in High School here comes my homework excuse.......

I really think that the questions Watchtower posted the other day are important and central to understanding what is happening to us right now. I think it deserves a full effort and I do have Monday off so I can work on it. The thought of Watchtower laying awake at night thinking about these things concerns me as well as puzzles me as I lay awake thinking about.....well lets say it not usually economics! HA!

Anyways, here is what I have put together to give you a flavor for where I am going.

The first issue I had was a central presentation I wanted to use is both only in PDF format and seems copyrighted so I am unsure of fair use. You can find it on a YAHOO search (I don't like Google) with the search term:
Total Credit Market Debt as a % of GDP
and it will be the 3rd one down by Crestmont Research.

I will take a chance and put up some items but if I get flack I will have to take it down.

First off, it was written in 2004 so try and extrapolate these terrible arguments out to now. The start:

1-This analysis relates to the often-cited statistic that "Total Credit Market Debt" in the U.S. has reached 300% of Gross Domestic Product (GDP), a historically high level
2-The data is accurate; the details are revealing. The often cited implication is that credit market leverage has soared and that the system is vulnerable to implosion or inflation as a
result of a leverage bubble. Those comments and conclusions don’t fully consider the underlying details.

So you can see the author thinks the chart is baloney. His case? (try not to laugh):

4-The so-called surge has resulted for a number of reasons, many of which pose relatively low risks to the system.
a) Substantial mortgage debt has been added to the ratio, especially after 1981
b) A significant number of workers were added to the economy in the 1970's
c) A growing economy with retained net worth can sustain higher debt levels
d) The substantial decline in the cost of debt encouraged and supported higher debt levels
e) Several developments (i.e. FNMA, FHLMC, GNMA, asset-backed securities, etc.) facilitated efficient leverage.
5-Home mortgage loans increased from 16% of GDP in 1952 to 66% of GDP in 2003, almost one-third of the increase in "Total Credit Market Debt."

Rising mortgage debt is a good thing because it is risk less as we know from history! Uh oh! The author may be surprised to find out that in 10 years we have added NO JOBS as well.

His conclusion:

CONCLUSION: The often cited chart reflecting a surge in Total Credit Market Debt as a % of GDP is distorted by a number of factors. One of the most significant reasons is that many
families have substituted mortgage payments for rents and, without changing their costs, increased the debt ratio. Ironically, the shift built significant equity value. Further, when the
long-term series is viewed on a standard logarithmic scale to show percentage gains over time, the chart becomes much less dramatic (see lower left chart). On a real basis, adjusting
for inflation, the rate of growth has been relatively constant over the past 50 years (see lower right chart).

See the chart in the post as it in much more tame than the scary one from last post.

Of course the chart the author uses is based on many metrics that are either bogus or heavily skewed by assumptions we know not to be true. Anyways, I am still working on that item.

Some other things on my radar as it relates to the discussion:
Greece Deal Opens Door for More Bailouts: Economist
While not US centric, the same principle applies. Key quote:

"If I was the Portuguese finance minister needing this one day, I would think I have a strong case," Nielsen said.
Now that EU leaders agreed to effectively backstop Greece's debt, they would struggle to say no to other euro-zone economies in the same difficult situation, he said.

Keep this in mind as the line forms behind California for handouts. I will set aside Jesse's false Sith Reference and submit his chart showing GDP contributions for the US states:

(click for larger view, you should know by now!) Plenty of housing bubble busted states in the top ten. Get in line folks and this adds to US debt.

Staying on topic, backstops add to the debt burden and now China may not be a buyer of anything not explicitly guaranteed by you and me, ie, the taxpayer:
China's Retreat From Risky Bonds Could Be The Straw That Breaks California's Back
Just as the Fannie and Freddie (and FHA) Federal guarantee fails to make it to the US bottom line, municipal bond guarantees are not likely to be found there either. But they will be there.

Maybe they are being counted already? The longer term US bond sales seem to be having some trouble:
30 Year Auction a Solid "F"
Worthy of making the FailBlog.org site?

My friend who writes The Housing Time Bomb chimes in with a post which is always helpful on auction days for me:
Is The Bond Auction Screaming Inflation?
I would quibble with the wording as I think the 30 year poor showing is a fear of devaluation/default (which fits our discussion) but then again inflation and devaluation are about the same in mechanics really.

Well that turned into a long post! I hope some found it helpful.

Things are moving fast and I would love to be on top of things a bit better but I have to do other things as well and that cuts down on my writing time. I think this summary of what I am watching is a good lead to what I am working on. Sound off in the comments and get Friday requests in as well.

Have a good night.

The Past as Prologue

The "big" snowstorm slated for this afternoon for the northeast was a no show here in Massachusetts for the most part. Only about an inch or two as of right now on the ground. Everyone was so scared about the storm that my work closed today at 12 noon. I will take the half day! Short on time again this evening so I wanted to take a comment from the comments section last post and set up a new post that will probably get done tomorrow. I have stepped up my boxing training and I am having a bit of trouble keeping my arms up over the keyboard tonight!

The Past as Prologue
Reader Watchtower submits:
As you can see this is the 'Total Credit Market Debt as a % of GDP' chart.
In Oct of 08 you wrote:
"At what point will the system break down and go supernova?"
Here is the chart for review:

From the comments:

"Which was from your post titled:
"Does The United States Have a Debt Chandrasekhar Limit?"

OK, now that we have that established, my question is:
Does the debt to GDP chart have a correlation to your 'Chandrasekhar Limit' question you posed back then?

The second question is:
You see where the spike did the cliff dive around 1934 in the first big run up in the chart?
What caused it back then, and is it 'different' this time around?
I guess what I'm saying is that chart is one scary a## chart if it actually means anything anymore.
Of course the Greece thing has me thinking about our nation and this kind of stuff again.
Any thoughts?

I do welcome questions and Watchtower picks out one of my favorite posts of all time!

I do have some thoughts along these lines and I think it relates very much to what we are seeing today. As I am short on time and lacking control of my arms I will repost the article in question and I hope to have a write up tomorrow night. Enjoy!

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.

Have a good night.

Spot the Problem

Very short on time tonight but it was very easy to do my boxing workout after another stellar post by my favorite economist Paul Krugman! I cannot leave this one alone!

Spot the Problem
My major argument against most economists is that they cannot answer basic questions they can only offer mechanics of action. Case in point, Mr. Krugmans post today:
Euro perspective
Krugman explains that the trouble makers of Greece, Ireland, Spain and Portugal are small fish:

Overall, the group of stressed economies account for about 20 percent of the eurozone’s GDP. So even a sharp fiscal retrenchment wouldn’t be all that big a shock; still, it certainly wouldn’t help.

No big deal.

What Mr. Krugman fails to address is the plight of these countries sounds all too familiar:
-too much spending
-low tax revenue
-crushing social cost spending
-long term structural issues with capital management

To am economist a Euro led bailout solves the problem because Greece will not default TODAY. They offer no help as to changing the situation on the ground that may actually help these countries turn things around.

Pretend and Extend just went global and I guess if you kick the can across time zones enough times maybe the can will never stop rolling. Better hope so because the Krugman's of the world will not have anything constructive to say at that point.

Have a good night.

The Total Miss Pricing of Risk

I had to take the day off as I was up too late celebrating the big win. I think I did more work today around the house than I would have done in an entire weekend.

New Orleans Saints 31, Indianapolis Colts 17
What can I say? After a shaky first half the Saints came out and played their game. The onside kick was a huge game changer. By the end of the third quarter the Colts defense was visibly breathing heavy and in the fourth they were spent. The Porter interception for a touchdown was shocking in how fast the game came to an end.

Congratulations New Orleans Saints, I have waited for this for a long time.

The Total Miss Pricing of Risk
I had mentioned last week that I was expecting some kind of announcement by the Euro Zone players concerning the Greece situation. As of right now, nothing has been brought out. What was interesting was a "secret" meeting of Central Bankers in Sydney Australia over the weekend:
Central bankers to meet in Australia to discuss looming new crisis
To be a fly on the wall!

February 11, 2010 may have some significance in the geo-political realm:

Iran anniversary 'punch' will stun West: Khamenei
"The Iranian nation, with its unity and God's grace, will punch the arrogance (Western powers) on the 22nd of Bahman (February 11) in a way that will leave them stunned," Khamenei, who is also Iran's commander-in-chief, told a gathering of air force personnel.

That does not sound good.

The mortgage mess keeps gaining steam:
Fitch: New Year, No Improvement as U.S. Prime Jumbo RMBS Delinquencies Approach 10%
Housing bottom indeed.

Unemployment is stated at 9.7% but this graph is far more informative (via The Big Picture and original work by Bianco Research):

No job growth for a DECADE. This is troubling.

So what am I trying to say?

I came to the following idea as I watched the reaction to the possible Greece bailout over the weekend:

Instead of being scared or fearing the need for another large scale bailout of an entire bankrupt country the reaction was one of joy over another financial rescue.

This is important because I think that financial risk is severely miss priced right now. Market (stocks, bonds, currencies, etc) operators are basing their decisions on a perceived backstop of all things at all times.

Here again is Moral Hazard:

Moral hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk

And yes "Too Big to Fail" has it's very own Wiki entry!

What a miss pricing of risk allows is distortions. Just like a bubble causes capital to be invested in non productive ways, the bailout bonanza has made all assets be treated as of the same risk regardless of underlying fundamentals. There is no price discovery in this way and thus right now may be a time where true "value" of many instruments are unknown.

Money is being created. The open ended commitments on the table are staggering. Whether it is Fannie Mae loans, Greece, Spain, or AIG the magnitude of intervention is astounding. While various observers feel that inflation is nonexistent, what do you call the artificial propping up of the housing market? Is that not inflation? What about Euro money created to save Greece (should it come), does that not constitute inflating?

The situation is not "more stable" after two full years of intervention. Instead assets across the spectrum are miss priced and risk is the most miss priced of all. Anything of significance right now is seen as fully insured by governments and taxpayers (truly "Turtles all the Way Down!"). With such a one way bet going on we can expect a serious market dislocation should that prove not to be the case.

For Consideration
I was thinking about the European drama and I was reminded of Dollar Swaps and how they may play into the mess.

Economic Reality Blog had a good write up on this:
Another Dollar Shortage?
Short excerpt:

As is evident, the dollar swaps did everything they were supposed to do. But now that they’re gone, there is a possibility that the dollar shortage will return. The dollar has been gathering momentum for quite some time. Those that look at charts had to have seen the massive divergence between the price action and most of the indicators (MACD is a good example) that first appeared in the spring. Now that the dollar is back in an uptrend with negative news from the Eurozone supporting it, we are looking at what could possibly be the second phase of the dollar shortage. It’s on the brink already and it only needs one little push.

If you want to "frontrun" the Euro zone bailout look for a headline renewing dollar swaps as a necessary precursor.

Co-Author Stoneleigh of The Automatic Earth has a thoughtful essay up tonight that is worth a look:
Corruption, Culpability and Short-Termism
Great stuff.

Have a good night.

New Orleans Saints NFL Champions

Thanks to Peyton Manning for the pick 6 but......

THE SAINTS ARE WORLD CHAMPIONS!!!!!!!!!!!!!!!!!

31-17 and a win going away. Is Manning still the greatest QB ever???? I dunno!

Thanks C-T for the kind words!

My mom even called as she knows I have loved the Saints forever!!!!!!!

This is huge and I welcome all nice comments!

Championship Sunday

In the end it comes down to one game. I cannot believe the NFL season is over! Just a short 6 months before preseason kicks off!

New Orleans Saints vs Indianapolis Colts
There is plenty of analysis out there on this game. I have been amazed at how much credit has been given to the Colts and consensus calls for them to win, perhaps even easily. There is plenty of revisionist history going on right now, consider;
-Are the Colts indeed a "team of the decade" contender and a proven playoff performer? All the talk this week was how experienced the Colts are.
-Is this the same Colts team that has been bounced from the playoffs almost every year and only has one Superbowl appearance (courtesy of the New England Patriots running out of gas in the 2006 AFC title game) and struggled to beat the Bears in that one?
Take your pick.

I am not hiding my bias, I love the Saints!

As 5 point underdogs I think the Saints will win outright.

Prediction: Saints 38, Colts 31


Have a good night.